No matter howmany regulations or internal fail-safe systems an organization or agovernment puts in place, preventing systemic economic collapsesmeans accounting for the worst instincts in human nature. Canenterprise risk managers mitigate “people” risk?

That was the provocative question raised by an audience memberat a recent enterprise risk management conference hosted by theevents division of my parent company.

The question was posed following a wide-ranging panel discussionof the financial meltdown and its implications for corporategovernance—entitled, “A Conversation About Risk: What Keeps You UpAt Night?”

An audience member asked the experts to explain how companiesand regulators can mitigate “people risk” to discourage behaviorthat is at best reckless, and at worst unethical or even illegal,when the potential for large profits looms.

“One of the clear weaknesses here is people,” said the attendee.“How do you get board buy-in to proceed with caution on risk? Howdo you mitigate the inherent 'people risk'?”

The responses were intriguing.

“There is a natural human reluctance when things are going wellto challenge the status quo,” said Helen Galt, senior vicepresident, actuary and chief risk officer at Prudential FinancialInc. “Even though some of the markets were defying the laws ofgravity, people were reluctant to miss the boat. More attentionshould have been paid to nightmare scenarios.”

She said CROs need to “challenge management to define their risktolerance more clearly.”

Ms. Galt later added that collateralized debt obligations (CDOs)packaging subprime mortgages were “embraced because of the highratings assigned to them by rating agencies”—a level of trust andconfidence that turned out to be misplaced.

She suggested that “if you can develop your own internalcapabilities to analyze these complex products, you must do so. Butif you find you need 300-page documents to fully explain how theproduct works, it's probably too complicated.”

Ms. Galt said her firm “basically decided we were not going toinvest in CDOs. After they were sliced and diced multiple times, itwas hard to understand what we were looking at.”

Earlier, Mark Abbott, managing director of quantitative riskmanagement at Guardian Life, had also urged companies to “do yourown due diligence and not just rely on the rating agencies. Asklots of questions about the underlying risks of securities you areconsidering purchasing.”

He added that firms need “a collaborative environment thatallows and even encourages management team members to challenge oneanother,” with the risk management department having a seat at thetable.

Nancy Bennett, a senior life fellow at the American Academy ofActuaries, said “people forgot the risk-versus-return part of theequation,” noting that “there were plenty of signs along the way,if we were paying attention, that the mortgage market was close toblowing up. But no regulator felt it was their responsibility toraise the issue.”

Ms. Galt said the financial markets will “always be susceptibleto poor judgments and even to fraud. But an enormous amount ofattention is being focused now on risk management internally andexternally. There is a lot of positive energy about it, andhopefully that will make a difference.”

The panelists, however, were not eager to see new federalregulations imposed, nor additional government referees put inplace to watch over their operations.

“Another systemic failure is possible,” said Ms. Bennett. “Butwhatever regulatory changes are made, let's make sure it's riskmanagement-based and not politically-based.”

Noting efforts in Washington to have the Federal Reserve and/ora federal regulator council oversee insurers—or at least thoseposing a systemic risk to the economy–Mr. Abbott said “the idea ofpeople accustomed to handling banking regulating insurance is afrightening thought. We need someone with equal stature at thetable representing the insurance industry.”

Ms. Galt agreed that “we're probably going to see some sort ofoverreaction in Washington on reform, especially since there islittle understanding there of the insurance industry.”

She added that “one of our challenges is to educate our futurefederal regulators on what insurance is all about.”

Good luck with that, right?

In any case, what suggestions might you have for mitigatingthis ”people risk” exposure? Can enterprise risk managementtackle human weakness and the proclivity for greed?

(To learn more about the National Underwriter Company's recentERM Conference, including the ability to download material from thespeakers–from yours truly as well, based on my speech aboutreputational risk in the insurance industry–go to http://www.summitliveevents.com/sites/erm/Pages/Enterprise-Risk-Management-Program.aspx.)