The following article is based on a presentation Mr. Hampton is making this month at the sixth International Risk Management Conference 2006 in Singapore, sponsored by the Federation of Asian, Pacific & African Risk Management Organizations.

Let's consider futuristic thinking about enterprise risk management. Many people accept the idea of ERM, but it has taken a long time to get any traction.

Companies talk about and flirt with it but seldom implement it. If they do, it is usually going through the motions rather than coordinating risk across all operational areas. Why? Everybody describes ERM as a complex process: risk identification, quantitative techniques, assessment, coordination, etc. Therein lies the problem. Doing some futuristic thinking, we might find ourselves focusing on something other than ERM as a process.

To illustrate the point about ERM, let's look at four seemingly unrelated stories:

• Do people prefer a coffee mug or a bar of chocolate?

• How do we purchase strawberry or grape jam?

• Do we want our automobiles to break down on the highway?

• Is Home Depot, the $80 billion specialty retailer, getting its business right?

First, the coffee mug and candy. The sponsor of an executive training seminar gives half of the attendees a coffee mug, while the other half receives a bar of Swiss chocolate. Afterward, the sponsor says anyone can exchange for the other item. What percentage exchanged the gift? The answer is 10%. This is the status quo trap: once committed, most people are reluctant to change. If a company is earning a profit, why should it consider ERM? Absent a good story, not much will happen.

Second story: jam on toast. On two consecutive Saturdays, an upscale grocery store allows an experiment using Wilkin & Sons exotic jams. On the first day, shoppers pass a tasting booth with a display of 24 different gourmet jams. On the second day, the booth contains only six jams. Observers calculated the number of people who tasted jam at the booth and the number of those who purchased jam. The results were (see chart)

With many more choices, people sampled but did not buy. What does it mean for a complex ERM proposal to manage risks across an enterprise? Are all risks coordinated, detailed and supported by data? Like the jam tasters, managers may sample ERM but can't process all the choices. Companies need examples of how ERM works.

Third story: automobile buyers want quality. When an automaker identifies a defect, it recalls the vehicle. A high number of defects reflects low quality--or does it? The percentage of recalls for all DaimlerChrysler, General Motors and Toyota cars on the road in 2005 ranged from 2.5% to 10.1%. Chrysler had the 2.5%; Toyota the 10.1%. In June 2006, Toyota recalled 1 million vehicles worldwide. In 2005, it recalled 10% of all Toyotas in the United States. In 2006, the annual J.D. Power & Associates' initial quality survey ranked Toyota No. 1 in high quality.

What does "best" and "worst" mean? In an ERM framework, the product recall is not the exposure. Failure to recall is the real risk. Toyota detects and fixes problems before customers notice them--no breakdown on the road, no bad feelings toward the manufacturer. That is how to manage risk across the enterprise.

Fourth story: Home Depot. The company, founded in 1978, went from zero to $40 billion in revenues in 20 years. By 1999, growth and profits stalled, so the next year the board chose Bob Nardelli as chief executive officer. He implemented a military-style management model. More than 500 of the 1,100 employees hired into management between 2002 and 2005 were previously junior military officers. By 2006, more than 100 were store managers. Mr. Nardelli believes a person who has faced a shooting enemy will be calm when dealing with a tough customer.

Prior to his arrival, store managers had enormous authority. The founders relied on instinct rather than analytics to build the company. After 2000, all major decisions were made at the top. Performance was measured with detailed analytics, such as the profit margin on products and the number of customers greeted. From 2000 to 2005, sales rose 75% and profits doubled. In 2006, Home Depot was the world's third-largest retailer, with 345,000 employees, 2,050 stores, annual sales of $81 billion and a net income of $6 billion. Fortune magazine named it as the Most Admired Specialty Retailer for 2006. Last April, the Harvard Business Review praised it as a model of corporate governance.

Sounds like a good story, except it is not an ERM story. Over the past five years, Home Depot's stock price dropped 7%. Shares of Lowe's, a major competitor, with more than 1,200 stores, rose by 210% in the same period. At Home Depot, inventory was sluggish. Mr. Nardelli ordered a focus on a single metric--inventory turnover. Store managers stopped ordering inventory. As expected, shelves were often empty. The CEO also ordered a reduction of full-time staffing, from 70% to 50% of the workforce. Managers hired part-timers with no real commitment to the company.

Where does the story go from here? Former employees describe a culture of fear at Home Depot. They alleged the staff was demoralized and customer service suffered. As part-timers replaced full-timers in many jobs, "Aprons" became a derogatory term for store workers wearing the signature orange Home Depot aprons. "Bob's Army" identified the store leadership program with half the individuals as former military. "Bobaganda" referred to company programming on TVs in employee break rooms with continuous play of tips, warnings and executive messages. "Home Despot" became the term disgruntled employees used for the company itself.

There are some signs that Home Depot is figuring things out and making changes. I suspect the company will get it right. We will see how Mr. Nardelli's story ends.

As the above stories indicate about ERM, it is natural to resist the changes ERM signifies. We need to reduce the complexity of ERM to produce action rather than curiosity. How? Tell stories. Explain why an ERM program helps Toyota get it right and why Home Depot needs to focus on cultural and management risks. With respect to ERM, is this futuristic thinking or common sense?

John J. Hampton is the KPMG Professor of Risk Management at St. Peter's College in Jersey City, N.J. He is the former executive director of the Risk & Insurance Management Society Inc. His columns and interviews can be found at www.businessinsurance.com/EmergingRiskStrategies.