Risk – 2009 the year that risk managers break into the boardroom

Yesterday Sir James Crosby, the Deputy Chairman of the UK financial supervisor, the Financial Services Authority (FSA) resigned in the face of allegations from a risk manager that, in a previous role as chief executive of HBOS, he had overridden warnings about that bank’s business model and dismissed the then HBOS Head of Group Regulatory Risk, Paul Moore. Although Crosby refutes all allegations and points out that an FSA investigation had cleared HBOS at the time, he has decided to resign from his FSA position.

On Monday, Lloyd Blankfein, Chairman and CEO at Goldman Sachs, published an article in London’s Financial Times where he attacked the historical data approach to risk modelling and the outsourcing of risk analysis to the rating agencies. He stressed the importance of independent risk management functions and that, in the event of disagreements with the business, the risk manager’s view should always prevail.

In December, we reported that Bob Merton, Nobel Prize winner for his work in pricing derivatives, risk modelling guru – and one of the creators of LTCM – was advocating that a risk management committee headed by suitably qualified risk managers should be in place in all financial institutions.

And there are other recent cases where industry leaders are advocating the importance of risk management or are admitting that it has been given insufficient priority.

Risk management can no longer be kept off the board of financial institutions. Failing to get to this level will send the message that it is not important and the regulators, the press, the public and, critically, the shareholders, will not stand for this. But to achieve this level of influence, risk management must move from being a skill, handled by current managers bankers or quantitative analysts, to being a both a profession and a career path, with qualifications needed in order to practice. Formal qualifications are needed to ensure that, in future, risk management skills are at the required level and that the profession has the board level influence to ensure that risks were understood and controlled.