Signs of Early Recognition (Part 2)
Last month I left you with some thoughts about how enterprise risk management (ERM) was showing signs of early recognition in the Middle East and North Africa, and particularly in some developing countries where modern business practices are less mature.
By Christopher E. Mandel
And while in some of those more developed countries where oil wealth has seemingly accelerated the progression of advanced business concepts and intelligence, it is encouraging to see that a more progressive view of managing risk is apparently getting increasing traction.
Meanwhile, here in the U.S., so many "progressive" companies struggle with the fundamental enterprise risk management value proposition. So many seemingly successful companies can't seem to get their heads around the idea that connecting risk management capability and outputs to their planning and decision making processes has obvious benefits. Whether you call them risks, business challenges or widgets, performance outcomes are heavily influenced by and typically a direct result of how well risks are managed.
Recently, I've been asked to participate in an ERM engagement for a relatively early stage company owned by a venture capital concern which holds some twenty or so other similar stage companies, most, if not all of which are being prepped for an initial public offering in the future. This engagement, recommended by the client's chief financial officer to the venture capital-controlled board, is a sure sign of early recognition of the value proposition ERM entails and a prospective engagement which, if successful, could lead to the potential further application of this approach to the rest of the portfolio. This is not something I would have expected from a venture capital firm. In fact, these firms, whose core strategy is developing and preparing companies for public offerings in order to cash out and maximize their return, have gone in a different direction in the past. In those cases, risk management functions were often deconstructed in an effort to reduce expense and increase income in preparation for being taken public. Risk management in those cases has been viewed as more of a superfluous staff function, the rudiments of which could be more easily dealt with by outsourcing or simply executing those minimum risk management elements that might be required by regulators. This view left much of the rest of the risk management paradigm on the table. Investing in prevention and control initiatives was viewed as of limited value, as was building a risk culture, a risk governance process, or installing monitoring and measurement mechanisms whose value was at best viewed as difficult to understand, let alone quantify. Related return on investment was viewed as negative and the efforts largely a distraction to the central focus on value maximization; how truly ironic since risk management excellence enables just that.
Finally, you may have noticed that governments, including the U.S. government, have recently pursued this progressive approach to risk management through, among other things, the appointment of chief risk officers in some agencies and within certain U.S. states. It is not yet clear whether true ERM is what is being pursued here but it is a surprising and hopeful sign of a growing recognition that even entities that often use sovereign immunity to fend off "claims," are seeing the underlying value in enterprise risk management. That is a very hopeful sign indeed: Stay tuned for signs of impact.
CHRIS MANDEL is the president, Excellence in Risk Management LLC, and executive vice president, rPM3 Solutions LLC, a long-term risk management leader and former president of RIMS.
June 1, 2012
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