Risk Velocity, the Unknown Dimension in ERM by ProQuest


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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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