A Call to Action for Risk Managers

Risk managers are waking up to the fact that as the world continues to change, they must also change. Upgrades to skill sets as well as the overall approach to risk management is essential for these professionals to provide the value that companies are demanding in the tumultuous global economic environment. Just this week, at the Federation of European Risk Management Associations annual conference in Sweden, a call to action is being made to risk managers around the world.  Here’s a sample of the views expressed during the conference as reported by Business Insurance magazine.

During a news conference at FERMA’s forum in Stockholm, FERMA executives said risk managers cannot isolate themselves from the financial turmoil in many parts of the world or the rapid changes in many industries because of technology. “You cannot put your head in the sand; you have to understand and live with it,” said Julia Graham, chief risk officer for London-based law firm DLA Piper U.K. L.L.P. and VP of FERMA.

Ms. Graham said the skills that risk managers need have changed in the past five years. Now, she said, risk managers need to look forward more than backward, have greater financial literacy to understand and talk the language that company boards use, and improve their management skills, among other things.

The purely quantitative, historical view of risk is no longer adequate in today’s complex global marketplace.  Strong business acumen is required for risk managers to provide a better view of potential risks and opportunities facing companies today.

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When Assessing Risk, Don’t Forget the People

The Conference Board released a report today about the need for stronger integration of human capital risks into a company’s overall enterprise risk management program.  Too often, these risks are left to the human resources department to manage alone with little understanding of the potential impact to a company’s entire operation.  After surveying 161 leading companies worldwide, here is what the researchers discovered.

At most companies, human capital accounts for at least half of operating costs and can have a significant impact on business results. However, the study finds that human capital risk (HCR) — which can range from unionization/labor relations to offshoring and outsourcing to staffing in a pandemic — tends to be siloed in human resources departments, away from the companywide assessment and mitigation processes of enterprise risk management (ERM). This arrangement prevents information about HCR from having a role in the comprehensive, aggregate view of risks, root causes, interactions, and impacts through which leaders set priorities and determine overall strategy.

Out of eleven risk categories, executives ranked HCR as having the fourth highest impact on business results, ahead of financial, reputational, supply chain, and IT risks. This high ranking is evidence that HCR should be taken seriously as an enterprise risk.  However, less than one-third (31 percent) of companies believe they effectively assess human capital risk, and 24 percent believe they do an ineffective job.

During an economic crisis such as the one we have experienced, many companies lose sight of what really drives a business – people.  Understanding the risks associated with the primary business driver is certainly a no-brainer.

H-P CEO Resignation Highlights a Bigger Risk

Hewlett-Packard’s announcement last week that its CEO had resigned as a result of code of conduct violations was a clear sign that corporate boards are taking their governance role more seriously.  However, in the aftermath of the resignation, a bigger and more pervasive risk throughout many corporate C-suites has been highlighted – the lack of a clear succession plan.  Here is what the Wall Street Journal reported today.

In the wake of Chief Executive Mark Hurd‘s sudden resignation, Hewlett-Packard Co. has declared that its focus on business remains intact. But its CEO’s unexpected departure reopens questions about H-P’s strategy and succession that had largely been absent over the past few years. On Friday, confidence over Hewlett-Packard’s prospects appeared to slip following Mr. Hurd’s resignation—which stemmed from misuse of corporate expense accounts, uncovered in an investigation into allegations of sexual harassment by an actress named Jodie Fisher who was hired as an event-planning contractor for H-P. The news, released after stock markets closed Friday, shocked investors and caused H-P shares to plunge 8.3% to $42.48 in after-hours trading.

Given the limited number of qualified external CEO candidates, it is imperative for companies to build their bench strength to support their succession plan in the event of a CEO’s or other senior executive’s untimely exit.

Lack of Resources Hinders Risk Management Improvements

A survey listing the top challenges for improving risk management practices was released today at the Risk and Insurance Management Society Annual Conference in Boston.  Not surprisingly, the number one challenge for most companies is the availability of qualified resources.  With limited budgets and smaller talent pools coming out of the economic recession, these companies are struggling to elevate the effectiveness of their risk management programs. Here is what Business Insurance magazine reported today.

