Making a judgment on risk

Making a judgment on risk

As we all struggle with the implementation of Basel II there comes a time when we start wondering about how we all got into this risk management game in the first place. The whole concept of risk management has been sweeping the corporate globe for over a decade now. It has now reached the point where one of our contributors in this issue of Balance Sheet makes the point that parts of the risk management process have now become "an imperial principle." In other words it is impossible to argue against any aspects of risk management as it is embedded into our organizations, used as the central principle in reorganizing a corporate structure or seen as the engine at the heart of running a business. Professor Michael Power of the London School of Economics has started the process of pointing to the "dark side" of a risk management culture and we are extremely happy to present an extensive overview of his latest thinking in Balance Sheet.

The central issue is that of judgment. The rise of regulators has meant that at every stage of the march towards more and more risk management processes the idea of judgment has receded further and further back down the road behind us. In Power's words: "Individual teachers, accountants, lawyers or doctors cannot be blamed for this state of affairs. Far from it; it is completely rational to invest in secondary risk management strategies to avoid blame for downside outcomes. The problem is systematic and therefore much more serious. A 'morally thin' environment is being created which, despite much talk of the 'opportunity' inherent in the new risk management and the Sarbanes-Oxley requirements, is profoundly damaging to professional cultures."

Increasingly risk management, up until now seen as a boon, will be seen as something which ought to be approached with a degree of skepticism. What needs to happen is for the positive side of risk management to be encouraged and the side which is simply the laying-off of blame to be discouraged.

And that is what the rest of the special risk management section of this issue of Balance Sheet does. One of our regulars over the years, Chris Mundy of Marsh, provides an overview of the importance of systemic risk. Richard Barfield of PricewaterhouseCoopers draws on a survey into Basel and financial institutions carried out by his firm and shows the effects we can expect it to have on the banking business. And Martin O'Donovan of the Association of Corporate Treasurers looks at an area which, for a while, escaped everyone's notice. A new code of practice has been drawn up to provide a market code, a spot of "light-touch" regulation, for the world of the credit agencies. He provides a guide to what it will entail.

Continuing the risk theme we also look at corporate governance in this issue of Balance Sheet. Another of our regulars over the years, the globe-trotting consultant Yen Yee Chong, takes a look at corporate governance disasters in recent times and suggests that some form of organic risk management might have been the answer. Then Rupert McNeil and Katie Rimmington of Deloitte look at the data to assess how effective the most recently implemented systems of corporate governance have been in achieving change at board level.

Meanwhile we also look at developments elsewhere. John Court brings us an update from the cutting-edge world of digital financial reporting and the reporting language XBRL. And Joseph Mariathasan of StratCom looks at liability driven investment. His conclusions chime with some of the outspoken views of one of our columnists, Dr Bill Robinson. He suggests that if companies take a very long-term view then shifting pension funds out of equities and into bonds could do wonders for their raising of debt. He makes the strategy clear.

Meanwhile Marc Dumbell of Deloitte, and independent consultant Matthew Leitch, both explain, in their respective columns how internal audit can be made simpler and more effective. Dumbell looks at the recent FSA review and Leitch shows how you should be rethinking your attitudes towards sets of risk. It is a topic you cannot escape from.

And finally columnist Michael Mainelli provides the sort of sideways thinking which we have come to so greatly value in him. In this issue of Balance Sheet he looks at DAPR. Timing and price are more and more crucial in business judgment. Find out where DAPR comes in and how it can help you.

This issue of Balance Sheet helps you with your problems in risk management in a thousand and one ways.

Robert BruceEditor