Corporate Value of Enterprise Risk Management: The Next Step in Business Management

Foreword ix

Preface xi

Acknowledgments xix

Part I: Basic ERM infrastructure

Chapter 1: Introduction 3

Evolution of ERM 4

Basel Accords 4

September 11th 5

Corporate Accounting Fraud 7

Hurricane Katrina 9

Rating Agency Scrutiny 10

Financial Crisis 11

Rare Events 13

Long-Term Trends 14

Challenges to ERM 15

Summary 16

Notes 16

Chapter 2: Defining ERM 18

Definition of Risk 18

Definition of ERM 24

Summary 58

Notes 59

Chapter 3: ERM Framework 61

Value-Based ERM Framework 63

Challenges of Traditional ERM Frameworks 63

Value-Based ERM Framework 65

Overcoming the Challenges by Using a Value-Based

ERM Framework 83

Summary 109

Notes 110

Part II: ERM Process Cycle

Chapter 4: Risk Identification 113

Components of Risk Identification 113

Five Keys to Successful Risk Identification 114

Risk Categorization and Definition 114

Qualitative Risk Assessment 129

Emerging Risk Identification 153

Killer Risks 155

Summary 166

Notes 167

Chapter 5: Risk Quantification 168

Practical Modeling 169

Components of Risk Quantification 174

Calculate Baseline Company Value 174

Quantify Individual Risk Exposures 185

Quantify Enterprise Risk Exposure 207

Summary 223

Notes 224

Chapter 6: Risk Decision Making 226

Defining Risk Appetite and Risk Limits 227

Integrating ERM into Decision Making 239

Summary 269

Notes 270

Chapter 7: Risk Messaging 271

Internal Risk Messaging 271

External Risk Messaging 280

Summary 292

Notes 293

Part III: Risk Governance And Other Topics

Chapter 8: Risk Governance 297

Focusing on Common Themes 298

Components of Risk Governance 298

Roles and Responsibilities 298

Organizational Structure 319

Policies and Procedures 325

Summary 327

Notes 327

Chapter 9: Financial Crisis Case Study 329

Summary of the Financial Crisis 330

Evaluating Bank Risk Management Practices 332

Summary 342

Notes 343

Chapter 10: ERM for Non-Corporate Entities 344

Generalizing the Value-Based ERM Approach 344

Complexities of Objectives-Based ERM 350

Examples of NCEs 351

Summary 369

Conclusion 369

Notes 369

Glossary 371

About the Author 389

Index 391