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Enterprise risk management helps firms, but results hard to measure

Enterprise risk management helps firms, but results hard to measure

CHICAGO — As the discipline of enterprise risk management matures, risk managers are highlighting the benefits ERM brings to their organization even if they cannot attach a direct dollar value.

“We are all facing the same challenge of not having a clear way to quantify” the benefits of ERM, said Puneet Kapoor, Deerfield, Illinois-based director of enterprise risk management at Walgreen Co.

For example, Walgreen's ERM program was discussed when the drugstore chain's financial officials met with ratings agencies after its recent merger with Bern, Switzerland-based Alliance Boots GmbH, Mr. Kapoor said.

“The merger that happened was a more material fact than the presence of an ERM program,” Mr. Kapoor said. “You never really know to what extent the ERM program was attributable to the rating; it's just part of the package that you present to the rating agency.”

Likewise, Julie C. Pemberton, Chicago-based director of enterprise risk and insurance management at Outerwall Inc., which operates movie, coin-counting and electronics recycling kiosks, said it is difficult to gauge how insurance underwriters value a company's ERM efforts.

“I thought that executive risk insurers would have a greater interest in our ERM program, but they didn't have as much interest as I expected,” Ms. Pemberton said at the Harold H. Hines Jr. Memorial Symposium in Chicago this month, which was presented by the Chicago chapter of the Risk & Insurance Management Society Inc. and Business Insurance. “However, I did use ERM in our underwriting meetings to describe what we did internally and position the risk in a way that it should be presented.”

Janice Ochenkowski, Chicago-based international director at commercial real estate services and investment firm Jones Lang LaSalle Inc., said she's seen some positive insurer response regarding the company's ERM practices.

“It's one thing to say you have ERM in place, but I think the difference can be made when you can explain in detail some of the things that you have done that make an operational difference,” Ms. Ochenkowski said. “You have to connect the dots between what you are doing in your ERM program and how it lessens or mitigates the risk for a particular line of insurance. If you can draw that picture, you can have some impact on better pricing or terms.”

Mr. Kapoor said risk managers also need to convince business unit leaders that ERM programs are worth the time and effort.

“One analogy that you hear is that ERM is like an orchestra where the risk manager is the conductor,” he said. “The problem is that we are not the ones playing the instruments. If you are the head of a business unit, you have no obligation to listen to me, but I have an obligation to try and influence you.”

Ms. Ochenkowski warns that focusing too much on quantifying ERM's financial returns risks obscures its larger value to an organization by treating it as an object rather than a methodology, and that risk managers should strive to integrate ERM into the organization's DNA.

“ERM shouldn't exist to be a profit center, a cost center or a group within an organization,” said the former RIMS president. “Rather, it ought to serve as a catalyst for raising the awareness of risks, and reduction and mitigation of those risks. The success of a good enterprise risk management program is that operationally your managers are thinking about risk and reward as they go about their tasks on a daily basis.”