Objective

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

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In many of the corporate risk management workshops I conduct, I generally start with two questions: (1) What is Risk? and follow that up with (2) What is the Objective of the Risk Management function? 

For the first question I often get something of the form “risk is something bad occurring”.  As readers of my blog know, I believe this is not a great answer, but admittedly it is by far the most common answer.  (I believe that a more useful and valuable definition of risk is “risk is the possibility that bad or good things may happen”)

While conformity may be the norm for answering the first question, there is generally much debate and one might even say confusion about how to answer the second question.  Some common answers are that risk is a regulatory function (ouch!), or that risk management is a baby-sitting function (ouch again!).

The truth is that many companies do not have a well-defined objective for the risk management function.  Without a well-defined objective, how is the risk management function supposed to add value?  In fact one cannot even answer the important question of whether risk management should be a cost centre or a value centre.  (I strongly believe that for most companies that risk management should absolutely be a value added centre.) 

So the question of truth becomes “does your risk management function have a well-defined objective?”  After all, we all know the statement that “if you don’t know where you are going then any path will take you there”.