Political ramifications of ERM pose difficult hurdles

Risk managers need to be aware of the political ramifications when implementing an ERM [enterprise risk management] program, Susan Witcraft, managing director of Guy Carpenter & Company LLCs Instrat Team, Mid-America Region, told attendees of Guy Carpenters ERM seminar in Toronto.
When developing and implementing an ERM program, four areas, including political, need to be given consideration, Witcraft said. The other three are organization, education and technical knowledge.
But its the political ramifications that most companies find the most difficult to overcome, usually due to the traditional silo approach of running an organization.
The investment department may be accustomed to owning the investments and managing them to certain risk tolerances within its own department and it may not be aware or understanding whats going on in the rest of the organization, or how its affected, she offered as an example.
Another issue within this area that may arise include the ranking of the chief risk officer (CRO).
If the CRO is too far down the ladder in the organization the position loses credibility with the other parts of the organization and it becomes ineffective, she said, adding that a CRO should report to the top of its organization.
But moving a CRO up to that level could cause a lot of political issues within the organization.
Within the organization aspect, a risk manager needs to ask: Is the organization managed in a way that all of the departments and all of the segments are in communication in an integrated fashion? she suggested.
And once a risk manager is comfortable with the concept of ERM, they need to make sure that senior management knows what it is and why its being done, as well as the organizations board.
And finally, economic capital models are very complicated, Witcraft admitted.
Its a whole new vocabulary that you dont necessarily have to understand in detail, but you have to understand enough to be able to ask the right questions, she said.
You have to be able to use the model, and if you dont understand it, you wont use it.