The six biggest issues in risk management today
Changes have been made since the crisis, but are they enough?
In March, the Economist Intelligence Unit conducted a survey of risk executives and found that firms had slowed in their progress on revamping and strengthening risk management. Based on this survey's results, I believe that it may be too early to draw specific conclusions on where the industry is headed with regard to dealing with its risk management challenges. But the survey does raise the general question of whether there may be a leveling out over the last couple of years of the drive toward – and interest in – improving firmwide risk management practices.
Today's complex risk landscape
It's now universally recognized that, given the interconnectedness of the markets and other factors, risk can crop up instantaneously from anywhere around the globe, causing increased volatility and uncertainty and increasing the pressure on risk managers. This uncertainty increases their need for accurate data and the need to ensure that their decisions take into account a variety of issues and alternatives. Consider the following six factors that have increased in relevance since the crisis:
Operational Risk has recently come forcefully to the forefront. With the increasing complexity of transactions, the global nature of the markets and the risks they represent, it's no longer uncommon for firms to have chief operational risk officers. Only a few years ago, the position did not exist.
Models and their role have become a focus, leading to a number of questions with no easy answers. For example, given the capital issues that resulted from the crisis, should we really continue to rely on a firm's proprietary models? Do we need public sector models, especially since it's been shown that in the event of a failure – especially that of a systemically important financial institution – the public sector may be asked to pick up the pieces?
Systemic risk issues are dominating the regulatory discussion globally, take up a considerable amount of the risk manager’s time, and raise very complex risk-related questions. For example, should the balance sheet size of a systemically important institution, or environmental issues such as sovereign risks, be included in a firm’s modeling scenarios not only to specifically measure the effect of each on the firm, but also how each may affect systemic risk?
Capital Charges and efficient use of capital have been and will be a major area of focus for risk managers well into the future.
Corporate Governance is also of growing interest to risk managers. Risk managers are now being involved in corporate discussions about compensation, and in some cases actually being asked to opine on compensation packages and whether the incentives built into the packages may increase the firm's risk profile.
Risk managers now are taking their place among company senior management teams and being integrated into many firms' strategic planning processes.
The Board of Directors' role has changed dramatically over the last few years, with risk-related issues becoming more important to directors. This is not only because directors are being held to a higher standard of conduct, but also because they now want to objectively show and ensure they are carrying out their duties to their companies and shareholders properly. Directors are also demanding that a culture of risk awareness exists throughout the organization, and that risk awareness becomes and remains an integral part of the company.
Today's risk managers
Today’s risk function is being asked to take on a role not envisioned in the past. Risk managers must become great communicators and take pains to develop that ability. They are now being asked to undertake lead roles in dealing with regulators, and have become indispensible in explaining the effect of regulatory change on a firm and expressing the company’s view about new or pending regulatory initiatives.
Risk managers in many firms are also taking on a quasi-sales role, augmenting company sales activities by acting as an "independent" counselor, explaining the risks associated with certain transactions to investors and providing insight into a firm's infrastructure and its ability to deal effectively with the risks associated with a specific transaction or portfolio of activities.
Over the last few years, the role of the risk manager has increased in importance globally. But, there's still a lot of room for it to grow and for risk management to become an even more integral part of a company's daily thought process. Risk managers now are taking their place among company senior management teams and being integrated into many firms' strategic planning processes. But, there are challenges ahead to keep the momentum going – and very few easy answers.
Bio: Richard Apostolik is President and CEO of Global Association of Risk Professionals (GARP).
Economist Intelligence Unit Survey Findings at a Glance:
- Financial institutions are increasing their exposure to risk.
- Managing complexity is becoming one of the biggest challenges for firms.
- The risk management function is finding it hard to increase its authority.
- There is plenty of room for improvement in the relationship between the risk function and other parts of the business.
- Progress on revamping and strengthening risk management has slowed.
- Management boards are now paying a lot more attention to risk.