Founded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.
In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.
As far as risk assessment is concerned, I am impressed with David Cooper who analyzed risk in military settings and asked, “How can you take all of the intangibles that you face in a combat situation and then come up with anything reasonable to do?” In extremely hazardous situations where the “fog of war” prevents any one individual from having all the information needed to make critical decisions, it may seem impossible to develop risk management tools to decide, “We’ll do this,” or, “We won’t do that. It crosses a line.” However, as David Cooper explained, the military has developed a set of operational guidelines that are used in critical combat circumstances.
If an experienced military expert can say, objectively and with confidence, “We have standard operating procedures. We know we’ve done this before. We know what the success rate is in this type of operation. And we understand the uncertainties,” and can base a decision on that, then any company should be able to apply sound risk management processes, too. Companies just can’t get away any longer with saying, “This is too complicated. We don’t have all the information we need. We don’t know what to do. Enterprise risk management is just too much for our company to incorporate into our decision making processes.” Companies just have to have the discipline to set up a framework for making decisions involving risk, and then modify the framework as circumstances suggest.
There’s so much still to learn about ERM. I’d like to understand the dynamics of a typical board of directors when the board is presented with a decision about risk. How do the individual dynamics affect the decision making? Does it matter how long somebody has been on the board or how they feel about raising objections? How do these factors figure into the final decision? Is there groupthink bias in organizations, in which the tendency to seek cohesiveness because everybody wants to agree with everybody else overrides a full airing of differences of opinion because it’s easier going along even if you know something is wrong? It would be useful for skilled researchers to watch board level decision making in action so we can learn about the process from somebody who is really skilled at analyzing group dynamics and applying that to boards of directors making decisions about risks.
What ERM professionals are doing now is important, obviously, working in the trenches of getting the quantitative and qualitative metrics right, but in many ways that’s useless without understanding how the right decisions are being made by people. We don’t really understand how that gets done. What appeals to these decision makers? What gets them to push in the right direction? There just are still many different directions to go with ERM research.
Stephen is a member of the Milliman Risk Institute Advisory Board. He is Professor Emeritus of Finance at the University of Illinois.