Risk Management Gains Higher Profile
By Beagan Wilcox
As losses stemming from defaults on subprime mortgages ricochet through the financial markets, it has become apparent that some financial institutions with strong, well-integrated risk management programs skirted some of the worst damage.
Another risk-focused group, The Buy Side Risk Manager Forum, issued a report in February that calls attention to “risk governance” as an important part of effective overall risk management.
The forum is made up of heads of risk management and chief risk officers from asset management and investment advisory companies.
The forum’s report “Risk Principles for Asset Managers,” states that risk governance refers to “the creation of checks and balances through organizational structure.”
With the caveat that risk governance structures will vary depending on the size and complexity of the organization, the report provides five risk governance guidelines that lay the foundation for effective risk management:
“Establishment of organizational checks and balances, including an appropriate segregation of front/back and/or middle office functions;
Creation of a culture in which understanding and managing risk is everyone’s responsibility;
Independent control groups, including, where possible, a risk manager reporting and/or having access to the [chief administrative officer], [chief executive officer], Board, Executive Committee or the like;
Senior management and board level understanding of risks, definition of risk tolerances, and setting of risk management and ethical tone;
An organizational structure in which risk management roles and responsibilities are clearly defined, including written policies and other procedures identifying the specific people within the organization who are authorized to approve various actions, make exceptions to various policies, etc.”
The report cites a recent survey of mutual funds conducted by the ICI, which states that “the vast majority” of fund groups do not have chief risk officers, but that there is a “growing trend toward creating such positions.”
At the same time, independent fund directors should assure themselves that the risk management programs of the funds they oversee are adequate given their trading strategies and investment objectives, says Barbara Lucas, partner at Capital Market Risk Advisors (CMRA), a consulting firm that works with various financial entities, including mutual funds, to assess risk.
CMRA worked with the Buy Side Risk managers Forum to draft the report on asset managers’ risk principles. Lucas suggests that boards ask their management teams to look at the principles, which are not prescriptive, and assess where they stand versus the principles. They should then lay out their plan as to which ones they aspire and which ones are not.
April 8, 2008