Case Study Module 2 ERM Mistakes

19 May No Comments

Introduction

This paper will go over the various aspects of Enterprise Risk Management namely on Risk Management mistakes. First the pros and cons of part time risk officers in various parts of a business will be explained. Next, Knight Capital will be demonstrated as an example of a company that failed to adequately asses the potential risks it faced, ultimately leading to its downfall. Lastly 3 ERM mistakes companies might make will be listed along with potential solutions for each of the potential mistakes.

Question 1: What are the pros and cons of having risk officers as part-time assignments within different functions and business units?

There are many benefits as well as potential problems with having risk officers operate part-time in multiple parts of a company. Some of the pros are general and not necessarily specific to being a risk officer. For example, working part-time means they probably don’t qualify for benefits making them cheaper to hire. Further, a company can hire directly according to its needs since they will not have to maintain 40 hours if it is unnecessary (Cauthen, 2017).

One risk officer specific benefit might be that if the part-time employees are being rotated through the different functions and business units it may help them to have a better understanding of the company. This could result in better decisions being made as risk officers better understand how their risk management actions could affect other sections of the company. Being that one of the things companies like General Motors looked for when hiring risk officers was big picture thinkers, rotating part-time risk officers through ought the company could help them have a considerably having a better understanding of their work (Fraser, 2015).

One of the potential cons of having part-time risk officers could be a degree of inconsistency to the quality of the work. If the part-time risk officers are not adequately assigned in accordance to the need in a business unit it could result in employees leaving before a project is finished. Another potential risk also associated with part-time risk officers is that if kept in the same section they might see the bigger picture even less than a regular full-time employee. Given that they are less involved with the company they might not be involved enough to fully understand risks if no special considerations are given. However, by using part-time risk officers to supplement full-time ones in specialized fields or rotating them to help them see the bigger picture these cons can be significantly reduced.

Question 2: Research a company whose strategy failed due to its not considering the actions of external players? What happened?  Why did it happen?  When? How?  Any information to support failures and make suggestions for improvement

Researching companies was difficult, but I finally pinpointed Knight Capital. Knight Capital is a perfect example of failure to demonstrate proper risk management practices. In turn, Knight Capital went from being one of the major trading firms in the country to bust in one day. “Financial firms have been pushing technology, their balance sheets, and their people to extract the smallest value that is on offer in the extremely competitive global financial market” (Team, 2012). Unfortunately for Knight Capital poor risk management analysis cost them everything in a matter of minutes, at the tune of almost half billion dollars.

Knight Capital went from a giant financial empire to broke on August 1st in 2012. If the company would have had or used better risk management and been able to test the new software before going live with it, Knight Capital may still be a financial competitor on Wall Street today. Knight Capital rushed the new software out expecting to keep their edge and stay on top, but it was complete devastation when their stocks plummeted over 75%. In July 2013 after a long hunt for a buyer, Knight Capital finally merged with Getco Holdings in an effort to stay afloat in the financial trading industry.

Examining the failure of Knight Capital, it appears that if they would have had more safeguards in place when the company introduced the new software on August 1st they may not have lost so much money. Or at least been able to recover from their losses and remain the innovator that they once were. Companies like Knight Capital must plan for everything including short- and long-term risks. Risk management is crucial to the success of all companies and in this case was not focused on enough.

Question 3:  Identify 3 common ERM mistakes and how they can be avoided

One mistake often made is when companies fail to have a focused purpose for the ERM system. Instead of creating it out of practical need sometimes companies make a system to please stockholders and fail to fully grasp the usefulness of an adequate ERM system. This usually results in a lack of actual change as the company typically does not make the change in its culture and climate to follow through on necessary changes an ERM system might point out (Vakil, 2017). However, by understanding the value of managing risks and support from upper management to make an actual change this mistake can be avoided.

Another common mistake is to overcomplicate an ERM system. An example of this can be seen with General Motors “heat map” in which risks were ranked on various scores. This system not only proved tedious, but the rating system caused many disagreements that wasted valuable time on numbers that ultimately didn’t matter much overall. By adding a new straight forward system and simplifying the heat map slightly GM was able to increase the efficiency and the new charting system was much better received than the previous one (Fraser, 2015).

One last potential risk for Enterprise Risk Management is to fall back into the generally more placement ways of traditional risk management. One of the primary things that set ERM apart from risk management is that it is proactive and prepares ahead of time for long term risks instead of simply reacting to obvious risks. If a company is not careful they can let ERM fall by the wayside and fail to monitor long term risks, thus almost defeating the purpose of ERM all together (Williams, 2017). This can be avoided by proper management of ERM and ensuring that its risk officers do not grow complacent, but instead actively seek out potential risks in order to better prepare the company for the future.

Conclusion

Enterprise Risk Management is a complicated issue but can prove invaluable when properly utilized. While part time risk officers come with some drawbacks if they are deployed in the right amounts or rotated through ought the company their efficiency can be greatly increased. Also, should a company fail to maintain a risk management system on themselves they risk losing everything in as little as a matter of minutes much like Knight Capital. However, by analyzing probable Enterprise Risk Management mistakes made by other companies and dealing with them early on a company is on a fact track to properly manage risk and set itself up for a more stable and successful future.

Cauthen, M. (2017, December 12). Filling the gaps: Pros and cons of hiring part-time employees. Retrieved January 25, 2019, from https://www.insperity.com/blog/hiring-part-time-employees/

Drew, Richard. “Getco and Knight Capital to Merge in $1.4 Billion Deal.” CNBC, CNBC, 19 Dec. 2012, www.cnbc.com/id/100325960

Fraser, J. (2015). Implementing enterprise risk management: Case studies and best practices. Hoboken, NJ: John Wiley and Sons.

Team, Trefis. “Knight Capital Is Just Another Example Of Poor Risk Management.” Forbes, Forbes Magazine, 5 Aug. 2012, www.forbes.com/sites/greatspeculations/2012/08/03/ knight-capital-is-another-example-of-poor-risk-management/#4d819ae17a44.

Vakil, A. (2017, July 6). Common Mistakes in Enterprise Risk Management. Retrieved January 25, 2019, from https://www.radiusins.com/blog/common-mistakes-in-enterprise-risk-management/

Williams, C. (2017, November 01). 7 Commonly Made Mistakes in the Risk Identification Process. Retrieved January 25, 2019, from https://www.erminsightsbycarol.com/risk-identification-mistakes/




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