Companies Succeed During Downturn with ERM
Originally Published: January 01, 2009
Companies staying afloat in the current environment have a common theme. The executive suite takes a lead on analyzing factors that lead to identified risks. Then, they continue on a process of investigation and study to assess the proper response. This approach led to higher amounts of cash reserves than peers stashed away during an investing peak by Berkshire Hathaway. The car manufacturers fairing best now also displayed foresight with early adoption of lower-cost, higher gas mileage automobiles. These decisions required an integrated risk management approach that started with senior management and spanned across all the business sectors of the company. Information was shared and analyzed outside of its originating silo, and corporate officers assessed the impact of separate events on the entire organization. In the example from JPMorgan, the retail banking division shared data about increasing mortgage delinquencies with the investment division, which ultimately resulted in this division changing strategies on these investments.
ERM Links Strategy and Risks
Walker emphasizes the importance of information sharing and discussion. He attributes successes in the current environment to understanding risks and inserting them into the business strategy, rather than just focusing on best practices and results from financial modeling to make decisions on risk mitigation. He notes "Companies that ready a response for a range of situations are not necessarily better at predicting the future; they are just more prepared for what comes to pass." This neatly summarizes that risk management must be an ongoing discussion of priorities and strategy; simply creating a contingency plan notebook will not be effective in crisis.
The impact of government intervention and new regulations is briefly mentioned. Firms could be subject not only to additional requirements, but may have to change their entire framework (for example, financial institutions receiving the "bailout"). Risk assessment strategies will have to transform, as corporate entities have to conform to a less tolerant constituency.
The conclusion recalls that profitability is necessarily directly linked with risk, and risk management should be "...an approach to understanding uncertainty, exposures, opportunities and limits in order to make educated investments. It requires executive involvement, an emphasis on making data-driven decisions, open communication and the discipline to think through scenarios and ready responses."