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The 1990s: the decade of risk management.

The 1990s: The Decade Of Risk Management

Risk managers are in the business of managing the future. In the next decade, risk managers will create their own individual career opportunities by fundamentally changing the traditional risk management function. Risk management will emerge as an essential business discipline and the risk management position will be elevated to the corporate officer level. The 1990s will be "The Decade of Risk Management."

Risk Management in the 1980s

Risk management mission statements generally focus on the preservation of assets and continuity of earning power. The mission statement is usually coupled with the five step risk management decision making process. The former defines "what" is managed, and the latter outlines "how" it is managed.

In reality, neither the risk management mission nor the risk management process accurately represent modern risk management. More importantly, these useful but outmoded definitions may be retarding individual career development and impeding the acceptance of risk management as an essential business discipline.

A giant leap is necessary to correct the creeping mismatch between these generally accepted risk management definitions and risk management in practice. However, before a leap is possible, a number of questions must be answered.

Should the preservation of assets and the continuity of earning power be claimed as the risk management mission statement? Clearly it should not! This mission can be claimed by the CEO, the treasurer, the legal department and the lobby security guard. It is absurd to suggest that a risk manager would propose that assets not be preserved or that earnings should cease. Corporate assets will be protected and earnings will continue. This basic mission was satisfied long before there were risk managers.

Does the traditional risk management decision making process accurately describe how risk managers make decisions? It does not! The traditional risk management process is the sequential application of five discrete action steps: identify, measure, select, implement and monitor.

While the logic is pristine and appealing, the traditional process fails to adequately describe the practice of risk management within the business organization. It is severely flawed in at least three areas:

* The process is circular. The third step (select) is the decision making process. How can it be used to further define a step in a "decision making process?"

* By definition, the time order must be sequential. One cannot "measure" unless one first "identifies;" one cannot "monitor" unless one first "implements;" etc. The concept is supremely logical but totally impractical. It implies a rigid, linear management process. As such, it is at cross purposes with the desirable image of a risk manager as an intuitive and creative problem solver.

* The same decision making process can be applied to almost any problem-solving challenge. Whether tying down a business deal or tying one's shoe, it is purposeless to reiterate the obvious. A benign process is not an essential risk management tool.

The traditional five steps imply an isolated technician, working outside the mainstream of management, who spontaneously identifies risks previously overlooked by well-meaning, but basically "risk-illiterate," superiors. In fact, more credit needs to be given to the intuitive risk recognition abilities of top management, and risk managers need to acknowledge that risk identification is often done for them by others.

The traditional mission and process have led risk managers into an overreliance on insurance. While effective insurance management calls for mega-dollar decisions relative to risk retentions, limits, coverages and deductibles, the close association with the insurance buying function has been detrimental to risk managers for the following reasons:

* Insurance deals with painful or unpleasant alternatives. It is a "bad news" business. Many risk managers, like Greek messengers, have lost their heads mismanaging the inevitable bad news inherent to the functioning of insurance mechanisms.

* Corporate America has a clear bias against insurance (or insurance-related mechanisms) arising out of unrealistic business expectations, a basic lack of understanding of insurance cycles and prior, unsuccessful attempts to establish long-term business relationships with insurance companies. Additionally, the influence of bad experiences with "personal insurance" cannot be underestimated.

* Insurance mechanisms deliver an inordinate number of financial surprises, giving a false impression that the managers of risk are less competent than, say, legal or tax department managers. As long as planning and predictability are top management's "measurements of choice," risk managers will finish last in the image race.

Risk Management in the 1990s

Risk managers will be whatever they can convince Corporate America they can be. Form will follow function. New functions will offer unprecedented opportunities to apply risk management principles.

The traditional definitions are limiting and no longer support risk management in practice. Emphasis needs to be placed on the mission rather than the process. The new combination of mission and process will emphasize the unique contributions of risk management rather than "how it is done." An entirely new platform must be constructed, universally adopted by the risk management community and carefully promoted to Corporate America.

The platform must build its foundation on the risk manager's unique experience in managing interdisciplinary skills. It must be flexible enough to allow for the significant variations that exist among and between diverse business organizations, independent departments and numerous layers of management. It must be creatively drafted and promoted to avoid criticism from competing disciplines.

The new mission and process are designed to help overcome built-in corporate barriers to effective risk management. It is the unique ability to coordinate interdisciplinary skills that is today's risk manager's strongest suit!

The New Mission

The new mission is to select, coordinate and efficiently apply interdisciplinary skills to harmful uncertainties which may diminish the future value of public, private or personal resources.

It is important to note that all reference to the word "manage" has been avoided. This has been done for several reasons. Manage is the most over-used and abused word in the business vocabulary. Second, the word strongly implies traditional authority/responsibility exchanges. The mission statement requires the application of skills possessed by other managers. It is political folly to suggest that a risk manager direct (i.e., manage) an attorney in matters of law or a treasurer's financial activities. Finally, the omission of manage is liberating. It permits a risk manager to turn the reporting pyramid upside down in order to tap the unique skills of the best and the brightest within the organization, irrespective of rank or structure.

The New Process

The new process is the measured application of the five descriptors (See Photo). Each one-word descriptor is a symbol for a much broader concept. The descriptors comprise the fabric of the process. Together, they are used to build networks among otherwise independent disciplines.

The common usage definition for each descriptor is:

* investigate - observe or study by close examination and systematic inquiry;

* inform - give material form to;

* influence - affect or alter by indirect or intangible means;

* interpret - explain or tell the meaning of; present in understandable terms; and

* integrate - form or blend into a whole; unite with something else.

