Pick the Targets before You Start Judging
In a Oct. 3 FT article, it says that just 30% of 465 executives surveyed said that “they were able to tap risk management programmes to prepare for and minimize the negative outcomes” of the recession.
But I wonder whether minimizing impact of a recession was among the targeted risks of those risk management programs.
And in addition, I wonder whether the risk managers would have been permitted to even think seriously about the impact of a recession as serious as the one that we have (and continue to) experienced.
Financial firms that would have been very well prepared for this recession would have been doing quite a bit more hedging than their peers and the cost of that hedging would have severely reduced earnings prior to the recession.
Non-Financial firms that would have been well prepared would have been running with very low inventories and with loads of unfilled positions, running tons of expensive overtime prior to the flop.
The article also said that “only 44 percent said that they had adequately captured the potential problems before the downturn.
Some of that may be risk managers being slammed for being poor fortune tellers. They did not foresee the size of this recession so they missed it.
I would suggest that these survey results are a case of risk management as scape goat.
Don’t get me wrong. There are times when risk management gets it wrong.
But if you want risk managers to be focused upon minimizing the impact of a once in 75 year recession, then you ought to tell them that before the recession hits, not after.
And if accurate predictions of the economy are required of risk managers, then you ought to completely change your ideas about how much risk managers should be paid.
By the way, if you know now what sort of result you would have wanted from the recession, then that information should be used to set the firm’s risk tolerance – which should be done in advance, not after the fact.
But in fact, 80% of the firms have never agreed on a risk tolerance. Quite often the reason for not picking one is a reluctance of management to have their options restricted by such a limit, to allow the board into decisions that they want to make without the help of the board.
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