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Unpublished Paper
Finding Shelter in a Time of Crisis: A Process-Oriented Approach To Risk Management
ExpressO (2011)
  • Kristin N Johnson, Seton Hall University
Success in financial markets rests on the effectiveness of a business’s risk management strategy: manage risks well and profits follow; fail to manage risks and a crisis ensues. It has long been evident that inadequate enterprise risk management policies, or internal risk-reducing strategies, create perilous consequences for a business. The recent financial crisis illustrates that the often disparate regulatory guidance and multiplicity of regulators who influence enterprise risk management policies were ill-suited to address conflicts and weaknesses in risk management accountability and enforcement mechanisms. During the crisis, a chorus of commentators demanded a federal solution to address the devastating economic effects caused, in part, by failed enterprise risk management policies at large, complex financial institutions and the threats of systemic risk that the wave of enterprise risk management failures engendered. In response to these demands, Congress enacted the Dodd-Frank Act. While the Act initiates significant reforms, Congress missed an important opportunity to implement truly effective enterprise risk mitigating measures. This Article challenges the prevailing wisdom that emphasizes systemic risk oversight but neglects enterprise risk management policies at systemically significant financial institutions. This Article sets forth a comprehensive regulatory framework to address the limitations of a fragmented regulatory structure. Specifically, this Article proposes to align gatekeepers’ accountability for risk management failures with broader social and normative expectations by developing a process-oriented, principles-based approach to regulate risk management. Process-oriented solutions evaluate corporate organizational and behavioral processes to enhance the effectiveness of risk management reforms. Such measures reduce the threat of future economic crises. The proposed framework offers a better solution to risk management concerns, encourages financial institutions and other businesses to internalize the negative externalities of their higher-risk business strategies, promotes corporate insiders’ accountability for enterprise and systemic risk, reduces markets’ vulnerability to future crises, and militates against the likelihood of another $700 billion federal bail-out.
  • risk management,
  • securities law,
  • corporate governance,
  • Dodd-Frank,
  • credit derivatives,
  • financial crisis,
  • quantitative models,
  • executive compensation
Publication Date
March 17, 2011
Citation Information
Kristin N Johnson. "Finding Shelter in a Time of Crisis: A Process-Oriented Approach To Risk Management" ExpressO (2011)
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