“Thanks to the global financial meltdown, we now know what a “black swan” is,” writes Russ Banham in the April edition of CFO Magazine, “but do we know from which direction the next one will swim into view, and what to do when it does?” Black swan events are highly unpredictable, but it appears more and more companies are implementing ERM programs in hopes of being better prepared to identify and mitigate the impacts of the next one. What is causing this uptake? Is it really the fear of the next black swan event?
Possibly, but Banham shares 3 other converging trends that he thinks will propel ERM to a new level of acceptance and maturity.
Regulatory Pressure on Corporate Boards. Corporate boards can no longer ignore risk management. “The Dodd-Frank Act establishes new requirements for board risk oversight and reporting,” explains Banham. “Rating agencies, led by Standard & Poor’s, now factor ERM criteria for financial and nonfinancial entities into the ratings process. The Committee of Sponsoring Organizations (COSO) rolled out COSO II (referred to by many as “COSO ERM”) in 2004 to establish requirements for risk identification, management, and reporting. And the Securities and Exchange Commission has sharpened its stance on risk management.”
ERM Recognition as an overall Risk Management Best Practice. Historically, companies have struggled to implement ERM due to a lack of overall standards. A set of standards is now emerging. “If you can demonstrate that you have identified and analyzed risks according to a best-practice standard, you have an advantage over competitors that do not closely hew to the standard,” explains Bill Ingram from Zurich Services.
New Technologies. New risk management tools are making critical risk analytics including stress-testing and “what-if” scenarios easier to perform and report. “Things are never static, so you need business intelligence on risks that flows in real time to senior stakeholders to enhance their decision making,” says Henry Ristuccia, the leader of Deloitte’s governance and risk-management practice.
Check out the full CFO Magazine article “Disaster Averted?” to learn more about what is driving ERM acceptance and predictions on what’s next for ERM. It is an excellent read.