By CYRIL TUOHY, managing editor of Risk & Insurance®
The job of risk management has got a problem. It's not all that good at managing risk.
We've just come through the most severe recession since the Great Depression, and there wasn't a thing risk management could really do about it.
Even at Citigroup and AIG, the largest property/casualty insurance company in the world, where one might have expected a good deal of risk management, risk management was impotent in the face of AIG's near collapse.
This isn't a reflection on the people who work in risk management, mind you. There are plenty of bright minds and hard-working souls--devoted workers all--striving to minimize risk and fighting to implement enterprise risk management (ERM) strategies.
It's just that risk management has an identity problem. The role often operates in the shadows of the C-suite, also known as the corporate Promised Land, the land of the CFO and the CEO.
At the same time, risk management isn't a bona fide part of the actuarial sciences, even if a number of risk managers today were originally trained as actuaries. No, risk management is a hybrid function, bridging a multiplicity of disciplines--from finance to compliance to human resources, even in some cases to information technology.
Herein lies the problem for risk management. Corporations don't like interdisciplinary roles. They're amorphous, fuzzy, often ill-defined and usually hard to quantify. Sure, corporations pay lip serve to the holistic approaches--you know what I'm talking about: "Total cost of risk," an "enterprise approach to risk" and the "holistic view of risk."
Sure sounds nice, but that's not really what generates quarterly profits, at least in the eyes of many hard-headed executives and hawkish board members.
Behind the press releases, the prepared speeches, corporations and shareholders in the end prefer precision. Ultimately, they worship the silo. The silo makes companies more efficient, maximizes shareholder value, improves return on investment and all of that.
Not risk management. Risk management bridges those silos. Therein lies its raison d'ętre. And therein lies its Achilles heel. It is no wonder risk managers have so much trouble explaining what they do to their own boards, and why boards often have trouble understanding how risk managers are still on payroll.
In the end, risk managers are fighting a losing battle. Is it any wonder that companies with some of the most highly qualified risk managers anywhere were also the companies that ignored the risks staring them straight in the face?
May 1, 2010
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