Risk Management: What Your MBA Program Should Have Taught You
May 2002 (SmartPros) This month's Book Corner selection, The Real World of Finance: 12 Lessons for the 21st Century, by James Sagner, is a no-holds-barred style blueprint for financial success in the twenty-first century. One of the lessons taught by this recently published book is that risk management often goes far beyond the traditional boundaries of finance.
Sagner says that many types of risks are embedded in a business operation, going far beyond the traditional boundaries of finance. In turn, the chief financial officer is the logical manager to develop a comprehensive enterprise risk management program to identify and quantify these risks and to develop appropriate programs for their management.
In The Real World of Finance: 12 Lessons for the 21st Century, Sagner describes business risk as a fact of every transaction; consequently, managers often fail to appreciate the extent of risk in normal business operations.
Traditionally, risk has been managed through separate programs, the responsibilities for which reside with the CFO and other organizational units. Internal risks such as operational, credit, derivative, liquidity, and foreign exchange tend to be managed with the assistance of services or external agencies that provide expertise on specific risk issues. External risks, managed primarily by external organizations, include financial institution, economic system and sovereign risk.
To break from this traditional approach and make the process of risk management more comprehensive and coordinated, Sagner emphasizes the value of the Enterprise Risk Management program.
Writes Sagner: "The ERM approach views risk as pensive in a business and assumes that a coordinated approach through a formal organizational function is necessary to apply twenty-first century management techniques."
Comprehensive ERM involves three separate steps led by the CFO:
"In the absence of ERM, the interdependencies and interrelationships of business risks can be overlooked, resulting in potential inadequate safeguards for the assets of the enterprise," Sagner explains. "ERM reduces the volatility inherent in business activities and helps to achieve consistent earnings and manage costs."
Whereas graduate programs tend to teach that risks are managed using various financial products, including insurance, options, futures, swaps and other derivative instruments, there are many other risks inherent in operating a business, and the CFO needs to recognize, measure and manage these risks in a comprehensive ERM program.*
For more information on this topic, check out Sagner's lesson on risk management (lesson 11) in his new book, The Real World of Finance: 12 Lessons for the 21st Century.2002 SmartPros. All rights reserved. * Sagner, John. The Real World of Finance: 12 Lessons for the 21st Century. 2002 John Wiley & Sons.