A Seat at the Table for Risk Managers: Risk Management's Future Looks Bright after Lessons Are Learned from the Economic Crisis
McLaughlin, Kevin, The RMA Journal
ECONOMIC CALAMITY HAS led banks and other organizations to take a hard look at risk when making business decisions. That bodes well for risk specialists, said participants in a recent panel discussion on the future of risk management. The panel spoke to bankers at the March meeting of the RMA New York Chapter.
"We are seeing interest in improving risk dialogue," said Hank Prybylski, head of Ernst & Young's Global Financial Services Risk Management practice. "A lot of firms are looking to build up their risk organizations and have the right balance between risk management and business-line activities."
The interest goes beyond banks, Prybylski added. "We're getting calls from hedge funds, asset managers, sovereign wealth funds, private equity funds, energy companies, and pension funds," he reported.
Does Risk Management Have a Seat at the Table?
Panelists discussed the role risk management should play in corporate governance.
"There are three groups in a business, and they should be mutually reinforcing," said Prybylski. "There are business people who take risks and need to identify risk as it emerges. There are governance groups that set strategy and set risk appetite. And there are control groups that monitor and report on activities and the balance between risk and reward. The question is, does risk have a strong seat at the table on key business decisions?"
Some firms had risk groups that were too independent of the business line and others that were too close to the business line, Prybylski added. "You need to find the right mix, but you've got a problem if your risk function doesn't have independence in evaluating major business decisions," he said.
Adam Gilbert, a managing director at JPMorgan Chase, said business-line and risk staff have mutual obligations. "The business people need to ensure that the risk people are key partners and have a seat at the table. That tone starts at the top. At the same time, the risk staff has an obligation to understand the business. They need to add value to risk/return decision making," he said.
Gilbert cited a JPMorgan Chase risk manager who marketed a line of business before becoming a risk manager. "He understands the business top to bottom, so he has tremendous value to the head of the business," Gilbert noted. "He can connect the changing risk characteristics of the portfolio directly to the decisions they're making."
Again citing JPMorgan Chase, Gilbert described how the firm approaches risk: "Senior-level involvement in risk governance is paramount. Risk issues are discussed at monthly business reviews. Senior management, including the chairman and CEO, engage directly the CEOs of the lines of business. They're held accountable not only for their financial performance but for their risk performance. It's viewed in an integrated fashion."
Speaking of enterprise risk management as a counterweight to using a "silos" approach to evaluating risk, Gilbert said, "Look back over the events of the past 18 months or two years and think about the connections people might not have been making. If they had been making those connections, we could have avoided some of the problems we're facing.
"For example, did we fully appreciate that the underwriting performance in mortgage banking would lead to the direct connection between credit and market risk in a way that posed solvency challenges for firms? Did we connect well enough how funding liquidity and asset liquidity were so intertwined and that firms' market values would be severely impacted by that relationship?
"To the extent that an organization has silos and doesn't have processes to bring those connections together through risk-related and finance-related information, and through governance processes that will force the connections to be made, you could be in trouble," he said. …