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Institutions need risk committees, in the same way that they currently have audit committees, and these need to be lead by formally qualified risk practitioners, said Bob Merton, speaking at Risk Minds 2008 in Geneva last week.
Bob Merton, risk management guru, professor at Harvard Business School and winner of the Nobel Prize for his work in pricing derivative securities, accused companies of taking excessive risks with their pension funds and called for all companies to have formal risk management committees where, at a minimum, the chair of that committee possessed formal risk management qualifications.
Merton told an audience at Risk Minds that companies were taking excessive risks with their company’s pension plans. Too many firms had been moving pension funds from secure bonds and governments securities to the equities market, with some holding as much as 75% in higher risk equities. This practice was no different from taking out a massive swap instrument trading bond performance against the equities market. “If I were the CEO of a major company and I announced to the analysts that I were buying a $20 billion swap with pension funds, it would be likely that I suddenly would find that I had been replaced as CEO for taking undue risks”, said Merton, “but moving the equivalent in funds from bonds to the equity market is no different – and no one says anything about this practice.”
Merton said that there was insufficient understanding of the risks that companies were taking. All firms now needed to have a risk management committee which directly reported to the board, in the way we are accustomed to with internal audit committees, and these committees needed to have, at a minimum, a person fully qualified in risk management at their head.
The time is rapidly coming for risk management to move from being a skill, handled by experienced bankers and quantitative analysts, to being a profession, with formal qualifications needed in order to practice. Steve Lindo, the Executive Director of global risk management association, PRMIA, said that formal qualifications were needed to ensure that, in future, risk management skills were at the required level and that the profession had the board level influence to ensure that risks were understood and controlled.
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