Posted on November 15, 2008 by

Integrating Performance and Risk Management Processes – What the Risk Professionals Say

To promote discussion and debate around the integration of performance and risk management, we recently posted a very simple question in the Enterprise Risk Management Association group on Linkedin

Should organisations integrate performance and risk management?

The replies are below and I would welcome further comments/feedback.

Comments

I think recent events demonstrate that they cannot be separated… – Richard

In this competitive and demanding world, business survives on performance and for performing a business will have to push to reach it’s limit and in the due course some risk is involved. So business is all about being risk aware, taking strategic decision based on calculated risk and performance. – Praveen

It can not be afforded on the longer term to have this unbalanced. But the question is merely, how ? It’s quite easy to meassure performance (sales increase; contribution ratio etc.), but how can we meassure the performance within Risk Management ? – Finn

Some companies with Chief Risk Officers (CRO) are developing models that manage the 4 pillars of ERM (Credit risk, Market risk, Business risk & Operational risk) like a portfolio. Performance can be measured within each category by the appropriate metrics versus investment required to improve the metric. Overall ERM takes all 4 pillars into account. The information provides a powerful management decision making tool for the future competitive advantage of the company…versus only the most recent quarterly results. Positive performance of the ERM portfolio can drive shareholder value and therefore should be a performance measurement in parallel with revenue and expense. – Marty

ok yes – can you maybe provide a few sentenses on how they meassure e.g. Business Risk Management ? – Finn

The risk-adjusted performance measurement is tricky. Transfer pricing could be used to measure the unit-wise performance of the firm. This involves building a benchmark portfolio and then measuring the performance of actual investment portfolio against this benchmark portfolio. The same technique could be used to measure performance of liabilities. Offcourse, my feeling is this technique would be backed by lot of assumptions by the risk manager. But, atleast it gives a base performance measure, which can be improvised as more detailed information is available. – Sandeep

Risk Management should be linked to an Individual’s Balanced Scorecard ! After all ERM is about managing risks which impact business objectives. The Balanced Scorecard seeks to ensure achievement of an organisation’s objectives by every individual in the organisation. Hence, inclusion of risk management on the balanced scorecard will obtain individual committment ! – Rakesh

We welcome further comments/feedback about if and how organisations integrate performance and risk management processes.