vol. XV no. 2

				Consider an American firm with manufacturing facilities in another country that sells its products in the United States. The firm purchases insurance coverage for workers and simultaneously manages foreign currency risk. These uncorrelated factors can be tied together for lower overall cost: When the dollar gains strength, the company can afford to carry less coverage on workers, making up any subsequent shortfalls in robust U.S. funds. Today's insurance contracts are increasingly allowing for this kind of flexibility and responsiveness to changing market conditions. "The United States leads in ERM because of our business culture: We're economically developed, entrepreneurial in spirit and highly competitive," observed Harold Skipper, professor of risk management and insurance and C.V. Starr Chair of International Insurance in the Robinson College of Business. But the process of achieving healthy ERM is evolutionary, not revolutionary, and firms have plenty of work ahead to optimize the approach within their operations. Stephen Smith, professor and H. Talmage Dobbs Jr. Chair of Finance, believes strengthening companies from within is crucial. "You can have the best risk management strategy in the world, but that won't help if weak internal control exists. A number can be calculated regarding the risk of hedging a stock portfolio, but operational risk - relating to how a firm does business - is more nebulous because it's difficult to quantify. A key operating risk is lack of separation of control. Companies need to set up a system whereby people can't take risks that put the company in jeopardy." Skipper agrees. "Organizations should seek internal hedges to risk. Transparency within the organization facilitates this and other good risk management practices. It also makes sense to model general management best practices: make everyone in the organization a risk manager." "It's management's responsibility, in conjunction with the board of director's audit committee as well as internal and external auditors, to build control systems to identify, monitor and mitigate risks," Messier elaborated. "As companies take a more thoughtful approach to risk management, the audit function too needs to take a holistic view rather than focusing exclusively on financial aspects." In addition to bolstering the internal audit system, Smith suggests that a company's chief risk officer not be paid according to how profitable the organization is but how well it manages risk. "Additionally, boards of directors could clearly benefit from focused education in ERM, which is where an organization like CERMAS comes in." "The center is ideally positioned to develop and dispense an integrated body of ERM knowledge," said Leinweber, "including identification, measurement, management, control and monitoring throughout the enterprise. These efforts benefit from CERMAS's close ties to the academic and business communities." A Personal Interest Individuals are well served by being good risk managers as well. "Personal financial planning is enterprise risk management for individuals," explained Conrad Ciccotello, associate professor and director of graduate personal financial planning programs in the RCB's Risk Management and Insurance Department. "A certified financial planner operates like a firm's chief risk officer by defining and identifying problems and opportunities. And like companies, no two people are exactly alike. By detailing goals, risks can be uncovered and assessed. In the same way companies should ideally balance and leverage risks, a person's investment portfolio should be thought of in conjunction with his or her insurance portfolio." To illustrate, buying into an assisted living community now (a real estate strategy) can be an effective hedge to a person's long-term health insurance needs - a real ERM approach. "A certified financial planner is akin to a person's primary care physician," noted Ciccotello. "The CFP can determine if there's a problem, and though he or she doesn't fix it, the advice and guidance are invaluable to a person's financial health." Making ERM Work Richard D. Phillips, associate professor and research associate in the RCB's Risk Management and Insurance Department, notes that even with best practices in place, several challenges to good ERM exist. "Firms need to find a common language so that different departments and functions can communicate effectively about risk. One person - a chief risk officer - should be responsible for risk synergy. With oversight of all operations, the CRO is situated to see how different company objectives and risks interconnect and to determine an integrated strategy for the entire enterprise." What else should organizations focus on? "Identify uncorrelated areas of risk to dynamically reduce costs. Take risks you have specialized knowledge about; profit from the risks you know," Phillips asserted. "In ERM, one size definitely does not fit all." See Best Practices in ERM Top | Back

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