The common usage definitions are only a starting point. Each risk manager must apply his own unique interpretation to the descriptors, in light of the new mission statement and the task at hand. The advantages of descriptors may be summarized as follows:

* definitions not required;

* support use of malleable matrix rather than linear model;

* support mission statement interdisciplinary theme;

* may be universally accepted but individually applied;

* allow for future interpretation and development; and

* support management trends toward downsizing, fewer layers of management and less formal structure.

New Opportunities

As a practical matter, the new risk position will become a repository of corporate related risk functions - functions which demand the intense coordination of interdisciplinary skills.

New functions may penetrate other corporate departments and be integrated at different managerial levels. Opportunities may arise out of:

* mergers, acquisitions and divestitures;

* environmental exposures;

* security;

* crisis and business resumption planning;

* benefit financing;

* information exchange;

* public relations/damage control;

* contract control/word control;

* quality control and product design;

* futuristic planning and product development;

* efficiency, ergonomics and value engineering; and

* personal/personnel risk management.

New Tools

Risk managers should strive to develop "receptors" within their organizations. Receptors are individuals for whom specific risk management information will have particular value and who will ultimately serve to fulfill the risk management mission statement. Additionally, the risk manager can anticipate special action from a given receptor.

Once the fabric of the receptor network is established, the risk manager can patch individuals in and out of the matrix to serve a specific risk management goal. A receptor may supply information, help the risk manager investigate, influence others, integrate risk management principles, or interpret issues within his/her area of expertise - all within an established matrix constructed by the risk manager.

Otherwise, effective stimuli are ineffectual without properly developed receptors. Risk managers must recognize potential receptors and anticipate a set of predictable actions from each receptor. Receptors must be sensitized to risk management issues long before they are asked to join the risk manager's matrix team. This should be considered a major part of any risk manager's job.

Creating Opportunities

By Changing Corporate Perceptions

Titles, first impressions and buzz words are the rule in our fast paced business world. Whether driven by business-like expediency or by human psychology, people like to sort, categorize and group the abstract into familiar constructions. It is convenient to group related functions under one-or two-word titles.

Risk management titles and functions are not commonly recognized or understood by Corporate America. The title "risk manager" will gain recognition and prestige with its adoption by established disciplines such as banking, engineering and health care.

Traditional risk management functions cast a negative image, while failing to accurately describe modern risk management in practice. Perhaps, the function should be changed precisely because the traditional function has failed to take root in the consciousness of Corporate America. The function must be upgraded to match the growing acceptance of the title. By this process, risk managers will be evaluated within the business organization.

With the exception of "officer," there are few powerful mental images projected within the typical business organization. Risk managers are presently placed at or near the bottom of the corporate hierarchy. The paradox is striking when one considers that risk management routinely deals with issues affecting the virtual survival of the corporation.

The problems associated with the title of risk manager were created, in part, by the fact that an overused business title (manager) is used in conjunction with an abstract term (risk). Other business titles developed out of a small group of traditional staff functions, including legal, tax, personnel, treasury, marketing and field operations. Titles associated with these disciplines are tightly defined, easily recognized and universally accepted.

While it is quite common to find a risk management position reporting to the CFO or general counsel, the reverse is never true, even though a risk manager may be a financial expert or an attorney. With the number of unrelated disciplines now claiming the "risk" title, it is conceivable that the title (perhaps without its current group of practitioners) may leapfrog the traditional hierarchy of corporate functions. The term "risk management" has become so popular, a synthesis of risk related functions may congeal into a quasi-risk management title that could be assumed by the individual who formerly held the title of, say, general counsel. Perhaps, the CEO (chief speculative executive officer) would require an alter-ego, the CRO (chief risk officer). The concept conveys an appealing symmetry and a democratic sense of checks and balances. The concept is not without precedent: Energy firms have appointed environmentalists to their boards of directors; nuclear utilities have created risk management committees with authority over operating officers; and other business organizations are adopting titles like chief information officer. Some "risk professionals" now report to the office of the president.

Creating Opportunities

By Changing the Functions

Risk managers manage risk; but what does that mean to Corporate America? The question has been complicated by a plethora of newcomers, each claiming the risk management title as their own. From interest rate hedges to personal health care maintenance, it appears the name is associated with every aspect of day-to-day life.

It is thus very difficult to discern the function from the title risk manager. Yet, there is no better title. Risk managers must learn to tolerate the high level of public misconception that currently exists. After all, if the principles of risk management can be as broadly applied as the new mission statement seems to indicate, then it is reasonable to expect that different "brands" of risk management will germinate in unlikely places. The process is healthy and should be encouraged. It enhances, rather than dilutes, the corporate risk management function.

Risk managers should aggressively attempt to change top management's perception and the perception of Corporate America at large. Meaningful change only can be realized by changing the function, not the title. The reality is that risk managers cannot change their own titles. It is fruitless, and possibly detrimental, to our best interests to try! Title changes are always awarded from the top down. Risk managers must learn to change their function from the bottom up.

If the function can be expanded and perceptions enhanced, then risk management, itself, will be integrated into the upper management decision making process. As experienced risk practitioners, risk managers will be given unprecedented opportunities to directly contribute. The next decade will be marked by the fulfillment of the risk management mission. At long last, risk managers will become part of the process.
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Publication:Risk Management
Article Type:column
Date:Mar 1, 1990
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