Georges Dionne - Corporate Risk Management: Theories and Applications

1. Chapter 1
2. Chapter 4
3. Chapter 5
4. Chapter 7
5. Chapter 8
6. Chapter 9
7. Chapter 10
8. Chapter 11
9. Chapter 12
10. Chapter 13
11. Chapter 14
12. Chapter 15
13. Chapter 16
14. Chapter 18
15. Chapter 20
16. Chapter 21

1. Chapter 2
2. Chapter 3
3. Chapter 4
4. Chapter 5
5. Chapter 6
6. Chapter 7
7. Chapter 8
8. Chapter 9
9. Chapter 10
10. Chapter 11
11. Chapter 12
12. Chapter 13
13. Chapter 14
14. Chapter 15
15. Chapter 16
16. Chapter 20
17. Chapter 21

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GEORGES DIONNE

Copyright 2019 by Georges Dionne. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data

Names: Dionne, Georges, author.

Title: Corporate risk management : theories and applications / Georges Dionne.

Description: Hoboken, New Jersey : Wiley, [2019] | Series: The Wiley finance series | Includes index. |

Identifiers: LCCN 2019001984 (print) | LCCN 2019006503 (ebook) | ISBN 9781119583158 (ePub) | ISBN 9781119583172 (ePDF) | ISBN 9781119583127 (Hardcover)

Subjects: LCSH: Risk management.

Classification: LCC HD61 (ebook) | LCC HD61 .D56 2019 (print) | DDC 658.15/5dc23

LC record available at https://lccn.loc.gov/2019001984

Cover Design: Wiley
Cover Image: Danielle Blanchard

To Danielle

Risk management, which is omnipresent nowadays, as Georges Dionne rightly highlights, is nevertheless a relatively young field. Twenty or 30 years ago, the term would have seemed pretentious, and the natural reaction of a company director would have been to associate it with the management of insurance coverage. Not that insurance is no longer the anchor point for risk managementit still isbut the term risk management means a lot more than just insurance coverage. In this respect, three events have changed the content of risk management: the collapse of the Long-Term Capital Management fund in 1998, followed by that of Enron in 2001, and finally that of Lehman Brothers in 2008. These three companies were all among the best in their category, and were considered to have the most sophisticated risk management of the time. Lehman Brothers was thus rated excellent in risk management, a real role model. This made these failures all the more resounding. Three main lessons have been drawn from these incidents. First of all, good management of identified risks presupposes good overall governance of all the processes of the organization concerned. Next, sophistication is not enough for good risk management, because it can mask major deficiencies in terms of internal control. Finally, operational risk should not be underestimated and should be subjected to careful and reasoned assessment.

Risk management therefore goes beyond simple knowledge of the risks to which the company is exposed, their possible aggregate cost, and the techniques used to cover them. It covers governance, internal control, and compliance with regulatory requirements. In concrete terms, it covers complex processes that play out in seven logical steps:

1. First of all, a general system of good governance must be in place, which ensures the transparency of management and the rationality of the decisions made by those in charge of the organization.
2. Then the governing bodies need to set objectives for the organization concerned, in sufficient detail (what are the missions, and under what conditions they should be completed?).
3. Also, from these objectives, the governing bodies need to ascertain the organization's preferences in terms of risk or risk appetite (which risks to take or not take, minimise, etc.), bearing in mind that the objective of risk management is not to exclude risk but to control it.
4. After this, the current and emerging risks to which the organization is exposed need to be identified, and their impact on it measured in terms of frequency and severity.
5. The next step consists of deciding which measures are necessary to control these risks, by ruling them out, transferring them to other agents, or containing them within predefined limits.
6. Next, processes, thresholds, and controls must be implemented to ensure that risk control is in place throughout the organization.