The RMA Journal July–August 2010 27

Risk Management Must Be Part of a Firm’s DNA

by Kevin McLaughLin

Enterprise Risk

••CROs at a New York Chapter meeting cited a strong risk culture and support from top management as keys to effective risk management.

Risk management must be embedded in an organization’s culture and have the explicit support of executive leadership to succeed, said panelists at the RMA New York Chapter’s annual Chief Risk Officers Roundtable. The event was mod-erated by Carl Adams, chapter president and principal at Capital Framework Advisors.

“Risk management needs to be part of a firm’s DNA,” said Brian G. Rogan, chief risk officer for BNY Mellon. “Cycles are a lot shorter now and you face risk every day. The firms that think they can turn on and turn off risk management are usually the ones that have a problem.”

A Seat at the Table for Risk ManagementStuart Lewis, deputy chief risk officer at Deutsche Bank AG, said senior management and the board at his firm give “a lot of scrutiny to our risk positions.” He said Ger-man banking regulations require that a CRO sit on the bank’s board.

“It forces risk onto the board meeting agenda,” Lewis said of the requirement. “You have an independent chief risk officer who is explaining to the board his perspective on risk, so the information flow that the management board has is quite phenomenal. All that information gets passed on to regulators, so there is an impetus at the senior management level to ensure that it is appropriate.”

Craig W. Broderick, chief risk officer at Goldman Sachs, said his firm’s leadership team seeks out advice and informa-tion from its risk managers.

“We meet regularly with the audit committee of the board, and we go through the risks we’re taking across the business

and the risk trends. We tell them how we measure it and manage it. But more important than the structure are the actions taken by our senior management. Our CEO, our president, our CFO, and other senior people regularly pick up the phone and lob questions at me as CRO or at other risk staff. They’re probing, they’re inquiring, and they’re clearly interested in the risk management of the firm. That really sets the tone for the organization.”

David Coleman, chief risk officer for the Royal Bank of Scotland (RBS), said risk managers need to cultivate influ-ence among senior management.

“Do you have influence? A senior risk person has to be more than technically qualified to be effective. I encourage people to get out from behind their desks and understand their marketplace, to think strategically and be engaged in strategy development,” Coleman said.

“The way to ensure that we remain relevant is to stay on

Brian G. Rogan, BNY Mellon

Photos by WiLLiaM thoMas cain

July–August 2010 The RMA Journal28

top of what is important to the business and understand the commercial, but disciplined, approach to risk in the marketplace,” he added. “We need to deepen our knowledge and be proactive.”

Incorporating Risk Management into the Business StrategyTo enhance their credibility, risk managers need to understand and support the firm’s business strategy, the panelists said.

“Risk managers need to have a clear understanding of what the strategy is in order to be effective,” said Broderick of Goldman Sachs. “We strive to be commercial in the deci-sions we make, we try to help our business colleagues get as much good business as they can, but our fundamental mission is control. Our unquestioned responsibility is to put the final stops on excessive risk.

“We spend a lot of time and energy building systems, processes, and procedures that allow us to manage our risk capacity very carefully—credit risk, market risk, operational risk, and so forth. Our systems give us ways to determine how much risk we allow in our businesses, and we price that so businesses are charged appropriately for the capac-ity they use.”

Lewis of Deutsche Bank said his firm is reintroducing risk and balance-sheet discipline in the aftermath of the financial crisis. “We’ve been working, as have many other firms, to right-size our balance sheet and deleverage. At the same time, we’re emphasizing that our front office needs to remain extremely disciplined in terms of risk taking.”

Lewis called the front office “the first guardians of risk in the firm, and we work with them to improve their awareness of risk across the many products the bank is engaged in. Then we try to instill a discipline and culture of risk across the whole organization. Our risk can’t be the responsibility only of the risk management function. It has to come from the top of the firm and have influence across the firm.”

According to Coleman of RBS, “Risk management must maintain a level of confidence to manage risk, not to avoid risk. Risk management is not only our job, it’s how the organization gets paid. There’s a tendency now to see every-thing in black and white—good things you should do and bad things you shouldn’t do. But from the risk manager’s point of view, it’s the gray you have to be able to navigate through.

