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Pursuing the vision thing: do you aspire to be an enterprise risk manager or a chief risk officer? If so, work on developing leadership and political skills to confront organizational tensions. (Perspective).

The enterprise risk manager/chief risk officer (ERMICRO) function is emerging aggressively within corporations--and the attention and prominence the role is earning is sparking a revelation among its early practitioners, other professionals aspiring to the role, and academics focused on risk management as a discipline.

Simply stated, they are realizing that this new function presently carries no established roadmap for career preparation and development--nor is there yet any universally accepted wisdom for managing and overcoming the subtle yet challenging organizational issues that the role's growth is engendering.

Indeed, many corporate ERMs are discovering that--as they strive to give the function structure, coherence, and value within the corporation--they also are breaking new ground in:

* Establishing appropriate strategic, cooperative relationships with other professionals managing risk in the organization;

* Helping to set standards in academia for the training necessary to create a new breed of risk manager; and

* Educating management about the right expectations--and rewards--for the ERM role.

Solutions to the new organizational and conceptual issues ERMs are now facing--and are likely to encounter in the future--will become more evident, based on the growing body of experience of ERMs in a range of companies.

At the same time, ERMs are realizing that; as corporations grapple with understanding and implementing an enterprisewide risk management function, certain key principles will strongly shape and direct the success of all of the ERM's efforts to establish a significant, viable and appropriately valued role within the organization.

Political Skills Needed

It has become clear that those who aspire to the ERM/CRO role must nurture and sharpen leadership and political skills to confront organizational tensions likely to develop as the function becomes more prominent.

Two kinds of tension are probable, as the independent risk oversight role embodied in the ERMICRO function comes face to face with other departments. Tension with the CEO can derive from the creation of centralized departments for management services, comprising the CEO, the CEO, and the ERMICRO, and charged among other things with developing and monitoring risk strategies across the entire organization.

Such department--giving the CFO and the ERM at least tacit shared responsibility for corporate risk management--can create potential for "push back" on the part of CFOs anxious to retain or regain certain risk management responsibilities that they deem critical to effective corporate financial management.

Above all, the CEO will play a critical role in setting the tone for creating true partnership between ERMs and management of business units, as well as between the ERM and other participants in corporate departments, including risk management.

As management of risk becomes increasingly specialized--yet critical to coordinate--the logic of housing more and more of the responsibility within the ERM function will only grow more compelling.

At the same time, ERMs themselves must work to overcome the stresses that will inevitably arise as their new function necessarily asserts itself. ERMs will need to develop partnering skills that accept the reality of such tensions, and channel and translate tension into positive problem-solving without sacrificing one's convictions, integrity, and personal authority. (Interestingly, those with trading or transactional backgrounds need to be aware that attributes considered typical of those environments--geared toward quick and forceful transaction resolution--will not necessarily be deemed consistent with the demands of collaboration, negotiation, and gentle persuasion likely to support success for ERMs.)

The ERM's awareness of and ability to manage potential organizational issues represents a key developing criterion of effective and successful practitioners and a means to differentiate themselves among the growing ranks of seasoned risk professionals.

Intrinsic within the definition--and the application-of the ERM/CRO role is the ability to view the organization's risk posture from the broadest possible perspective, and put in place procedures for reconciling risk not on a one--off basis, but in light of the organization's entire risk picture.

Those who aspire to the ERMICRO role must develop their skills and balance the acquisition of their experiences across as many of the major risk management disciplines as possible, e.g., credit risk, market risk, operational risk, fiduciary risk, etc.

The lines of demarcation between credit risk and market risk are blurring, making cross-training easier. On the other hand, in some institutions--banks, for example--the tendency has been to elevate credit risktrained people into the ERMICRO role, creating an imbalance in risk disciplines. Indeed, many banks' CR0 role emerged directly from the chief credit officer position.

Attaining the proper balance of risk expertise means structuring a career path with as many stops as possible within functional categories of risk, to gain both a technical understanding of risk as well as practical experience with various methods of risk management and mitigation.

Competing Interests

As organizational tensions are resolved--and the scope of the ERM/CRO's role grows--one of the responsibilities of the ERM will be confronting and dealing with the corporation's topmost issue regarding accountability and fault, i.e., "Who, if any one person, is ultimately responsible for all risks taken in an organization?"

Issues of legal and professional liability will arise, making the position fundamentally "risky" in ways that could make it less attractive in the corporate structure.

Every organization will find its own way to address such issues. But the ERM needs to be mindful of the need to educate management about the implications of concentrated responsibility for risk management and provoke the discussion that can ultimately ensure that the organization has in place all necessary safeguards to protect both the enterprise and key individuals.

The ERM function will carry, potentially, strategic weight and presence that, up to now, has not been consistently present in organizational risk management. Filling the role will demand maintaining a balance between upgrading one's quantitative and methods body of knowledge and broadening one's strategic and macro management skills--the former necessary to remain competitive with the ever-increasing diversity of risk management specialists and disciplines, the latter key to differentiating oneself from other risk managers.

Higher and advanced academic training as a primary credential for building a risk management career now needs to be balanced with good leadership and interpersonal skills, and executive "presence" essential if the ERM is to establish and extend the credibility and influence needed to make the enterprise risk management function viable across the organization.

Part of this presence will be honed, effectively, by the ERM's need to have meaningful and frequent exposure to relevant board committees as well as external regulatory authorities. Resolving inherent organizational tensions also will represent good tests of one's current and budding management skills and instincts.

Primarily, the current or aspiring ERM needs to keep in mind that successful execution of this role will require the ability to embody and project a certain degree of authority commensurate with the considerable stakes of the job. From a pure skills standpoint, communication expertise also has become a critical success component for ERMs, along with the ability to convey ideas and concepts at a level of sophistication appropriate to the audience,

Appropriate Compensation

Establishing performance criteria and the correlation to pay/rewards for risk managers presents a conundrum for most organizations. Managing one's career as a risk manager will include educating and influencing the organization regarding appropriate and meaningful compensation.

Appropriate performance assessment must combine technical skills evaluation and leadership/management assessment, with the input of the organization's risk management matrix and business units factored into the assessment--a feature that will reinforce the concept of organizational partnership for risk management.

Most organizations haven't yet learned how to provide incentives for risk managers in ways that accurately reflect both the short- and the long-term mandates of their roles. Trade-offs must be made between attractive short-term incentives versus longer-term incentives that carry less immediate reinforcement of behavior, but better reflect the timeframes and consequences inherent in strategic risk management.

The risk professional has the need and the opportunity to educate and create appropriate expectations within the organization about their role, such that compensation closely tracks the function's varying "time horizons." In practice, compensation ideally would reflect both one's short term, tactical achievement at creating an appropriate risk management structure within the organization as well as one's long term, strategic success at managing the organization's overall risk profile.

The ERM must play an activist role in suggesting and structuring ways to correlate performance assessment and specific methods and levels of compensation. In so doing, the ERM will create a significant opportunity to share in the long--term wealth accumulation that is afforded other senior executives whose decision--like those of the ERM-have a tangible, long-term impact on the fundamental health, stability, and future growth of the organization.

Art D'Elia is managing director risk management search practice, of Korn/Feny International, an executive recruiter in Los Angeles.
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Author:D'eliz, Art
Publication:Risk & Insurance
Date:Oct 1, 2002
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