Advancing the complex adaptive systems approach to enterprise risk management with quantified risk networks (QRNs)

Business enterprises are complex adaptive systems (CAS) subject to fragility caused by the non-linear effects of uncertain risk events. The regional bank collapses in the United States are a case in point. Recent papers have highlighted a shortcoming of the traditional risk management process, which focuses on compliance but considers neither the interdependence between complex risks nor the mechanism of their non-linear impact on the organization. A new perspective on Enterprise Risk Management (ERM) has instead called for a shift of mindset from mitigating risk to building resilience by honing a CAS view to contextualize, assess, and manage complex risks. But the building blocks needed for a CAS representation of ERM have not yet been systematically developed. Specifically, we are missing a typological inventory of risks and a mapping of risks onto the general structure of an enterprise. In this paper, we build an industry-agnostic inventory of plausible risk factors using information extraction on large scale text data. Additionally, we develop an understanding of risk-function and function-function interdependencies through a survey of top business managers. The result is a novel complex network view of enterprise risk called a Quantified Risk Network (QRN) that displays small-world properties and highlights internal company functions central to non-linear risk propagation mechanisms within the enterprise. The QRN draws attention to vulnerabilities in the enterprise structure such as risk-function connections measured by Edge Betweenness centrality. The generic QRN developed herein is a proof of concept and we advocate that enterprises build their own company-specific QRNs to identify highly connected and central functions in their company structure that could lead to cascading failure when specific risks arise. QRNs can contribute to the objective of building enterprise resilience.