Risk Management: The Unifying Framework for Business Scholarship and Pedagogy

ABSTRACT In this article, I provide a brief critical assessment of the intellectual history of risk management and insurance (RMI) as an academic discipline. Although the level of rigor and overall quality of RMI scholarship and pedagogy continue to improve, RMI remains too narrowly focused upon risk management issues specifically affecting insurance markets and institutions. Since risk management is of fundamental importance to virtually all areas of business scholarship and pedagogy, we must seek ways to more broadly apply risk management concepts. INTRODUCTION I am a risk management and insurance1 professor today primarily due to the considerable intellectual influence and encouragement of my friend and mentor, Neil Doherty. Although a number of other colleagues and coauthors have played important roles in my career development, Neil introduced me to risk management and insurance more than 20 years ago while I was a graduate student at the University of Illinois. As my dissertation advisor, Neil opened my mind to how interesting this field can be, and the learning continues as a result of collaborative research efforts. I come to risk management and insurance from a financial economics perspective. During the early to mid 1980s, academic finance was largely fixated on asset pricing theory, and there was little, if any, interest in risk management. In general, the finance profession at the time seemed quite comfortable with the notion that insurable risks were largely irrelevant because risk averse investors could efficiently manage such risks through portfolio diversification.2 Indeed, it was somewhat of a conundrum to financial economists at the time as to why corporate risk management could possibly matter.3 My doctoral dissertation specifically addressed the effects that corporate insurance contracting has upon firm value (see Garven, 1984), and this topic has subsequently grown into a fruitful area of research.4 In a nutshell, the literature shows that corporate risk matters because stakeholders other than shareholders tend to hold (relatively undiversified) claims on the firm, and that if these contracts are not well designed, then the firm subjects itself to potentially significant costs related to moral hazard and adverse selection. Furthermore, asymmetries which derive from bankruptcy costs and taxes exert important influences upon corporate risk management decision making. This article is organized in the following manner. The next section addresses the convergence that has taken place between RMI and finance during my academic career. The third section extends this theme of convergence to a discussion of risk management in the context of other business school disciplines such as management and marketing. My purpose is to convince the reader that risk management is properly viewed as the unifying framework for business scholarship and pedagogy in general. The fourth section briefly considers some important cultural aspects of scholarship and pedagogy which are important to consider as we move forward. Since the convergence perspective has implications for RMI pedagogy as well as scholarship, I address this issue in the fifth section of the article. The sixth section concludes the article. ON THE CONVERGENCE OF RMI AND FINANCE I attended my first ARIA meeting in 1986, two years after completing my Ph.D. in finance at the University of Illinois. Bob Witt was ARIA's past president at the time, and at his invitation, Cliff Smith gave a lecture entitled "On the Convergence of Insurance and Finance Research" (see Smith, 1986). It is important to note that at the time of Smith's lecture, this convergence was already well underway, e.g., Cummins' (1976) seminal article which studies risk management decision making in a CAPM framework, Main's (1983) article which motivates corporate purchases of insurance on the basis of various tax asymmetries,5 Doherty and Tinic's (1981) article which shows that reinsurance is valuable for reasons other than insurer risk aversion, and a number of articles applying financial theory to insurance pricing and the so-called fair return problem. …