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Risk in the Boardroom

As the world very slowly and painstakingly emerges from one of the

worst financial crises in almost a century, core assumptions about both

markets and organizations have been turned on their head. The general

consensus is that the failure to understand the true nature of enterprise-

wide risk exposures was one of the core reasons behind the collectivedownfall of organizations.

Responding to this systemic failure, regulators have implemented a

slew of regulations and mandates in the hope of avoiding a repeat

of a similar financial crisis. Investor behavior over the last few years

has also changed, with markets and shareholders seeking a thorough

understanding of the risks involved in strategic decision making.

Whats more, markets have gotten more difficult to navigate, with

a shortage of growth opportunities and liquidity. This has forced

organizations to stretch beyond their comfort zones in search of growth

opportunities. Given the significant reduction in the margin for error,

organizations cannot afford to make a wrong move. Therefore, the need

for them to understand and effectively manage their risk profiles is no

longer just a good practice but a necessity for survival.

Faced with this scenario, boards have undergone a paradigm shift in

their approach to decision making. Decisions are no longer based solely

on point estimates of expected financial outcomes, but also on the

associated risks.

Balancing Risks and Rewards

As an intermediary between management and stakeholders, the board

plays a critical role in risk management -- especially in terms of defining

the organizations risk appetite and overseeing its actions in relation

to this risk appetite. Being an independent entity, the board has the

perspective to spot emerging risks and areas of concern that may

be missed by risk managers immersed in the daily functioning of the

organization.

The challenge that most boards face today is in trying to understand and

control a growing range of risks that include reputation risks, cyber-

security risks, ethical risks, environmental risks, social risks and supply-

chain risks.

The common tendency may be to take the safe path and veer toward

risk avoidance. But as visionary boards know, there can be no rewards

without risk. These boards are able to distinguish, successfully, between

risks that need to be mitigated and risks that can be capitalized on or

optimized. Instead of trying to manage all risks at once, they know the

ones on which to focus their maximum time and effort. What gives

them this advantage is, to a large extent, the quality of risk intelligence/

information that they receive.

The Importance of Risk Intelligence

Risk-related intelligence is now an essential requirement for the board and

executive management. Organizations are spending considerable time

generating and unitizing risk-related intelligence, while also deciding their

risk appetite based on reasonable assumptions of downside outcomes.

This approval of the risk appetite is now prominent in boardrooms, as

every decision -- be it on the launch of a new product or expansion intoa new market -- is being evaluated by management with respect to this

predefined risk appetite.

The additional interest in risk intelligence is being driven by the fact that

markets today are well aware of the benefits of risk intelligence, while

shareholders are appreciative of companies with strong risk management

practices. Boards realize that they need to speak consistently about their

organizations largest risks, and also present facts that facilitate dialogue

and questions about the assumptions that drive expected financial

outcomes.

Organizations with a thorough understanding of their risk profiles are

better suited to make wiser decisions in the long run. They are more likely

to attempt to free up more capital for profit-generating activities, rather

than remaining strictly focused on risk reduction.

Effective risk intelligence and r isk management also hedges organizations

against market volatility, providing a sustainable competitive advantage.

Boards, for companies large and small, today should spend significant

time analyzing each move with respect to the change it would cause in

their companys risk profile.

Toward a More Robust Risk Management Program

Even though the need for risk intelligence in strategic decision making

is critical, the actual practice of providing relevant, timely and forward-

looking risk information to the board requires meticulous planning

and seamless execution of an integrated and enterprise-wide risk

management program.

To develop a risk program that is efficient and effective in providing

information to the board, organizations should consider taking the

following steps:

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MetricStream

Brenda Boultwood

Vice President of Industry Solutions

MetricStream

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1. Define a single risk taxonomy across the organizations, such that

everyone understands and reports risks in a common language. This

would help in board level comparative analyses across products,

processes, business lines and other organizational elements.

2. Break down organizational silos to create an integrated risk

information repository. This would aid in the sharing of information

across the organization, increasing its capability to aggregate risk

information and ensure that this information is representative of

every part of the organization.

3. Automate the risk management processes to ensure that all risk

efforts are conducted in a timely manner and with sufficient rigor.

As an efficient risk management program brings together reams of

information, automation helps in rationalizing efforts, thus reducing

cost.

4. Develop a strong risk awareness program to supplement the risk

management process. This will help build a risk culture within the

organization.

A risk management program with the above characteristics would be

capable of catering to the risk intelligence needs of the board. In addition,

risk management programs need to provide strong and flexible reporting

capabilities, as the board needs r isk-related information aggregated at

multiple levels of the organization. Strategic decisions are never very

simple; therefore, the need to provide simple and clear risk information

becomes paramount for quick decision making.

Executive dashboards are very powerful tools for visualization. The ability

to view risk data from multiple perspectives is also very important, since

all decisions at the board level will involve more than one organizational

unit.

Though boards need to view aggregated information, there are many

occasions on which they will need to drill down further into the specific

details to gain a clearer understanding. Consequently, a risk management

program is only as good as its capability to provide varied and intuitive

visualization of the risk information.

As we emerge from the financial crisis, risk intelligence within

boardrooms will play a major role in deciding the fate of organizations.

Boards have the perspective necessary to leverage this risk intelligence

to craft long-term risk management strategies which, in turn, are critical

for sustainable and profitable growth. They have the power to ensure

that their organizations are not only protected against risks but are able

to thrive on risks. Therefore, boards must actively participate in and

collaborate on risk management, realizing that risk-related conversations

in the boardrooms are here to stay.

Brenda Boultwood is the vice president of industry solutions at

MetricStream. She is responsible for a portfolio of key industry verticals,

including energy and utilities, federal agencies, strategic banking and

financial services. She has had a rich career in risk management, and

has held several key operating roles at some of the largest global

organizations.

Most recently, prior to joining MetricStream, she served as senior vice

president and chief risk officer at Constellation Energy. Prior to that, she

served as global head of strategy, Alternative Investment Services, at

J.P. Morgan Chase, where she developed the strategy for the companys

hedge fund services, private equity fund services, leveraged loan services

and global derivative services. During her tenure at J.P. Morgan Chase,

Brenda also served as global head of strategic risk management for its

Treasury Services group. Earlier in her career, at Bank One Corporation,

she worked as the head of corporate market risk management and

counterparty credit, and head of corporate operational risk management,

before advancing to head of global risk management for the companys

Global Treasury Services group. She has also been a board member of the

Global Association of Risk Professionals (GARP), and currently serves on

the board of the Committee of Chief Risk Officers (CCRO).

This article was originally published in the December 2012 issue of

GARPs Risk News and Resources newsletter.

MetricStream

MetricStream, Inc.

2600 E. Bayshore RoadPalo Alto, CA 94303

Phone: 650-620-2900

Fax: 650-632-1953

info@metricstream.com

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