Risk is hyperconnected. No risk exists in isolation. Enterprise risk management is now essential for
The recent World Economic Forum Global Risks 2013 report, which is developed from an annual survey of more than 1,000 experts from industry, government, academia and civil society that were asked to review a landscape of 50 global risks, makes depressing and scary reading (see summary of the main findings in the chart below).
Global risks in terms of likelihood and impact
Source Copyright©2013 - World Economic Forum
The report makes a passionate plea for today's leaders "to understand better the international and interdependent nature of such constellations of risk", they just cannot work in isolation. The same is true for corporate risk.
The report claims that "It seems an obvious one when contemplating the external nature of global risks because they are beyond any organization's or nation's capacity to manage or mitigate on its own. And yet global risks are often diminished, or even ignored, in current enterprise risk management. One reason for this is that global risks do not fit neatly into existing conceptual frameworks." The report recommends adopting the Harvard Professors Kaplan and Mikes's concise and practical taxonomy of global risk, which uses three types of risks as categorized by:
- "Preventable" risks, such as breakdowns in processes and mistakes by employees
- "Strategic" risks, which a company undertakes voluntarily, having weighed them against the potential rewards.
- "External" risks, which this report calls "global risks"; they are complex and go beyond a company's scope to manage and mitigate (i.e. they are exogenous in nature).
The report writers hope "that this differentiation will not only improve strategic planning and decision-making but also increase the utility of our report in private and public sector institutions."
Existing enterprise risk management systems and services
Few enterprise risk management systems comprehensively consider the exogenous risks to the business, and the international and interdependent nature of risks.
FINCAD's F3 award winning enterprise analytics platform - Risk Magazine's 2013 Risk Management Technology Product of the Year - certainly doesn't do this. F3 can "Price anything from the simplest instrument, to the most complex structures and portfolios, using any combination of model, trade and calculation method over and over again without the need to start from scratch." But that isn't full enterprise risk management. More is needed.
Corporate treasurers have had to become much more strategic as the importance of treasury has been understood and recognised by the board. Similarly corporate treasury departments will have to take a more enterprise wide and strategic view of risk. The World Economic Forum's 'Global Risks 2013' Report is essential reading for this new role.
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