Determining The Right Amount Of Corporate Risk Management Part III

By M. Isi Eromosele

The capital required to hold up the contribution of specific actions to the risk of the company is a measure of risk. This measure of risk can be measured across actions or across risks. Strategically, the company will need to decide on the issue of the probability of financial distress that maximizes shareholder wealth. This decision influences all the actions that follow it.

At a conceptual level, Enterprise Risk Management (ERP) is clear-cut. Implementing ERM is very challenging. To successfully implement ERP, it is imperative that it be driven into the organization that Enterprise Risk Management will create value. Employees should be made to understand risk management is a significant instrument that would enable the company to better implement its business strategy. Subsequently, ERM needs to be successfully sold to all levels of the organization.

The cornerstone to implementing ERM is the identification of the risks the company is exposed to. These risks would be categorized and measured. There will be a focus on market and credit risks as well as operational risks. Financial institutions would need to classify risks into market, credit and operational risks. In order for this scheme to be successful in catching all the risks the company is exposed to, operational risk has to include all risks that are not associated with market or credit. For financial institutions, operational risk as defined in THE Basel II Accord is a lot thinner in scope as it does not include reputational risk. As a result, there will be a conflict between the measurement of operational risk for regulatory purposes and the measurement of operational risk from the ERM viewpoint.

Companies could advance beyond simply measuring market, credit and operational risks. Companies should also measure liquidity, reputation and strategic risks. In general, risk measurement has to be customized to the organizational uniqueness of various industries and their respective marketplaces. Evaluating risks in banking does not correspond well to the risks faced by insurance companies. Insurance companies face risks on their assets area - their investment portfolio as well as on their liability area, which represent insurance payouts they may never have to make.

Enterprise risk management creates values for company shareholders, despite the practical issues that arise during its implementation. In the past, a lot of inordinate notice had been paid to the measurement of tail risk. A better process requires a more complete understanding of the distribution of the company’s value. The implementation of enterprise risk value has made a great deal of progress in the past decade, benefiting companies and their shareholders. It is time to take it to the next level with implementation improvements through better understanding corporate risks, thereby increasing gains for companies as well as shareholders.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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