The lack of staff dedicated to risk management ranked highest on a respondents’ list of challenges to improving the practice of risk management in their organizations, with 44% citing that lack as a challenge, according to “Excellence in Risk Management VII: Elevating the Practice of Strategic Risk Management.” Having other areas with greater priority than risk management was cited as a challenge by 43% of the respondents. Demonstrating the value of risk management ranked third, at 34%. Lack of financial resources dedicated to risk management, and senior management commitment rounded out the Top 5, cited by 33% and 32% respectively.

Companies will need to be creative in finding solutions to these challenges.  Wheelhouse Advisors can help.  With deep expertise at a reasonable cost, Wheelhouse Advisors provides a compelling alternative to engaging larger consulting firms or hiring full-time staff.  Email us at NavigateSuccessfully@WheelhouseAdvisors.com to learn more.

What Makes a Risk Manager Effective?

An interview published in today’s Wall Street Journal discusses the importance of risk management as a business discipline and the need for more formal training for professionals who dedicate themselves to the discipline. Gideon Pell, Chief Risk Officer at New York Life Insurance, provides his perspective on the increasing demand for risk management professionals.  He also offers some great insight on what makes a risk manager truly effective in an organization.  Here’s what he had to say.

It’s obvious that we’re living in an uncertain economy. The idea of having a disciplined approach to risk management, to be able to look at risks holistically across the organization, to make sure you’re not missing significant risks, is even more critical today than it was two or three years ago.

One lesson that we’ve learned from the last couple of years is that the institutions that failed had a lot of risk managers who were very smart and very quantitative but it didn’t help them save their organizations. If you’re not able to influence the organization that you’re in, you’re not going to be effective at your job. To be an effective risk manager, you have to have a good understanding of the business. You’ve got to have sound judgment and you have to be able to communicate effectively up and down the organization.

Mr. Pell is spot-on in his assessment of what makes an effective risk manager.  The challenge for many companies is developing talent to master both the quantitative and qualitative.  Risk managers must be practical and business focused in their approach to be successful.  For help designing a talent development plan, email us at NavigateSuccessfully@WheelhouseAdvisors.com.

Looking to Satisfy Risk Management Demand

Companies are now beginning to shore up their risk management practices and are hiring more risk management professionals as a result.  An article in the New York Times this week discusses the increase in demand for risk management skills and how prominent business schools are preparing graduates for the field.

Among the hot areas now are positions related to minimizing risk, as firms try to mitigate the chances of another financial crisis. Risk in general is a relatively new focus, and the openings range from business, credit and operational risk to product and technology risk. “Risk is everywhere,” said Jeanne E. Branthover, head of the global financial services practice at Boyden Global Executive Search.

This year, the Stern School of Business at New York University started offering an executive master’s in risk management in partnership with the Amsterdam Institute of Finance. During the program, which lasts a year and costs 42,000 euros, or about $60,000, students meet 10 times for multi-day sessions and study subjects including risk metrics, credit risk and liquidity risk. The course covers about 75 percent of what one is required to know for the professional risk manager certification, said Ingo Walter, a professor of finance at Stern.

Stern also offers a less technical three-day executive education session on integrated risk management. Columbia Business School and the Kellogg School of Management at Northwestern University are among other institutions that offer similar programs, which range in cost from $3,750 to $10,000.

As more business school graduates with a foundation in risk management enter the corporate world, corporations will certainly benefit from having these skills proliferate throughout the organization.

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Where is the A-Team?

At many companies around the world right now, executive management is feverishly looking for ways to cut costs and eliminate headcount to bolster the bottom line.  As I have heard many times before, many are probably asking themselves, “Do we really need an A-Team to handle our enterprise risk and compliance activities?”  As a result, risk management and compliance are areas that are typically cut first.  While that may be helpful to the bottom line in the short run, it typically comes back to haunt companies as we are seeing today in the many corporate failures related to poor risk management and compliance practices.  

So, those same executives shoud be asking themselves, “Do we have the right talent to address our risk management and compliance activities?”  Some key skills required for the “A-team” include:

  • Solid understanding of the business
  • Well informed on regulatory and compliance requirements
  • Ability to see the big picture beyond just the rules
  • Uncompromising integrity and courage
  • Strong communications skills to articulate risk exposures as well as opportunities
  • Capability to persuade and influence appropriate behavior in others
So, as budget season winds down in many corporations, executives need to be very careful not to succumb to the temptation to cut what may seem like a non-essential activity.  As Mr. T from the original A-team would say, “I pity the fool who cuts enterprise risk!”  Do you agree with Mr. T?  Comment below.