“There are not two separate agendas, one for business and one for risk. Risk management is our business and delivering a higher value to our shareholders is the mission-critical goal,” Coleman said.

Tempering excessive optimism is among the risk man-ager’s responsibilities, said Broderick.

“Our business colleagues are optimists and that contrib-utes to success in their functions,” he said. “On the other hand, risk professionals don’t need to be optimists. We need to have long memories and remember the lessons painfully learned in the past two years, and in the crisis before that, and the crisis before that.

“Remembrance of issues that arose in the past needs to be factored into strategic planning at the most senior levels, but also into the operating level of our business units,” Broderick remarked.

The Value of Continuing EducationBecause of the ever-growing complexity of risk manage-ment, continuing education is critical, said Broderick.

“Risk management is like your hardest course in school, where, once you fall behind, it’s almost impossible to catch up. Continuing education is absolutely critical. You need to stay on top of the issues in your particular specialty, but also understand risk as a broad discipline across the credit, market, and operational areas,” he said.

Lewis said that, at Deutsche Bank, he has urged risk managers to take a portfolio-wide view in evaluating a

“I encourage people to get out from behind their desks and understand their market-place, to think strategically and be engaged in strategy development.”

David Coleman, Royal Bank of Scotland

Stuart Lewis, Deutsche Bank AG

“Our risk can’t be the responsibility only of the risk management function. It has to come from the top of the firm and have influence across the firm.”

The RMA Journal July–August 2010 29

transaction. “Our business is becoming far more complex, and that means risk managers have to be less silo-oriented in looking at transactions and consider the consequences of incremental risk on the portfolio.

“We have an enterprise-wide risk management group now established. Risk management isn’t about silos. It’s about a holistic overview of risk and understanding our business units in terms of the amounts they make in relation to the risks they take,” Lewis said.

This year’s CRO Roundtable also was a celebration of the New York Chapter’s 90th anniversary. Speaking before the group, Gary Brown, former New York Chapter president and current president and CEO of CIBC World Markets Corp., set the stage for the panelists’ discussion from a front-office perspective.

“Culturally, we have to instill risk principles in those sit-ting on the front lines. It has to come from the top down,” he said.

“Learn as much as you can and stay relevant,” he added. “Our objective is to make money while managing risk ef-fectively, so have courage, exercise good judgment, and stand firm in your positions.”

Brown also urged attendees to become more active in

RMA. “My career has benefited from my association with RMA,” he said. v

••Kevin McLaughlin is senior writer and contributing editor for The RMA Journal. He can be reached at kmclaughlin@rmahq.org.

Craig W. Broderick, Goldman Sachs

“Because of the ever-grow-ing complex-ity of risk management, continuing education is critical.”

Here Is 1 Way To Obtain ASubstantiated Defensible Value And 4 Ways That Put You And

Your Client At Risk...

Do You REALLY Know What The Equipment Is Worth?

If you apply any of these 4 ways to determine value, you’ll have a problem!1. Guess (filled with liability and is inaccurate);2. Rely on the word of the owner (filled with liability and is inaccurate);3. Rely on a depreciation schedule or book value (inaccurate and filled with liability); or4. Rely on the word of a “non-certified” person. An auctioneer or dealer may have a hidden agenda. (Filled with liability and may be inaccurate).

We all know that equipment has value. How youarrive at that value is of the utmostimportance to collateralize a loan, businessvaluation, business or property sale, and 20other business reasons.

1 Way To Obtain A Substantiated Defensible Value...Earn the professional designation of CMEA (Certified Machinery & Equipment Appraiser)! Find out how youcan earn the CMEA credential, reduce the risk of liability, and increase your business by requesting our FREECMEA Preview Pak. If you don’t want to earn the CMEA credential, we have over 400 CMEA’s coast-to-coastand worldwide that provide you with a substantiated, irrefutable and defensible Certified Equipment Appraisal.

www.nebbi.org Toll Free (866) 632-2467