Good ERM is loss control & a strategic enabler
Thank you for reading this most recent post in our “ERM in 3 Minutes Knowledge Series” (previous posts here). In this blog, I reemphasize that a solid and well-run ERM framework must cover the downside and the upside aspects of uncertainty.
Megrow’s clients, readers of this blog and our students often raise their eyebrows when I use our “risk is opportunity” mantra. Similarly, an article on Bloomberg appears, at first glance, to support a more traditional view that risk management is about avoiding “downside” 1.
Shortly after Credit Suisse announcement results in Q1/2021, Bloomberg wrote about “a crash course on risk management” for the bank’s CEO. According to Bloomberg, risk managers at Credit Suisse were told by the CRO [… to stop thinking only about defending the bank’s capital and also look at strategic business priorities …].
For this article, I assume the quote shown above was indeed made by the Credit-Suisse CRO and reported accurately by Bloomberg. On a tangent: at the time of publishing this blog, the said CRO no longer works for the bank (honi soit qui mal y pense).
When I first read the Bloomberg article, I immediately thought: “I say that all the time”. In other words, if Bloomberg thinks that the bank’s risk management isn’t up to scratch by referring to “look at strategic business priorities”, then am I lecturing the wrong ideas to my students?
Of course, I’m not lecturing wrong content. Let me explain:
The UPSIDE and the DOWNSIDE
- good risk management needs to identify and mitigate downside risk
- good ERM also must look forward and assess strategic opportunities
- note the “and” in the quoted statement. In other words, the CRO appears to have told the risk departments to look at downside AND upside.
There is a risk (pun intended) that the Credit Suisse CRO might have under-emphasised the “and-component” in the statement. Henceforth, the risk department focused more on the “strategic opportunities”. Simply because “the boss said so”. That is of course pure speculation.
Both aspects must be curated and executed at optimal efficiency and effectiveness. It is an “AND’ not an “OR”.
from loss control and compliance …
Risk Management started as a control and compliance function. Activities and output focused – rightly so – on hazard risk and compliance with workplace safety rules.
… to risk return optimisation and strategy
More recently though, practitioners and scholars started realizing that risk management adds more value once the control aspect is combined with a more forward looking and strategic approach. Hence, ERM was born.
This evolution has several consequences:
- risk practitioner’s role is much broader (aka interesting IMHO)
- ERM is more demanding, especially from a coordination and communication perspective
- ERM is much better integrated (remember “PACED” …) with the organisation’s core activities than stand-alone risk management
In summary, good Enterprise Risk Managements is key to the mitigation of downside risk AND the implementation of any organization’s strategy. In other words, enterprise risk management plays a vital role in loss control & strategic enabler.
Megrow’s consultants and our partners built and implemented efficient and effective ERM-frameworks. Crucially, we always make sure to embrace the upside AND the downside of risk. Contact us via the social media buttons below in case you would like to know more.
1 Bloomberg Article April 2021.