We’ve all heard the children’s story about the emperor and his new suit. The emperor ordered some clothes from some con men that had passed themselves off as weavers. These grifters convinced the king and his court that the clothes were “made of material that possessed the wonderful quality of being invisible to any man who was unfit for his office or unpardonably stupid.”
So, they pretend to dress the emperor, and as he stands there naked, all of his advisors and associates begin to comment on the beauty of the suit, since each feared that not being able to see this beauty would validate his unworthiness for his high position.
As each of the emperor’s confidantes spoke glowingly about the clothes, the emperor began to believe that he could be seen as unfit for his high place because he could not see the suit. As he stands there naked, he makes a really bad decision:
Hey — let’s have a parade so I can show off these wonderfully beautiful clothes!
So he parades through the street, and all marvel at the exquisite suit of clothes, until a small child calls out, “But he has nothing on.…” The crowd begins to chant this as well, while the emperor lifts his head higher and the chamberlains proudly hold higher the emperor’s nonexistent train.
What does this tale have to do with risk management and the current financial crisis? Read on.
The Rise of Enterprise Risk Management
The enterprise risk management (ERM) movement began to take hold of the risk management and financial community following two significant events shortly after the turn of the century. These events set the stage for the risk management community to step forward and make itself known to the business community as a vital element of the financial system, necessary to protect the assets of the organization.
The Attacks of September 11, 2001
In 2001, the attacks of September 11 forced businesses, governmental entities, and the general public to take a serious look at the risks they faced on a daily basis. On any given day, the walls could literally fall down, and life as we know it can be changed forever. After September 11, all of the securities we took for granted needed to be reevaluated. Our personal, financial, and infrastructural security all took a hit that day, and businesses were forced to look at risk as an important factor affecting the continuity of business activities as well as factors that could result in the actual demise of the entire organization.
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