Volatile markets and skyrocketing oil prices dominate the news but are just a bump in the roller coaster that has taken Main Street, Wall Street and everyone in between for a wild ride. The economy is once again growing, yet the path to prosperity remains unclear. Are we truly on a trajectory of rebounding economic fortunes and job growth, or teetering dangerously close to a double dip recession? While there is no crystal ball, one thing is certain; the role risk management plays in guiding corporate strategy is amiss and must change.
The past few years have not been kind to the financial services industry. Risk managers at financial firms did not prove effective. Companies took massive risks and lost trillions in wealth. Armed with mystifying models and persuasive pitches, alleged experts sold everyone on endless upside, while long-term risk was swept under the rug. Most analysts, ratings agencies and managers jumped on the bandwagon. The music was playing, and everyone wanted to dance.
Where was a voice of reason? Why were risk managers quietly sitting on the sidelines rather than speaking out about the spiraling risks? The problem was a culture of "yes." During the unbridled boom times of the early-mid 2000s, saying yes was in, and touting risks was out. Until, that is, markets collapsed, liquidity dried up, hundred-year old banks crumbled and there was nothing left to say yes to. That was our wake-up call.
As the financial markets imploded, forever altering individual and corporate fortunes alike, companies learned why risk management is more than a "nice to have." While a careful review of the risk and return of any pursuit is important, quantitative models and common sense are not enough. Companies need a CEO-led culture that welcomes challenges to assumptions and encourages a contrarian view. Risk management needs a champion in its corner -- in the C-Suite -- whose job is to be chief skeptic and devil's advocate.
Most companies already have a Chief Risk Officer. But to truly be effective, companies need to further develop this role to include a team tasked with probing deeply into strategies, acquisitions and growth initiatives. In turn, the team should be incented to play devil's advocate, to ask questions when others hold back, and weigh and flag potential risks.
This team needs to combine intimate familiarity of the company's products, strategy and culture that internal stakeholders offer with the knowledge and best practices external consultants can provide. Actuaries, with a strong financial and risk skill set, provide an important perspective to a team charged with making better decisions. By considering how risks interact with each other, risk management can improve strategic planning by looking at risk-based opportunities as well as risk mitigation techniques.
Most importantly perhaps, the leader of such a team needs to have the CEO's ear, the respect and attention of the entire C-Suite and Board, and ownership and understanding of the company's strategic planning process.
Is this role feasible? Yes. Is it needed? More than ever. But to become an ingrained part of the strategic planning process, a shift in corporate cultures is desperately needed. The risk team needs to be viewed not as a road block, but as a competitive advantage that enables companies to navigate the complex world of risks and rewards. In a culture of high stakes and high rewards, it's easier to be a yes person. But as businesses move forward in the post-financial crisis world, it just may pay to encourage someone to let us know when it is time to leave the dance floor.