Reluctantly, let’s take a time machine back five years to
2009 when the US economy came apart from all ends, leaving the country with
Great Depression-like markets. The crash of the US financial system devastated
financial institutions (FIs) that were once thought of as indestructible and
left other businesses petrified of their uncertain economic futures.
The impact of the crash didn’t just apply to business. In the US, ordinary
investors, whose retirement funds were guided by trusted financial advisors and
employers, were left with little or no equity. Real estate, previously thought
of as a safe haven for investment, crumbled as a result of careless subprime
lending practices. In a blink of an eye, most of Wall Street’s major investment
firms had either collapsed or suffered staggering losses.
tremendous economic uncertainty, credit lines froze. Businesses, both large and
small, were denied critical funding needed to carry out routine operations
essential to the vitality of their business. Lack of funding brought US
business to a grinding halt. Companies scrambled to cut costs which ultimately
led to mass layoffs.
Today, however, it appears the American
economy has made a tremendous rebound, as lines of credit have become more
available and the value of real estate is slowly returning. The most
encouraging sign is that treasury departments are showing renewed optimism and
have regained an appetite for spending – a trend that suggests the threat of a
‘fiscal cliff’ has dissipated.
So how has the US economy made such a dramatic
turnaround in such a short period of time? While there are many factors that
have contributed to this advantageous market swing, the value of risk
management can be considered a key contributor to this resurrection.
In the months following the market meltdown, investors, and even corporate
boards, were left wondering how the actions taken by mid-level traders in some
of the world’s most prestigious FIs could cause not only the collapse of
companies like Bear Sterns and Lehman Brothers, but spur wider implications
that obliterated personal wealth accounts.
The pursuit of
accountability prompted the following questions:
- Why did the chief
financial officers (CFOs) and treasurers not highlight these risks?
- Where were the internal and external auditors?
- Why were
executives and boards not exercising more oversight?
- Did the rating
agencies fail to adequately understand, assess and report on risks taken by
But, ultimately, the question ‘Why did we fail
to manage the risk?’ has seemed to resonate the most – sparking a renewed focus
on establishing risk management as a core business competency.
government, regulations such as the Dodd-Frank Act were established to promote
financial transparency, forcing US corporations to review the way their money
is allocated, the resiliency of their supply chain, as well as the ethics of
their second and third-tier partners. In 2008, Standards and Poor’s (S&P)
announced that it would use enterprise risk management (ERM) in rating
financial securities in non-financial companies.
It is no longer
enough to just have risk management capabilities. The C-suite has learned their
lesson and now has a better understanding of the value and importance of
advancing their risk programs to an enterprise-wide and strategic level.
RIMS and Marsh Excellence in Risk Management IX report notes that 87%
of companies with annual revenues above US$1bn confirm that expectations of the
risk management department have increased. Moreover, the 2013 report indicates
that many of these companies have already started turning these expectations
into reality. More than half of the members of the C-suite surveyed have
integrated the risk management function with the organisation’s strategic
planning and execution activities to identify and assess risks arising from
The Value of ERM
risk management is catching on. RIMS has defined ERM as a strategic business
discipline that supports the achievement of an organisation’s objectives by
addressing the full spectrum of its risks and managing the combined impact of
those risks as an interrelated risk portfolio.
organisations to become more self-aware. It identifies and manages
cross-enterprise risks; provides integrated management reporting; helps
organisations prioritise risks; and enhances its risk response decisions.
While it might not be apparent to those not entrenched in the practice
of risk management, dynamic ERM programmes are in motion every day,
contributing to the success and sustainability of countless organisations
throughout the world.
In fact, in certain companies, ERM did make a
difference during the economic crash five years ago. According to reports from
the conference board, Goldman Sachs adjusted its positions in mortgage-backed
securities (MBS) beginning in 2006, differentiating itself from the rest of the
market. Members of the firm’s management team have attributed this change to
the company’s risk management competencies that supported strong governance
oversight, reporting, communication and fostered a risk aware culture.
Ultimately, this approach to risk management allowed Goldman Sachs to avoid the
financial collapse realised by many of their competitors.
many organisations, risk professionals have become a trusted partner in the
strategic decision-making process. Business leaders are relying on their
facilitation, their consultation skills and their analysis to not just protect
shareholder value – but to help create it.
The connection between
risk management and the organisation’s new-found willingness to invest capital
in new business areas, resources and other enhancements rests in the
discipline’s ability to help define the organisation’s risk appetite (how much
risk it is willing to take on) and risk tolerance (how much risk it can accept
before reaching set thresholds).
The word ‘risk’ has a negative
connotation. For many, this word has only a narrow meaning as an adverse event
that needs mitigation or prevention. Instead, risk professionals are
challenging leadership to change their attitudes about risk. Characterising
risk as an uncertain outcome that can either improve or worsen a position has
opened the door for a more productive exchange and view of the positive side of
risk. Without risk, many of the world’s most successful organisations would not
Finance departments have demonstrated a renewed commitment
to risk management and many are taking a more aggressive approach to this
essential business capability. With input from department managers on the
impact of each decision, as well as a more complete understanding of potential
outcomes from those decisions, the organisation’s strategic objectives, and its
propensity to take on risks, mean that it is now equipped to make business
decisions with more confidence.
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