More Than Just Models

A recent article in Treasury & Risk Magazine highlights the shortfalls in enterprise risk management (ERM) programs leading up to the current financial crisis.  One of the main issues addressed in the article is the blind faith placed in the quantitative results of risk models such as Value-at-Risk (VaR).  Here is what David Fox, head of enterprise risk at global engineering and construction company KBR, Inc., had to say.

Banks had been held up as an example to risk managers in other industries because of their ability to precisely quantify their exposures. But the crisis has demonstrated that ERM is about much more than measuring risk, says KBR’s Fox: “The need for ERM in operating companies has been magnified by the banking crisis. However, risk quantification as practiced by the banks does not provide a meaningful ERM template. Apparently, few of them were able to convert the model-driven numbers into timely conversations about managing risk.”

Instead of producing numbers, Fox argues that the focus of ERM has to be on actually managing risk, and doing so by focusing on more elusive concepts like attitudes, behavior, governance and communication: “KBR is focused on how to marry risk awareness with expert and timely perspectives about emerging and strategic issues. I think this has to be done qualitatively.”

Mr. Fox makes a great point.  Effective ERM programs must include both qualitative and quantitative methods supported by strong communication channels.  Wheelhouse Advisors can help build programs such as these. Visit www.WheelhouseAdvisors.com to learn more.