Question: How do I make Enterprise Risk Management fly at my institution?
The other day I was visiting the always amazing Smithsonian’s Air and Space Museum with my son. I entered the Wilbur and Orville Wright section, where a presentation was being made. The subject of the flying challenge emerged and what the Wright Brothers did to propel flying.
The brothers’ fundamental breakthrough was their invention of three-axis control, which enabled the pilot to steer the aircraft effectively and to maintain its equilibrium. They didn’t focus on the most powerful engine, but rather they took advantage of their innovative wind-tunnel. Through this effort, the brothers filed U.S. Patent 821,393 not for an airplane, but rather for a system of aerodynamic controls that manipulated a flying machine’s surfaces.
The three-axis control is an amazing principle that was and is critical to controlled flight. If recognizes that a plane exists in three dimensions and that control of each dimension (roll, pitch and yaw) must be accounted for and managed.
In the world of Enterprise Risk Management, a similar concept is emerging. It is beneficial that we have three elements in ERM, namely Enterprise, Risk and Management. Each integrates to the other much like roll, pitch and yaw.
Within Enterprise, we continue to gain an understanding of our financial institution as it relates to risk and to the management of that risk. From a Risk perspective, we have the seven broad categories of risk and we continue to evaluate those within the perspective of our enterprise and our management efforts. Each risk must be evaluated against the magnitude of exposure as well as the risk drivers and directional factors. Management focuses on the quality of that management and what efforts are being undertaken to promote risk mitigation.
When these elements are analyzed in a quantitative and/or qualitative approach (and we always look for the presence of both), we can begin to achieve ERM flight. Eliminate proper understanding of any of the three and the exercise becomes subject to, well, a crash, if I might extend the analogy to its logical end.
There is little question that techniques, models, approaches, etc., for ERM will evolve over the next few years and beyond. After all, the solving of the three-axis control didn’t mean that the Wright Brother’s plane was the end of aeronautical advancements. Rather, we will continue to evolve in our efforts to apply ERM into how we see ourselves and how we promote the security of our Enterprise.