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Boards & Shareholders Risk Velocity, the Unknown Dimension in ERM By Stephen Davis and Jon Lukomnik ly what happened to Lehman Brothers, develop the slowest? Be aware that some Compliance Week Columnists whose 100+ years of history collapsed in risks arising from the same incidents may days. vary in velocity. In the product liability R isk is a full-bodied presence in the boardroom and the C-suite, so it’s time risk management stopped being two- Thinking about how quickly a risk metastasizes into impact also leads to new insights into the optimal speed for a com- example above, the reputational risk is hurtling toward impact, while the regula- tory response may lag far behind. Hence dimensional. Let’s add a third dimension pany to respond to those risks. your lawyers may be able to take more to risk measurement. When a risk emerges, many companies time deciding a defense strategy, but your And, while we’re doing that, first react by gathering PR will need to work and respond to risks it’s time to stop confusing risk all corporate leaders almost instantly. measurement and risk anticipa- together, to understand Once you’ve created a three-dimen- tion with risk management. the situation fully and sional matrix, start examining your esca- For years, the twin pillars from different per- lation and risk response plans against all of risk management were prob- spectives: the general three dimensions, including velocity. Is ability and impact: What are counsel, business-line the odds an event will happen? management, the CFO, What will the damage or the investor relations, pub- benefit be if it does happen? lic relations, and so Hence the attempts to deter- forth. Sometimes that How can you assure your mine what were high- or low-frequency response is correct; you don’t want to re- ERM program is robust? events, and to distinguish what would spond prior to knowing the facts, yet you cause minor losses and what would put a still need an understanding of the trade- First, take a look at the risks company out of business. off between your level of knowledge and you’ve already identiﬁed. Probability and impact give rise to a the speed of the response. Moreover, the Then, add risk velocity as a nice, neat matrix. High-probability/low- speed of the response contributes to the impact situations, such as shoplifting at effectiveness of the response. Because third dimension. Which risks a retailer, are managed on a daily basis. while you are gathering facts, nothing is develop the fastest? Which Low-probability/high-impact events, slowing the process by which the risk is such as an earthquake, are often ad- transforming into impact. develop the slowest? dressed through insurance. High-proba- Let’s use product liability as an ex- bility/high-impact events are everyone’s ample. Your company has manufactured a nightmare and receive the lion’s share of product you believe to be safe, but there’s risk-prevention efforts. Low-probability/ a media report of a death, and it’s at- there a mismatch between how quickly low-impact events simply don’t get much tributed to your product. You obviously you escalate your awareness of and re- attention at all. want to gather the facts. But be aware
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