Credit Crunch Drives Short term strategies

One of the most powerful and persistent arguments against spending money on risk management is the 'hope for the best' school of management that hide behind the casual observation that most companies survive from year to year even if they don’t do any formal business risk management.

Consider this against the current downturn caused by the banks taking enormous risks for a considerable period of time and fortunately getting away with it, until now. Indeed, both staff and shareholders of banks benefitted enormously from the increased short-term profits that were generated; but this was never a sensible or sustainable way to do business.

Given the catastrophic consequences of this criminal disregard for risk there is now much debate on how banks, and individual bankers, can be encouraged to take a longer-term view including:

• Changes to remuneration packages, especially cash bonuses;
• Ensuring that directors having a better understanding of the risks to which the bank is exposed; and
• Institutional shareholders becoming more active.

Many of these debates will need to include and address the promotion of more effective risk management in all industry sectors.

Obviously incentivising employees appropriately and educating directors about business continuity management, resilience and risk, are important. Ultimately, most employees and directors will still have relatively short term or near horizon views (of the order of 3 – 5 years) compared to the longer time-frame of catastrophic events.

As has been graphically illustrated by the current crisis, it is the long-suffering investors and shareholders who sustain the big losses when risks are not managed effectively. So, improving the understanding of operational risk amongst institutional investors is paramount to the future success and stability of organisations.