Risk Management Watch: Firms Realize Strategic Importance of Risk Management
The outlook for mighty investment banks Goldman Sachs and Morgan Stanley is growing bleak. Money.com reports that industry analysts have slashed their fourth-quarter expectations for the two Wall Street firms in recent weeks as the financial markets remain under severe strain. The report adds that Goldman and Morgan Stanley may be forced to writedown as much as $5.5 billion combined since the two firms are also sitting on massive portfolios laden with securities that continue to tumble in value, such as those backed by residential and commercial real estate loans.
Right now, as financial firms continue to struggle and risk management weaknesses are exposed, it is not too soon to begin a fundamental rebuilding of the risk function, according to a white paper from Deloitte & Touche. “We believe it is time to take a fresh look at the risk management capabilities of financial institutions and the processes in place to support financial risk management,” states the report. Deloitte adds that risk management should be viewed “not as a drag on strategy, but as an integral part of a strategic discussion where decision makers look at risk and return collectively.”
More than ever, firms are realizing the strategic importance of risk management. Corporate boards today face unparalleled levels of business complexity, new regulations and mounting shareholder demands. As a result, executive search firm, A.E. Feldman, says risk management jobs are evolving to better manage counterparty risk as well as initiatives to ensure that business objectives are met, losses are minimized and greater accountability is achieved. In short, risk is the name of the game. Firms are on the hunt for risk professionals who have been tested by previous market cycles. One senior industry veteran now working with A.E. Feldman also notes that market participants should not rely exclusively on mathematical models, qualitative and trend analysis or geographic distributions. In addition, there should be more disclosure related to counterparty risk to make the extent of different investors’ exposures more clear.
Top Down Approach to Risk
The Deloitte report, entitled “Risk Management in the Age of Structured Products,” recommends a top-down approach to risk management, a “risk-literate” board of directors and independent risk measurement systems. According to Deloitte, “Many companies are learning the hard way just how critical a defined and supported risk function is to survival and success.”
Securities Industry.com quotes Edward Hida, Global Leader of Deloitte’s Risk and Capital Management practice as saying that Deloitte found a few basic lessons learned in analyzing client assignments and regulatory and association reports. “First is that governance, risk management and oversight should come from the board,” Hida said. “There should also be a chief risk officer with overall responsibility reporting to the CEO and who has sessions with the board.” Securities Industry.com also states that financial firms must also look at risk and return together, according to Hida, and build them into the decisionmaking process. “This often is not embedded,” he noted.
Deloitte concludes, “Now is the time to undertake a fairly rigorous examination. A change in the way risk management methodologies and processes are executed … will help companies move from a position of vulnerability to a place where risk management is executed more holistically, and the company is not exposed to material unknown risks.”
OppenheimerFunds, Inc. (OFI) recently moved to do just that. The Firm announced that Geoffrey J. Craddock has been named Senior Vice President and Director of Risk Management & Asset Allocation. According to OFI, Craddock will oversee the Firm’s fixed income and equity portfolio risk management functions and work to develop a consistent, structured, firm-wide approach to evaluating risks and developing asset allocation plans. Craddock, who will oversee OFI’s existing risk management teams, will report to Kurt Wolfgruber, OFI’s President and Chief Investment Officer.
“Geoff joins us at a crucial time,” said Wolfgruber. “As we continue to focus on asset allocation products and managing risks in individual funds, Geoff’s broad experience will serve us well.”
Boards Focus on Risk
Meanwhile, in a separate report which focuses on “The Risk Intelligent Board,” Deloitte argues that corporate boards can address risk more effectively - intelligently - by looking at all business issues through a risk lens. Deloitte contends that boards make risk a regular topic of every board meeting and provides several key action items boards can do to become risk intelligent.
“Risk ought to be a core issue of every full board meeting,” said Steve Wagner, Managing Partner of Deloitte’s U.S. Center for Corporate Governance. “At a minimum, this will address the pervasive problem of risk management occurring in silos. Boards need to define risk, broaden their view of risk and adopt a framework over which risk governance activities occur. By doing this, boards will be setting themselves on a path to becoming risk intelligent, driving growth and increasing shareholder value.”
Risk Management to Remain in Spotlight
Risk management will remain in focus and a top priority for the foreseeable future. The Global Association of Risk Professionals (GARP) recently announced that registration for the Financial Risk Manager (FRM) Program has reached an all-time high. Registrations for the 2008 FRM Exam at the close of the Standard Registration period on August 31, 2008, surpassed the August 2007 total of 9,865 registrants by 36%. Total registrations through August surpassed 2007’s total number of FRM registrations of 10,135 by 32%.
“Risk management is in the spotlight in most organizations around the world,” says GARP. The group adds that exceptional risk management skills in staff are critical. “Having professionals who are able to objectively demonstrate competence in financial risk management concepts, standards and practices is becoming a universal requirement” said Richard Apostolik, GARP President and CEO.
The FRM Program experienced a compounded annual growth rate of 23% over the last 6 years, higher than any other financial certification program in any 6-year period in history, according to GARP. The group also notes that a total of 2,483 organizations, including 26% of the Fortune Global 500 companies, from over 135 countries around the globe were represented by the 10,135 FRM candidates in 2007.
Are you working in Risk Management? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman, now. Find out more about Risk Management jobs today!
