As you may recall, it was on the above mentioned date that New York Giants linebacker Lawrence Taylor tackled Joe Theismann, quarterback of the Washington Redskins: but he did not just tackle him.
Taylor ran up to Theismann from the quarterback's blind side and hit him with such force that Theismann's right lower leg bones snapped and protruded through the muscle and skin. People still shudder at the mere mention of the tackle. It ended Theismann's career and cost the Redskins millions of dollars.
Catastrophic losses have a way of bringing attention to our vulnerabilities. The owners of NFL teams took the Theismann injury to heart and reassessed the manner in which their assets were being protected. Over time, their attention came to rest on the offensive linemen that protect the quarterback's blind side (the left side for right-handed quarterbacks.)
The player responsible for patching this vulnerability (usually the left tackle) went from being one of the lowest paid players, to one of the highest paid players. In fact, one left tackle actually had a clause in his contract guaranteeing that he would be the highest paid player on the team.
This is very significant for risk managers. The person responsible for protecting the team's chief asset, the quarterback, was actually paid more than the quarterback. This is akin to a risk manager being paid more than the CEO.
At first glance, this seems an impossibility; however, it might become more of an inevitability and for very good reason. It really doesn't matter how good the quarterback is at scoring (or the CEO is at running the company) if all of his gains can be destroyed in a single event.
This lesson has been learned (or ignored) time and time again. Most recently, SociétéGénérale suffered a $7 billion dollar loss as the result of internal fraud. A rogue trader seeking to cover his losses managed to beat the company's controls and keep his activity secret. By the time the French bank discovered the problem, it was $7 billion poorer.
This is not the first time this has happened. Barings, an English bank that had thrived for 230 years, was utterly destroyed by the activities of a single rogue trader. Amaranth, Long Term Capital Management--all destroyed by single catastrophes. What was more important for them, risk management or smart traders?
Looking at these disasters in retrospect, one has to ask, what is risk management worth? It is a hard question to answer for a position that does not generate revenue.
However, if a single person or event can destroy 230 years of success or can wipe out $7 billion in a single day, what is the value of a person or team that can stop that from happening? According to the NFL, the answer is "a lot."
The value of risk management and risk managers is even greater than simple loss prevention. In The Blind Side, Lewis interviews quarterbacks who discuss how they could not focus on scoring because of their worries about being blindsided. Similarly, executives cannot focus on earning money if they are worried about catastrophic surprises. A good risk management team allows them to focus on what they do best by removing the worry about risk.
BEAUMONT VANCE is the risk management columnist for Risk & Insurance®. He manages risk for a leading financial company.
March 1, 2008
Copyright 2008© LRP Publications