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New Risk Management Model: Capturing Upside vs. Mitigating Downside
December 11, 2007
AFP Staff Writers
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Podcast discussion with Kraig Conrad, AFP's director of corporate finance and risk management
Over the last few months, the AFP Risk Forum agenda has taken shape. What is the theme of the forum and what are you trying to accomplish?
Our tagline is "Shaping Risk Strategies to Capture the Upside." This translates into a goal of changing the way a corporate risk management team thinks about what it does and how it operates.
The Corporate Risk Task Force, a group of practitioners, and I have tried to develop a forum that helps other risk practitioners think differently about how they develop their risk programs and how they structure their risk management activities. These could be practitioners in treasury and finance, they may be in a stand-alone department with risk responsibilities, or in a related area out in the business units. But they have one thing in common: They are trying to make the practice of risk management more strategic in their companies.
Today's corporate risk management practitioners are likely being asked by executive management to help create value. Let me be clear. This may not necessarily mean creating value through financial instruments or running opportunistic options strategies to take advantage of rate changes. The other way to do this is to have risk management supporting corporate strategy, to take on the risks that could lead to failure in strategy. This is often complicated by traditionally ingrained and legacy risk and insurance management beliefs that have focused the function on trying to mitigate the downside. This is not to say that insurance has no place in the new risk management model, but many strategy-related risks are not insurable, so there just isn't a market for them.
How did the task force come up with this theme?
The concept has been bubbling in the risk management community for some time. AFP learned a little more through research we conducted nearly two years ago on treasury's role in risk management. The growing body of evidence has been supported by my discussions with risk practitioners since then, and it has been validated by the task force.
What are some of the highlights of the forum? What types of sessions will deliver on the theme?
The event starts off with Michael Raynor, author of The Strategy Paradox and an earlier book called Innovative Solution. He has a great perspective on the challenges of the strategy process. The paradox he speaks about is that a strong focus on what we all consider to be the best practices in risk management could actually be setting a company up for complete failure. He will go into great detail about how companies that have what we would consider best practices related to strategy – following along, trying to go "from good to great" in the words of John Collins – could actually be setting themselves up in an equally likely situation for failure.
We move on from there to talk about four key themes, being able to optimize risks to find the upside. These are assessment, measuring risk and results, cultural alignment (always a very difficult thing, especially in a company with multiple business units), and the ever-present governance structure. In many companies, risk management is seen as a drain on value instead of a place where value can be created.
Then we move on to mapping key risk indicators to key performance indicators. This is a great way to demonstrate the value that risk management is creating within the organization. This means understanding the risk measures that the organization is monitoring and matching them to performance metrics, essentially what the organization is being valued against.
We try to get into a different view of risk. A lot of folks think of risk in a very specific platform, essentially what is available in the insurance market. We take an alternative look at those risks so that organizations can find another way to approach them than simply going to the insurance market.
We will discuss Enterprise Risk Management (ERM) and what it means today, and many other topics. I'm most excited about our closing session, which is about the future of corporate risk management. I am going to interview leading Chief Risk Officers from major companies to hear their views on the challenges of risk management in the coming years.
The Forum will also have opportunities for networking, a component of what we do here at AFP. As the field of risk management grows, it's important for risk practitioners to have a network of colleagues they can tap for information. There will be many changes in the near future as organizations revamp and re-approach their risk programs. Practitioners will need someone to call on when they are faced with day-to-day challenges. They want to hear what others have gone through and what they are attempting. This is as valuable as listening to a topical presentation.
The forum will open in a beautiful setting looking out onto Lake Las Vegas. There will be a dinner with Master Sommelier Edmund Osterland, one of only a few with that title in the United States. He will share his experience with various wines, bringing some humor to the discussion, too
Learn more about the AFP Risk Forum: www.afponline.org/riskforum
Listen to the podcast: www.afponline.org/pub/podcasts/p_20071205_conrad.mp3
Copyright © 2007 Association for Financial Professionals. All Rights Reserved.
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