One of the lessons from my post on the objective of risk management was that there are number of perspectives about it. I asked a number of leading industry experts to share their perspective.
Today, I am sharing the views of Jim Suttcliffe, Chairman
of Sun Life Financial (Canada) and Chairman of BaxterBruce (UK) and former CEO of Old Mutual Group. Jim sets out
the objective of risk management in terms of the 'use test'. His next post will consider how to implement it in a meaningful manner.
Previous posts on this series shared the views of James Tufts,
Group CRO of Guardian Financial Services (here) and Carlos Montalvo
Rebuelta, Executive Director of EIOPA (here). I will continue
sharing these perspectives in the next few weeks.
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Defining the use-test
Jim Suttcliffe, Chairman of Sun Life Financial (Canada), and Chairman of BaxterBruce (UK)
The Use Test is a simple but powerful concept to think about the
objective of risk management. You should actually use your risk management
system as part of your business, not as an afterthought.
But it's still true in many places that the risk department are those
interfering people from Head Office whom we have to placate occasionally, but
whom we basically avoid. Grrr.
Happily, in some of my interests, this era has passed and the power
of doing things properly is showing through in the share price.
Actually there are two sides to this story. Risk departments need to be
staffed by potential CEOs and not Dr No's. Risk people need to be able to
contribute to the development of these organizations, not just inhibit. But
with the right people in place, good first lines will welcome the second pair
of eyes, and the help in avoiding pitfalls, that risk departments with their
broader vision can contribute. Bad first lines put up boundaries around their
activities, and restrict access to information. They have their ears closed to
different ideas, and are the weaker for it.
I sat with a lunch group of non-executive directors recently, not from
the financial services industry, and found the room split between those who
thought risk management was a waste of time, and those who embraced it
wholeheartedly. There were few in the middle. Actually good risk management,
and the embedding of risk management in the first line is not new. Good
managements have always done it, and when risk is physical, as in the
extractive industries, there are some very advanced techniques, and
acknowledgement of the behavioural aspect of the subject.
And the Use Test has this behavioural issue at its heart. All the rules
in the world won't prevent risks from crystallizing if the culture is against
it. And that too needs attention. Risk managers are managers, and the art of
management needs to be on the agenda as well as statistical technique and Monte
Carlo simulation.
The prize is still out there to be won in many organizations. Some
already have it in their hands and will be the winners in the next
crunch. But beware the backwoodsmen who think that risk is for boring HO
people!!
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If you work in financial services, I would be keen to hear your
thoughts about this perspective on the objective of risk management. If
you don’t, I would be keen to know if these lessons resonate with your
experience.
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future posts here.
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