Changing perceptives on risk management

In implementing integrated financial risk management, senior management's view of risk management shapes the risk management thinking and culture throughout the organization. Key to this is a consistent message about the importance of risk management and changing perceptions regarding risk management.

The benefits of risk management is not clear throughout the organization resulting into inconsistent interpretation of the value proposition of risk management. The recent financial crisis has somewhat provided the impetus for pockets of people, entities or business units within this organization to consider risks in their businesses or where financial risks complacency existed, financial risks became a priority in their management radar. This is evidenced by the multitude of financial risk advisory and guidance that has been sought from us in the past 6 months, with market risk and counter-party risks as their top risk management concern.

This development that came about arising from the financial crisis is indeed a positive development in that businesses are realizing the importance of understanding how risks impact their businesses and makes efforts to manage these risks. In my view, these developments still fall short of what constitutes an effective risk management practice.

In this posting, I will attempt to list key risk management concept and ideas that I believe will shape the organization's thinking on the value proposition risk management brings and the practice of risk management.

Understanding the value proposition of risk management

Based on our experience in implementing integrated financial risk management, there are still companies that think of risk management as compliance and that risk management will stop businesses from expanding because their view is that risk management is risk aversion. There are also companies flush with cash that believes managing risks does not apply to them. Why manage risks when we have survived all these years without having the governance, framework and discipline of risk management in place?

These are dangerous mindsets because as I mentioned earlier, the practice of risk management is shaped by how senior management perceives it to be. Key to this is consistent message on risk management value proposition. Risk management (more so ERM), when designed comprehensively especially in a large organization is not just about having in place a process to protect businesses from setbacks, it enables better business performance by prioritizing risks that businesses want to reduce and risks that businesses want to profit from. With the uncertainty facing businesses in 2009, particularly brought about by economic uncertainty, subsidiaries and businesses should jump at the opportunity to leverage on the strengths of a risk management program in having a total view of its risks and knowing how these risks will impact their business growth strategies.