Risk response not assessment is the key – Comment

The reason for this is not because the subject itself is inherently sleep-inducing, or that the people that like to talk on the subject are inherently boring. Far from it, many of the risk managers who like to discuss this topic are some of the most forward thinking of the profession. The problem is that the topic is just too broad to squeeze into the hour, at best, normally allotted for speeches and so the end result is usually the same – an hour devoted to explaining why managing risk in silos is simply not as good as doing it in a holistic, enterprise wide way and how it is high time main board executives wake up to this fact.hideNow there is nothing wrong with these statements of course because they are essentially true. The problem is that people have been standing up and saying this for at least ten years and one can only presume that the reason why it keeps being repeated is that the message is not getting through to the main board. It was therefore refreshing to avoid the very tempting call of the pool last week, while in Dubai for Marsh’s National Oil Companies Conference, and instead sit down to listen to what Jose M. Carrera, risk manager with Petroleos Mexicanos, the Mexican oil major, had to say on the topic. Mr. Carrera talked a lot of sense and his message was certainly well received by both the risk managers in the audience and some very senior oil company executives. The difference was that Mr. Carrera did not dwell for too long on the merits of ERM and tread the same old path as so many others. He said that ERM can prove to be a waste of time if companies focus their efforts on the wrong risks in the first place (financial rather than strategic) and focus most of their efforts on risk assessment rather than risk response. “Many organisations have deployed risk management efforts to identify, assess and mange risks using techniques such as value-at-risk, scenario analysis and stress testing as a basis for determining response strategies that align the firm’s objectives with risk appetite and tolerance. However, recent events revealed shortcomings in these efforts,” said Mr. Carrera. This is obviously true in the banking market that wasted fantastic amounts of money on very sophisticated models that were more or less useless when the crisis hit, because they did not provide the banks with the tools needed to cope. Stochastic models are not very good at managing real crises. This message is probably also relevant to most corporations that have adopted some form of ERM. I recall interviewing a very intelligent and committed Scandinavian risk manager once who had won awards for his true application of ERM, across the organisation he worked for. But most of the discussion we held was focused upon the vast number of risk categories that he had managed to identify, log and benchmark using a state-of-the-art model – no doubt developed by some very successful financial modelling firm. I wonder how useful that Leibniz-like risk library was when the crisis hit and his company’s board was forced to act rapidly, decisively and with a full knowledge of the risk-reward options they faced in that stressful time? This crisis, that we are seemingly now groping our way out of, has for many risk managers offered an opportunity to grab the attention of board members who were previously focused solely on growing top line revenues and opening up new markets. Now that they are interested in risk management, the underlying message provided by Mr. Carerra would seem to be that you really should not waste this opportunity by telling your board how cleverly you have identified and measured your risks. Let them assume that you have done this and focus on how you will help them truly manage those risks when the next crisis hits and, importantly, what measures you have in place to manage the velocity of those risks as they fly throughout the organization.

Risk response not assessment is the key – Comment

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