Magazine article Risk Management

How to Manage Career Risk

Magazine article Risk Management

How to Manage Career Risk

Article excerpt

Finding the Right Balance

A rather cynical individual once said that at the most fundamental level, all uman relationships are based on mutual exploitation. That may seem a bit of an overstatement to those of you who don't work on Wall Street, but in the current business climate, it does provide an interesting perspective. To be valued in today's business enterprise, you must produce revenue or be seen as providing a critical protection to the firm's revenues and assets. In fact, it is no longer enough to produce revenue. The function performed must be one in which the firm believes it has a comparative advantage and one that clients value and at which the firm believes it can excel. Business activities that do not meet these criteria are sold to other firms that believe they have a comparative advantage in such activities.

Where does risk and insurance management fit into this environment? I think risk and insurance management practitioners have been somewhat misled in recent years about the nature of their potential contribution to the business enterprise. Simplistically stated, the syllogism seemed to be: All business is risk, the risk manager is master of risk, the risk manager is master of all business. People in risk and insurance management were urged to assume control of all aspects of both financial and operational risk management. However, in most cases they lacked the expertise for the former and the platform with which to effectively address the latter.

Financial risk management came into vogue when the "D" word emerged. Derivatives are not new, but today's exposures are larger and some are far more complex than those of the past. Although some derivative products may ultimately prove attractive to risk and insurance managers as funding mechanisms for certain risks, financial risk management, as such, will continue to be led by the organization's CFO and treasurer. In my own case, the assumption of financial risk is the nature of our business. Financial risk is the core competency of the firm, and we have established a group that is wholly dedicated to continually monitoring and controlling financial risk.

Some of the most horrific losses involving derivatives were not primarily the result of market variables, but rather of poor operating controls. This is true whether we are discussing the demise of Franklin National Bank in 1974 from unauthorized foreign exchange trading (a form of derivative) or the collapse of Barings more than 20 years later.

To be effective, operating controls must be imposed systemically. For many firms, particularly those in financial services, technology and data represent the greatest systemic dependence running through the entire enterprise. As blood carries oxygen throughout the human body, the body corporate relies upon the flow of information through its technological systems. It is logical, therefore, that the ultimate responsibility for operating controls may be placed with the chief operations officer and/or chief information security officer, both of whom may be functionally joined.

This does not mean that managing operational risk does not continue to be a shared responsibility across the enterprise involving the compliance, legal, human resources, audit, insurance and other departments. The nature of these areas will vary by type of organization. Together with business representatives, these areas may be brought together as an operating risk group to look at issues across the organization.

To use the current idiom, this is an example of thinking laterally rather than vertically or hierarchically. To think laterally you do not need to lie down. It simply means breaking down the traditional compartmentalization of risk management. It gets away from the need to find a specific pigeon hole for each issue: Is this a legal question? A human resources issue? An operations matter? An information security issue? An insurance concern? …

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