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DUBAI, August 2011, an article by Horst Simon, Risk Culture Builder.

I was about to submit this article for publication when I realized that in order to execute the change you advocate, you have to become that change, so why do things the old way? Here it is, free to all of you. You can make a difference and shape the future of Risk Management!

Volumes have been written on the cause of the crisis the world is in, surveys have been done and many fingers are pointing in every direction—a couple of these are pointing straight at us, the Risk Professionals.

It is time for us to accept that risk management, as we know it, failed; and for as long as we try to re-direct or break the fingers pointing at us—we will be stuck in this crisis. It is time to renovate risk management. The past is no longer a roadmap for the future.

Let us come clean and move on, the earlier the better for all. Which other industry has so many frameworks, so many different processes and so many different standards, regulations and so-called guidance documents? Which other industry has so many people claiming to be experts and trying to squeeze a quick buck out of something nobody can ever be an expert in? Too many "somebodies" out there who are “certified” by nobodies, too much education done by non-educators.

Any process older than 5 years is outdated; we live in a world of dynamic change, the pace of which is ever increasing and with it, the levels of Risk Exposure. The basic Risk Management Cycle is one of these outdated processes.

Let us look at Risk Identification: we tried in many different ways to identify all the risks—until a volcano sneezed and we realized that we have not; and can never, identify all the risks. Let us accept that and move on. The size of your risk register is not related to, nor is it an indication of the effectiveness of your risk management process.

Next we get to Assessment and Analysis: Those who thought they were good at risk identification moved on to quantification. Sadly, many are still

All rights reserved, not to be used without reference, Horst Simon

stuck there, thinking that models can control and mitigate risk. Some in the alternative movement is trying to justify the great cost of their models by using the results for good purposes, like calculating economic capital etc. Thinking of which; the gross income of most banks dropped since 2008, so how cool is it for those using the Basic Indicator or Standardised approach for Operational Risk—in a time when their operational risks increased significantly, their capital charge has come down. Can this create a passion to improve Operational Risk Management to an AMA level?

Even sadder is that in my recent risk survey on LinkedIn, only 26% of the respondents said they have no problems with the data in their systems. Does that mean that 74% of corporate risk reports and a large number of regulatory compliance calculations are sucked out of useless data of varied degrees? The quantity of data is often so impressive that people forget that the underlying quality might be bad. (or is confirmed bad like the 74% of recent survey respondents)

Risk reporting, control and treatment: How wrong did we get red, amber, green! Now everybody wants every risk to be green, because green is good. Green on a risk report is perceived to mean “do nothing”, but that is the quickest way for those risks to shoot to red. Then we get to amber, what a nice place to be- all risks are under control and we choose to overlook the fact that those controls might not be efficient or can be completely ineffective.

DANGER ZONE- those risks in the red zone, the bad zone. The red zone is where you make the most money, but it is also the place that requires the most effort in risk control. For as long as red is perceived as bad we will be stuck with average risk management effort (amber) or no risk management effort (green). So the red zone is the best zone with the biggest returns—if you are prepared to put in the effort.

We already know that the effectiveness of your risk management process is not linked to the size of your risk register. Similarly, it is also not linked to the thickness of your executive risk report. Anyway, we have sanctified board risk reports to the extent that the difference between what the top thinks and the bottom knows is so big that those in the middle are just slipping into the ditch. Trouble surely comes when people are working harder at keeping their jobs, than doing their jobs.

All rights reserved, not to be used without reference, Horst Simon

If you have a formal monthly risk report it is generally 28 days too late, frightening to think some have a quarterly risk report, or as a friend commented recently, an ANNUAL risk report! It is thus not about the size, its all about the timing; having a risk nervous system that runs accurate risk information from all points inside the organisation (and outside) and having "live" dashboard reporting on the company intranet. The earlier people know, the better the decisions and the smaller the losses.

Secondly, the sole purpose of many risk management processes is to produce the risk report, often that is the sole purpose of the risk management department. The outcomes of a risk management process are much more than models and risk reports. What do you do with the information you have? If your risk management department cannot show a Return on Investment—get rid of them!

Processes and Systems: Most organisations have taken the easy way out (note: not the cheapest) and they built impressive risk management systems worth millions of dollars; but failing to address the fundamental issue of people. All risk management efforts are worthless without a risk nervous system—and only humans can add that.

We already know that there are no risk management experts; and in fact, we do not need any risk management experts! All we need is for each and every employee to know the basic risk management skills and principles; use them to evaluate the risks associated with his/her job and do something on a daily basis to mitigate and control those risks. Risk Management success lies in embedding an effective risk management culture!

Prevent your business from crash-landing, change the way you see and approach risk management and execute that transformation; put in the effort and embed an effective risk management culture in your business, delivering good risk governance and building sustainable competitive advantage.

Welcome to transformation, be the change to want to see!

The comments made in this article should not be associated with any of the companies I represent. I am a dedicated Risk Culture Builder and these are my personal views. If you want to steal my job title of Risk Culture Builder or my strap line of How to mitigate Human Control Malfunction; please do so, it can only lead to a brighter future for risk professionals and a transformation in risk management.

All rights reserved, not to be used without reference, Horst Simon