ENTERPRISE RISK MANAGEMENT: TECHNOLOGY AS A CULTURAL ENABLER

On Tuesday, I participated in a risk-themed Twitterview with Michael Versace, director of global risk at IDC-Financial Insights (@versace57) and Virginie O’Shea, managing editor at A-Team Group (@virginieateam).

Virginie posed several interesting questions to Michael and me, covering technological and cultural challenges and approaches to enterprise risk management. Within the boundaries of Twitter, we had a meaningful discussion around internal governance, the importance of risk empowerment, and how to capitalize on industry changes and take action now.

If you missed the #riskchat Twitterview, you can view the full conversation below. And if you have your own answers to Virginie’s questions, please add them to the comments.

Question 1: Are firms waking up to the need to adopt enterprise risk management infrastructure? #riskchat

MARCUS: Slowly, since the crisis hit, the crosshairs have moved between models and incentives, but as normality resumes.. #riskchat ..Lack of risk as a cultural imperative has been recognized. This is also reinforced by #DoddFrank & new Basel rules #riskchat

MICHAEL: 75%+ of financial firms we speak with have a Chief Risk Officer – that’s waking up, I guess #riskchat

Question 2: The challenge beyond technology is cultural for ERM to work, how are firms tackling this? #riskchat

MICHAEL: Linking risk vision and accountabilities to performance, and from performance to compensation #riskchat

MARCUS: It comes down to looking beyond calculations, and focusing on credibility of results, and distribution of those results.. #riskchat ..Asking traders to use risk strategically demands that they be given numbers, in context that can be trusted! #riskchat

Question 3: How could they improve their risk governance accordingly? Is a chief risk officer the solution? #riskchat

MARCUS: To an extent, but only an empowered CRO. If CRO reports directly to CEO then you have platform for better governance.. #riskchat ..The language of the firm has to evolve to include risk context, to make risk cultural. #riskchat

MICHAEL: Measuring CRO performance is crucial but data shows compensation committees not involved yet in ERM programs- big missing link #riskchat

Question 4: Where do the biggest challenges lie on a day to day basis? #riskchat

MICHAEL: Talent, demonstrating breadth & depth of understanding in ERM functions, selling ERM competitive advantage #riskchat

MARCUS: The biggest challenge is cultivating a risk culture, at the expense of absolute profits.. #riskchat ..It’s easy to talk risk in a crisis, less so when it means reducing (non risk adjusted) profits… #riskchat ..this is why the context of success must include risk, which is the cultural rather than mathematical part #riskchat

Question 5: Regulators have stepped in to mandate certain risk governance guidelines – is this the right approach? #riskchat

MARCUS: Prob the only approach, given the backdrop. But be cautious. Capital regs provide buffer btwn a firm blowing up.. #riskchat ..& potential systemic effect. They’re not there to insulate the firm from itself. Requires internally driven governance #riskchat

MICHAEL: Regs set expectation, but businesses hold accountabilities & compliance obligations to shareholders, customers, & market #riskchat

Question 6: Have the regulators gone far enough to ensure firms change their approach to risk management? #riskchat

MICHAEL: Far enough for what? In certain areas like capital adequacy & liquidity, I think so. Security http://bit.ly/pVBj6k, yes… #riskchat ..Defining understanding the economic impact of #DoddFrank, probably not #riskchat

MARCUS: At this point, we can’t tell. They have the mandate and implied power, but until the full regulations are in place.. #riskchat ..and supervision is set against them, we won’t know whether or not they’ve used their full firepower #riskchat

Question 7: How could firms leverage technology to this end? If at all? #riskchat

MARCUS: Don’t get hamstrung by bad tech choices. Calculation/production control/distribution require specific tech solutions.. #riskchat ..Keep focus on end point goals & choose tech for each. Take an infrastructural approach to join the dots.. #riskchat ..Think about it as a risk ecosystem, rather than an application #riskchat

MICHAEL: Many examples- ALM, financial crime, credit & portfolio risk: people, policy & tech manage risk http://bit.ly/q0fiRg. #riskchat

Question 8: What would be your advice to risk management teams struggling with a lack of empowerment? #riskchat

MARCUS: Take the bull by the horns. Be willing to expose errors and gaps, and generate firm-wide participation.. #riskchat ..Empowerment is borne from credibility, which involves evolving from a regulatory capital report into a strategic tool.. #riskchat ..Be willing to debate & validate or change approaches. No one will empower you w/o you first proving why they should. #riskchat

MICHAEL: Be business people, demonstrate returns from effective ERM, and the costs of “wait and see” approach #riskchat …You’ve got to be thinking this way, because your competitors are. #riskchat