“enterprise risk management is a plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster—both physical and figurative—that may interfere with an organization's operations and objectives.”- Investopedia.
There are so many reasons why ERM is an important method for any project manager to use. Dealing with risks that might face a company, a project manager needs to identify, assess and mitigate those risks. Giving priority to the most critical risks according to their estimated negative impact. Nowadays, even special teams for Enterprise Risk Management are created to work not only on the downsides but also on the upsides of any risk and take part in setting investment decisions.
The one most challenging phase of ERM is Quantifying non-quantifiable risks; those are mostly ambiguous operational methods.
the lack of ERM might lead to disasters caused by human or by systems here are a couple of examples of that:
Historical catastrophes related to ERM
Barings bank collapse
In February 1995, one of the biggest financial disasters was announced with the collapse of Barings Bank that left it with a debt of over a billion pounds. The main reason for the financial disaster was making random and huge bets on the Japanese market hoping it would rise but instead, it dropped. Surprisingly the collapse was caused by a single trader, Nick Lesson, the head of derivatives of the bank who was only 28 years of age at the time. With the absolute authority, he had at the time he gambled with most of the bank's money leading to its crash.
Here is a short documentary explaining the catastrophe in a dramatic manner.
Long Term Capital Management General American Insurance Company
General American Insurance Company used to be dominating the market for years before its sudden collapse in 1998. With the aid of academic formulas and developed software to forecast opportunities in the market, LTCM became the largest hedge fund ever. Due to the gap between the academics and the real-world conditions, the irrationality of humans using the highly intelligent tools developed by LTCM expertise caused the failure of the company. During the Asian financial crises, instead of betting on safe stocks, the models misled the bank leaders to bet on high-risk stocks. The company lost half a billion dollars.
Watch this illustrative video to learn more about how the concept of hedge funds caused the collapse of Wall Street.
Development of Enterprise Risk Management
The formulation of the Enterprise Risk Management went through phases in order to move from the traditional risk management practices to the ERM. In 2001 D’Arcy assumed that the first trial for identifying ERM was made by professors i.e. Robert I. Mehr and Bob Hedges in the 1950s and it was through a text titled “Risk Management and the Business Enterprise‖ was published” and was made mainly to optimize the production efficiency of an organization. Through the following decades, ERM started to convey into a more complex and profound form.