When I was a kid in the 1960’s, I was sick and tired of how much time on TV and movies was taken up with stories of WWII. Didn’t my parent’s generation get it? WWII was ancient history. It was done. Move on. Join the real world that was happening now.
From that statement, you can tell that I am a Boomer. But I am already sick and tired of how much ink and TV and movies and Web time is devoted to the passing of the world as the Boomers remember the golden age of our youth. Gag me. Am I going to have to hear this the entire rest of my life? Get over it. Move on. Live in the current world.
Risk managers need to carefully convey that message to the folks who run their companies as well. What ever way the world was in the “Glory Days” of the CEO or Business Unit manager’s career, things are different. Business is different. Risks are different. Strategies and companies must adapt. Adapt, Burn Out or Fade Away are the choices. Better to Adapt.
I saw this happen once before in my career. Interest rates steadily rose from the late 1940’s through the early 1980’s. A business strategy that emphasized amassing cash, locking in a return promise and investing it in interest bearing instruments could show a steady growth in profits almost every single year without too much difficulty. Then suddenly in the mid-1980’s that didn’t work anymore. Interest rates went down more than up for a decade and have since stayed low. Firms either adapted, burned out or faded away.
We have just concluded a (thankfully) brief period of massive financial destruction and are in an uncertain period. When we come out of this uncertainty, some of the long held strategies of firms will not work. Risks will be different.
The risk manager needs to be one of the voices that helps to make sure that this is recognized.
In addition, the risk manager needs to recognize that one or many of the risk models that were used to assess risk in past periods will no longer work well. The risk manager needs to stand ready to adapt or fade away.
And the models need to be calibrated to the new world, not the old. Calibrating to include the worst of the recent past might seem like prudent risk management, but it may well not be realistic. If the world reverts to a reasonable growth pattern, the next such event may well not happen for 75 years. Does your firm really need to avoid exposures to the sorts of things that lost money in 2008 for 75 years? Or would that mean forgoing most of the business opportunities of that period?
Getting the correct answers to those questions will mean the different between Growth, burn out or fading away for your firm.