During my annual pilgrimage to Ireland on the ferry from NW Wales to Dublin I was struck by the unnerving thought that all it would take for a ship like this to be unrecoverable is for it to list by 11 degrees or more. Thankfully, it was early in the day and the captain didn’t seem sauced as was Captain Schettino on the Costa Concordia.
The point is that there are risks in our lives everywhere, many of which are unknown; but each tragedy that occurs reminds us of the importance of risk management. In fact, managing risk is being recognized as critical to keeping businesses afloat. In a recent Times article, “Unheard of 20 years ago, chief risk officers have become indispensable,” the author points out that getting ahead of and being more informed about risk is becoming an increasingly high priority.
I often approached the discussion around risk tentatively with our clients because everyone immediately asks, “What do you mean by risk?” and the answer is unclear. Why? Because everyone has a different perception or understanding about what the risks are and how much priority they should be given.
Ideally, a Chief Risk Officer would be able to answer these questions. Given the evolving criticality of risk management, The Times article suggests that the unique position of Chief Risk Officer is now being seen as a stepping stone to the CEO role (Nathan Bostock, Santander, a recent example). Although currently more common in financial institutions, I believe other corporations will want to understand the value of risk management and look to create such a role.
The problem, however, is much more wide ranging and is not only defined in purely operational terms, but also encompasses credit risk, market risk, legal risk and regulatory risk. The role of CRO is to become more strategic and less focused on back office functions. This is exciting news and will start to form a better understanding of the link between risk mitigation, reward and brand value/protection. Understanding the link between value creation, contracts, supply chain commitments, supply performance and customer obligations could well now be in sight.
So, for example, are we able to answer the question, “What is the impact of the Greek default on my business?” A 50% reduction in GDP from 2008 levels is sufficient to help us understand how the demand for consumer goods will shift; however, what about pharmaceutical products, for example? I understand that the Greek health service has unpaid bills dating back to January racking up billions in debt. If a bailout were successful, how would I deal with the current debt and future supply? How will it impact my brand in the region if I decide to stop supply? Do I only trade with COD? What about the Chinese property bubble currently bursting? What impact will this have on my supply chain and my revenues?
The point I am trying to make is that a new CRO starting a new job today will have a full list of “to-do” items. The CRO will have limited resources, limited points of reference and will be responsible for “risk” (the insurance industry has taken 200 years to evolve starting from the understanding of the probability of life expectancy of clergymen in Scotland). Without a full line of sight on the data points that impact a business, they are in danger of always being right and always being wrong, which is not a great starting position to be in.
So unlike the 11-degree point on a ship, we do not yet know to what point we can list before our ships become unrecoverable. I believe we are about to embark on a whole new interesting area of corporate management that will need cross-discipline cooperation as we have never seen before, as well as new investment in different technologies that are more intuitive and understand the relationship between different actions from environments both external and internal to the organization.
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