Caremark and Enterprise Risk Management
![handle is hein.journals/jcorl34 and id is 975 raw text is: Caremark and Enterprise Risk Management
Stephen M. Bainbridge*
I. INTRODU CTION ...................................................................................................... 967
II. ENTERPRISE RISK M ANAGEMENT .......................................................................... 969
A . O verview ........................................................................................................... 969
B. Risk Management and the Financial Crisis of 2008-2009 ............................... 970
III. CAREMARK AND PROGENY ...................................................................................... 972
IV. Do ENTERPRISE RISK MANAGEMENT AND LAW COMPLIANCE DIFFER IN KIND?... 978
V. THE SIGNIFICANT DIFFERENCES IN DEGREE .......................................................... 981
A. Risk M anagement is Still Evolving ................................................................... 982
B. The Benefits of Risk Management Programs are Inherently Less Certain ....... 982
C. Risk Management and Risk Taking are Inextricably Intermingled .................. 982
V I. TW EAKING CAREMARK ........................................................................................... 985
A. An Utter Failure to Adopt Risk Management Programs .................................. 985
B. Risk M anagem ent Red Flags ............................................................................ 986
V II. C ON CLU SION .......................................................................................................... 990
I. INTRODUCTION
Enterprise risk management is the process by which the board of directors and
executives of a corporation define the firm's strategies and objectives so as to strike an
optimal balance between growth and return goals and related risks.1 It encompasses
determining an appetite for risk consistent with the interests of the firm's equity owners
and identifying, preparing for, and responding to risks.2 Although primary responsibility
* William D. Warren Professor of Law, UCLA School of Law. I thank Iman Anabtawi, William Chandler, and
William Klein for their helpful comments. Any remaining errors are mine.
1. COMM. OF SPONSORING ORGS. OF THE TREADWAY COMM'N, ENTERPRISE RISK MANAGEMENT-
INTEGRATED FRAMEWORK: EXECUTIVE SUMMARY 1 (2004), available at http://www.coso.org/Publications/
ERM/COSOERMExecutiveSummary.pdf [hereinafter COSO FRAMEWORK].
2. Id. Because risk and return are positively correlated, a corporation inevitably must take risks to
generate a positive rate of return. See WILLIAM A. KLEIN & JOHN C. COFFEE, JR., BUSINESS ORGANIZATION
AND FINANCE 45 (9th ed. 2004). Owners of the firm's equity stake will have the strongest appetite for risk
because, as the company's residual claimants, they do not get paid until the claims of all other stakeholders have
been satisfied. Id.](ViewImageLocal?handle=hein.journals/jcorl34&div=33&collection=&method=preview&ext=.png&size=3)
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