Advanced

Enterprise Risk Budgeting - Bringing Financial Management into the Financial Planning Process

Jankensgård, Håkan LU and Alviniuissen, Alf (2009) In Journal of Applied Finance 19(1/2).
Abstract
Enterprise Risk Management (ERM) is a holistic, integrated

approach to managing a company’s risks, in contrast to the

so-called “silo-approach” prevalent in many firms in which

risks are managed independently of each other. Yet for all the

risk exposures that are brought under the corporate umbrella

in an ERM initiative, it may be inadequate for addressing the

firm’s aggregate risk in terms of the probability of failing to

meet important corporate objectives, such as implementing

the business plan or protecting debt covenants. In this paper

we present a quantitative approach to risk management in

the non-financial firm that retains the integrative,... (More)
Enterprise Risk Management (ERM) is a holistic, integrated

approach to managing a company’s risks, in contrast to the

so-called “silo-approach” prevalent in many firms in which

risks are managed independently of each other. Yet for all the

risk exposures that are brought under the corporate umbrella

in an ERM initiative, it may be inadequate for addressing the

firm’s aggregate risk in terms of the probability of failing to

meet important corporate objectives, such as implementing

the business plan or protecting debt covenants. In this paper

we present a quantitative approach to risk management in

the non-financial firm that retains the integrative, enterprisewide

mindset, yet also equips corporate management

with the ability to evaluate financial distress-probabilities

by incorporating ideas related to the concept of a firm’s

Economic Capital. We term such an effort Enterprise

Risk Budgeting (ERB). ERB makes possible an ongoing

reassessment of the firm’s expected financial position and

overall risk profile, and in particular how these change as a

result of corporate policy decisions, for example relating to

capital expenditure, acquisitions, dividends, and hedging. The

transparency created by such a tool increases the likelihood

that management makes sound proactive decisions with

respect to its risk profile, rather than reacting to challenging

circumstances once they occur. We illustrate using the

experiences of Norwegian aluminium producer Norsk Hydro. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Journal of Applied Finance
volume
19
issue
1/2
publisher
Financial Management Association International (FMA)
ISSN
1534-6668
language
English
LU publication?
yes
id
2ac6fec9-68c0-44bc-894c-279f5fd1e344 (old id 4064558)
date added to LUP
2013-09-27 11:25:50
date last changed
2016-04-16 02:31:03
@article{2ac6fec9-68c0-44bc-894c-279f5fd1e344,
  abstract     = {Enterprise Risk Management (ERM) is a holistic, integrated<br/><br>
approach to managing a company’s risks, in contrast to the<br/><br>
so-called “silo-approach” prevalent in many firms in which<br/><br>
risks are managed independently of each other. Yet for all the<br/><br>
risk exposures that are brought under the corporate umbrella<br/><br>
in an ERM initiative, it may be inadequate for addressing the<br/><br>
firm’s aggregate risk in terms of the probability of failing to<br/><br>
meet important corporate objectives, such as implementing<br/><br>
the business plan or protecting debt covenants. In this paper<br/><br>
we present a quantitative approach to risk management in<br/><br>
the non-financial firm that retains the integrative, enterprisewide<br/><br>
mindset, yet also equips corporate management<br/><br>
with the ability to evaluate financial distress-probabilities<br/><br>
by incorporating ideas related to the concept of a firm’s<br/><br>
Economic Capital. We term such an effort Enterprise<br/><br>
Risk Budgeting (ERB). ERB makes possible an ongoing<br/><br>
reassessment of the firm’s expected financial position and<br/><br>
overall risk profile, and in particular how these change as a<br/><br>
result of corporate policy decisions, for example relating to<br/><br>
capital expenditure, acquisitions, dividends, and hedging. The<br/><br>
transparency created by such a tool increases the likelihood<br/><br>
that management makes sound proactive decisions with<br/><br>
respect to its risk profile, rather than reacting to challenging<br/><br>
circumstances once they occur. We illustrate using the<br/><br>
experiences of Norwegian aluminium producer Norsk Hydro.},
  author       = {Jankensgård, Håkan and Alviniuissen, Alf},
  issn         = {1534-6668},
  language     = {eng},
  number       = {1/2},
  publisher    = {Financial Management Association International (FMA)},
  series       = {Journal of Applied Finance},
  title        = {Enterprise Risk Budgeting - Bringing Financial Management into the Financial Planning Process},
  volume       = {19},
  year         = {2009},
}