A key topic at RIMS 2007 will be the value of enterprise risk management. Session 304 promises a lineup of industry leaders who will tackle this challenging topic.
Like all business activities, ERM must demonstrate that it has value to the organization. It must also be proven that ERM has ongoing value for both governance and for the strategic decision-making process. How one does that is the challenge.
Is it possible to prove that risk management activity has a direct effect on company performance? Does ERM provide a quantifiable value? Many have attempted to draw a line between ERM and financial performance, but somehow the attempts always lack a certain je ne sais quoi.
According to author and researcher Phil Rosenzweig, it might indeed be impossible to tie activity directly to financial performance. In his new book, "The Halo Effect," he details the numerous attempts made within the business community to tie the effects of such things as CEO quality, corporate culture, customer focus and human resource efforts to a company's performance. He looks at business literature such as Fortune, Forbes and Business Week, "From Good to Great," "Built to Last" and "In Search of Excellence." His focus is on the ways in which they have tried to prove the contribution of specific business activities to the success of the firm. With meticulous detail and flawless logic, he shows just how difficult, if not impossible, it is to show a causal relationship between any given activity and financial performance.
Rosenzweig does not, however, suggest that there is no value to risk management activity. To the contrary, he provides refreshing insight into why ERM should be undertaken.
"The task of strategic leadership is to gather appropriate information and evaluate it thoughtfully, then make choices that, while risky, provide the best chances for success in a competitive industry setting," he writes.
One would have to wonder about a leader who took the opposite position!
ERM is important and necessary because failure to properly evaluate risks when making decisions decreases the chances of success. Understanding the risks that the company faces also allows it to execute on its strategy with greater speed.
As Sun Microsystems' Chris Kite (one of the presenters) is fond of saying, "Race cars have brakes so that they can go faster."
Risk management investment does, however, require a certain leap of faith because it deals with the raw uncertainty of the future. Proving the prudence and value of being prepared for a future event that might never occur is difficult.
Ideally, one would tie risk management directly to company financial performance. Perhaps Rosenzweig is correct that ERM simply makes sense on its face and should be accepted on that basis.
Session 304 should provide some tangible examples of how ERM provides value to the senior-executive level. Additionally, it should offer some real-world examples of leading companies leveraging the work they have done with internal audit and Sarbanes-Oxley.
Allowing improved governance and better decision-making are worthy goals. It should be understood, however, that they are not the type of goals that lend themselves to quantification. However, this should not detract from their importance.
It is certainly understandable that strategic decision-makers wish to see more tangible value out or their investment in ERM.
Hopefully, as ERM gains wider acceptance, the value of ERM will simply become a given like so many other activities that constitute good management.
Ironically, to get to that point, we will have to demonstrate the value of ERM. This session should help.
manages risk for Sun Microsystems Inc. and writes about risk management issues for this magazine.
May 1, 2007
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