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Alternative Strategies - A year away from the City - May

Patrick HealyMy subject this month is the bleeding obvious.

This occurred to me as a possible topic when we recently visited the Iguazu Falls on the border between Argentina and Brazil.  The falls are enormous, by many measures the largest in the world.  Six and a half thousand cubic metres of water hurtle off the basalt edge of the falls every second and plunge over 200 feet to pound into the shallow riverbed below, sending clouds of water vapour 500 feet in the air.

Quite surprising then to see on the bank above the falls a sign saying that swimming is prohibited.  Only the addition of hungry (and necessarily fast-swimming) sharks could make the place a less attractive spot for a swim.  It was clearly still felt to be useful to forbid it.

Risk management of some form is at work here and it has some resonance in the world where risks relate more to financial loss than the possibility being turned into puree by thousands of tons of water.

Photograph by Lucy Reeve.

The bleeding obvious can be missed in the regular world of risk management.  Sometimes risks are omitted as they are so obvious and so potentially devastating that discussion is almost taboo; a quasi-superstitious fear of mentioning the elephant in the room.  Most market bubbles are recognised well in advance but onward we all rush for fear of being the one to precipitate the curse by mentioning it.

There are other reasons why major risks may be missed.  In our taxonomies of risk we have a tendency to parcel them out into distinct and discrete classes - market risk, credit risk and operational risk being the most usual.  Other risks appear around the interaction of these classes, the enhanced credit risks resulting from major market events, to take a current example.  Some further risks do not fall into obvious categories - reputation risk, for instance- and on this basis may be crammed into one of the major classes; most often operational risk, although they may not necessarily fit well with the general methodology.

Sometimes risks that are hard to classify just slip through the cracks between the classes.  Risks that are hard to manage or mitigate may also get lost.  Why this might be the case has little to do with the scientific pretensions of risk management and a lot to do with human psychology.

Photograph by Lucy Reeve.

Even if common sense tells that the risks are real and should be included in any sensible portrayal of the hazards to which your business is exposed, the pain of having to explain great red blotches on your recurring reports may dilute your enthusiasm, particularly when you are trying to show people what a terrific job you are doing at managing your company’s risks.  Your board may be equally unenthusiastic about a fearless search for truth that requires them to explain those red blotches to regulators.  They will be even less eager to have to clarify it for analysts and document it in the annual report.

There are also risks that you, the risk manager, may become aware of but cannot, for various reasons, articulate.  Why might this be the case?  Well, you might have been with the organisation for a while and the potential danger of this risk might not have occurred to you before or you may have underestimated its potential impact.  People will reasonably ask why you did not say anything before.

Or you could be new to an organisation and do not want to look stupid by mentioning something that clearly does not worry your new colleagues.  There is probably a good reason why no one is worried so keep it to yourself while you work it out.  No point in looking like an idiot.

Equally bad, you could make someone influential look bad and this might have a terrible effect on your bonus and/or career.

Why should you expose yourself to ridicule or risk your career in these circumstances?

Because if you are a risk manager it is your job.  Need I mention that if it does blow up then you might reasonably be fired for not raising the issue?

There are less dramatic reasons why you should raise these matters.  It is quite possible for example that you may actually have found something that has not been articulated before.  Part of your role is to stimulate productive discussions around risk issues and to facilitate connection between different parts of the business in order to allow the better management of risk to flourish.  Expressing your concern may smoke out an issue that has been worrying people around the business but over which they lacked the information or authority to address individually.  As a risk manager at the centre you should be in a position to draw the interested parties together and to facilitate, if not a solution, at least a better awareness.

Photograph by Lucy Reeve.

As to the reporting side; while the board may not enjoy learning of risks that they cannot control an intelligent board will not thank you for withholding information for fear that it might upset them.  You are a professional, not a courtier.  You will have to do your job in explaining risk to them in clear and rational terms and they in turn will have to do theirs in explaining the risks to the stakeholders of the firm in the context of the business, strategy and environment of the company.

You should also bear in mind that sometimes risks that are apparent to you might not be as obvious to others and that sometimes it is necessary to state the bleeding obvious.  While credit might be given to those far sighted risk managers at the Iguazu Falls for their wisdom it is worth noting that in the early days of tourism at the falls, boat trips were permitted to sail out from above the falls to their very edge.  I am sure you can guess why these too have been forbidden.  Hopefully your businesses can learn this lesson in a less dramatically final way.

Patrick Healy was the Group Head of Risk Reporting for Man Group plc
© Patrick Healy

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