Risk Management Adds to Value

It always seems like the same argument.

One the one side, you have the folks who say that risk management is an expensive waste of time, and on the other the folks who see risk management as vital to the survival of the firm.

The folks in the first group pull out their trump card…

OK, if risk management is so good, show me a demonstration of the value added.

And what they are looking for is a clear example where all that money spent on risk management resulted in some clear cut benefit.

The risk managers will sometimes be able to show a benefit.  But usually the best examples are somewhat difficult to claim clear credit for:

  1. Remember when Risk Management suggested that we reduce our stock market exposure in 2007?  Well, we cut it in half and saved the company millions.  (Or do you look at that as keeping half and losing millions???)
  2. Or that time when we stopped that trade that if it had gone through the firm would have lost a million.

Firms of all, viewed in that manner, risk management “accomplishments always seem negative.  Always seem like they are all about stopping business.

Second, it is quite possible that in good times, risk management will not have any stories like this at all to talk about.

In the best of times, risk management does seem like a complete drag.  The folks who had weak risk management seem to do better than the folks with strong risk management.  That is because even the bad trades make money in the best times.

Risk management needs to avoid getting sucked into this discussion.

That is because the primary benefit of risk management is purely prospective, not retrospective.  It is pure luck whether risk management advice has resulted in positive benefits during any period of time.

Risk management has benefit and provides value in the way that it shapes the FUTURE.

The value of risk management is that it creates a future that has the risk profile that is what management and the board wants.  A firm with good risk management has potential for failure and potential for success.  Those potentials have been deliberately balanced by consciously balanced by management and the board.

The value of risk management is the value of a known balance compared to the value of an unknown balance.

The management of a firm is betting on a roulette wheel.  The firm with risk management knows how many numbers are on the wheel and can choose how many it wants to cover.  The firm without risk management does not even know how many numbers are on the wheel and may not even know the extent of its bets on any one spin of the wheel.

With that idea in mind, risk managers should be asking how the opponents of risk management would propose that they can value their own future.

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