Risk Managers Versus Risk Champions

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

 

All good books (and even the bad books) on risk management talk about the need for a company to have a risk champion in order to put in place a good ERM system.  The books all talk about what a risk champion does and why they are so important.   A change in tone then takes place and the books talk about implementing risk management.  The tasks change.  The arguments change.  The skills needed change.  Is the risk champion still the risk manager?   Are the skills needed to be a risk champion the skills needed to be a risk manager?  Is your Chief Risk Officer (in title or in deed) a risk manager or a risk champion?  Are they really effective at being both (or neither?)

Low interest rates. Going, going, gone.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

As a follower of our blogs you know our views on rising energy and commodity prices and how this will impact those firms that depend on them in the creation of their firm’s products.  We also know that this rising tide of wholesales prices will eventually push up consumer prices leading to increases in consumer price indexes (inflation) which in turn will cause interest rates to rise.  You could say that this is (money) supply side induced inflation caused by several of the Western world banks introducing quantitative easing. 

In an excellent article in McKinsey Quarterly (link below) their analysts also look at another catalyst for higher interest rates – namely the lack of savings which will be structural in nature.  It is argued that with the Western world’s aging demographic spending (on health) will increase as will the amount of money put aside for food and energy.  All of this will reduce the amount of money available to be saved and thus force borrowers to increase interest rates to incent what few savings are out there. 

With a strong case that interest rates will be going up, how is your firm’s financial risk management preparing for this and how do they plan to push back the day of reckoning? 

For a link to “The era of cheap capital draws to a close” click:

http://tinyurl.com/6ca78gd

 

Common Risk Networks

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com 

 

In risk management one of the mantras is to get everyone communicating with the same language on the same page with the same information network?  While intuitively appealing, this may be counterproductive.  Let me provide three quick examples. 

 

1.  Ants – as discussed in a previous blog, ants find food through feedback loops based on a sent trail left by other ants.  What is less known is that ant colonies also have dedicated ants that intentionally do not follow the path of others but instead seek out other sources of food via random searches. 

2.  In his book “Gut Feelings”, Gerd Gigerenzer explains how too much information can actually lead to less optimal decision making.  Essentially knowing too much about a situation, having too much information available, or believing that you have too much information leads to inferior decisions. 

3.  If everyone has the same information then you get systemic risk as everyone acts en masse – to frequently counterproductive outcomes.  This is seen in stock market bubbles and crashes, it is seem in program trading, it is evidenced by a form of groupthink.

 

Having the same language, frameworks and metrics sounds ideal in theory – but perhaps a little bit of confusion can ironically be helpful.

Snap the Fingers on Risk. Part 3 of 3

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

  

In previous “Snap the Fingers” blogs (http://tinyurl.com/5wy7wz9, http://tinyurl.com/5vkqcph) I talked about the snap the fingers exercise where you assume I have magical powers and upon snapping my fingers you get to switch your risk department with the risk department of any other company.  The challenge was to figure out who you would choose. 

The second step of the process was to drill down as to why you made the specific choice that you did.  In fact you need to drill down to at least 5 “why” levels to get to the core.  The final step of the process is to ask yourself “what are you doing to become like that risk department?”

 

Domestic Risk Management - Our Valentine's Blog

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

Valentines Day is an appropriate time to ponder on some aspects of personal risk management, especially for those of us who have spouses or partners.  Actually, if some thought had not gone into Valentines Day before now, the risks of arguments, domestic splits, divorce or even being told that your partner has a headache increases dramatically. 

A basic domestic risk hedging program could include ordering flowers.  The addition of a present adds extra cost to the program but can provide a better hedge.  Booking a table at an expensive restaurant is again more expensive but can provide the most effective protection against domestic risk.  Each of these provides a progressively more expensive risk management program and the one chosen would depend upon a number of factors including risk appetite, past experience, etc. 

Of course, the risk management program can be poorly conceived or implemented.  If, for example, the present is a book entitled “How to Stop Snoring” or “10 Steps To A Cleaner House” or the dinner is not at a romantic venue with subdued lighting, but at the local sports bar when an important game is on, then the risk management program can significantly increase risk.  Of course, the same risk program can work for good or bad depending on the circumstances.  So in our sports bar example, if it is a female taking her boyfriend there she could gain a whole lot of brownie points, whereas the other way round, the boyfriend may well end up wearing a pitcher of beer and going home alone. 

Looking at the downside, a hedge may also include an escape plan.  I am told that France is a much friendlier jurisdiction then England for the male side of a relationship in a divorce.  (There are some people I am hoping won’t be reading this!!!)  You only have to spend a night in France to claim residence and give the courts jurisdiction … and assuming you file first! 

All the above considerations are completely applicable in a corporate context and show that a risk management program is individual to every company and should be developed and implemented according to specific circumstances. 

How do you handle your domestic risk management? 

For my part, I intend to rush out to the store immediately I stop typing.

Train Wreck Equilibrium Theory

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I have lost the reference, but somewhere I was reading about Train Wreck Equilibrium Theory (TWET).  In a nutshell this is the theory that over a business cycle all businesses (no matter how well prepared) will experience an equivalent amount of train wrecks (scaled to the size of the organization). 

There are a couple of points to make about this.  First off if all companies experience the same amount of train wrecks, why practice risk management?  The first answer is to avoid the preventable car wrecks.  The second reason is to be in position to capture the positive effects of good train wrecks (that is unexpected good things happening). 

A third – and perhaps the most important reason is to be in position to respond to a train wreck.  Risk happens.  It is how you respond to it that counts (and profits). 

By the way, this is not to imply that companies should have rigid risk response procedures.  Far from it.  Each train wreck is unique.  Each train wreck is unique and unexpected (one hopes – or else it should have been prevented or at least mitigated).  Train wreck response teams need good principles and practices, but it is critical that they also possess flexibility, creativity, decision making skill, communication expertise all mixed together with wisdom.