Risk Management is a Corporate Culture Issue

At the Wharton Finance Conference in 2007, Lloyd Blankfein, chairman and CEO of Goldman Sachs, and Kenneth Moelis of Moelis & Co (previously with UBS Investment Bank) gave their perspectives on risks, rewards and opportunities in Wall Street.

They both provided different perspectives and here are the excerpts :

"At its most fundamental level, they agreed, risk management is a corporate culture issue. To manage risks effectively over time, employees must put the firm's welfare and the preservation of important client relationships ahead of everything else. In October, said Moelis, "firms got hit from The Blind Side" -- a reference to a recent bestseller by Michael Lewis about professional football -- "and a number of Wall Street leaders suffered career-ending injuries." Said Blankfein, whose firm seems to have emerged from the recent credit implosion relatively unscathed: "Risk is risk, and you can't be perfect at managing it."

"Give an experienced trader a new rulebook on risk, and he will figure out how to game the new rules in minutes.... What you need from employees is a sense of relationships.... You need to have people who want to save the firm... one trader sitting next to another, saying, 'This doesn't look right' instead of saying, 'I want to join that scam.'"

Blankfein offered a comprehensive overview of Goldman's risk management approach. Besides the firm's daily mark-to-market disciplines, the three indispensable ingredients, he said, are "escalation, accountability and culture." Escalation means communicating risk concerns to higher levels of management, "getting more fingerprints" on potential problem risks and challenging the notion that a business group leader ought to make independent decisions on risks that affect the entire firm. Accountability, of course, means acknowledging that people are responsible for what their business groups do, and, equally important, holding senior management committees responsible for evaluating all aspects of risk, including the quality of the people with whom the firm chooses to do business.

Goldman's greatest risk protection, however, comes from ascribing as much status, prestige and compensation to those partners engaged in control functions as to those running businesses -- and in constantly rotating partners back and forth between risk control and business operations.

Going back to fundamental disciplines such as "escalation, accountability and culture" is to my mind where we should be focusing in instilling the discipline and practice of risk management in this organization.

The entire article can be read here.