The Myth of the Risk Manager

One job that appears to be gaining momentum in the organization is the risk manager, or chief risk officer, which on paper looks really good, but in practice is potentially a career killer.

Much like the “director of special projects” or “director of business opportunities” or any other title that sounds great but is rarely connected to anything approaching real authority, risk manager appears to be a job you may want to avoid.

Still, the concept of putting more resources into risk management is incredibly timely – it’s just that the related efforts should be more focused on actually reducing risk, not assigning blame if the company gets caught with its pants down. Let’s chat about that this week.

The argument for risk management
At the core of risk management is risk assessment. Few organizations do a good job of the first, which is why I think the second is more CYA than actually making the firm less risky. A risk assessment done properly is a comprehensive list and ranking (by importance) of the risks a company is likely to face. If it’s done right, this sets a framework for how you prioritize your limited assets to mitigate each risk.

Few companies perform adequate risk assessments. If they did, there wouldn’t be laptops loaded with customer data, nor the opportunity for Enron-like problems, nor executive mistakes like stock option post-dating.

After 9/11, Sun’s executives were so convinced that they were next that they moved the company headquarters and hardened the executive floors to withstand a tank round. Setting aside for a moment how stupid it is to harden the top floor only in a multi-story building – particularly after 9/11 – a risk assessment would have shown that an earthquake was more likely. And hardening a top floor probably made them less safe for the more likely seismic event.

If you know what the likely risks are, you can then build plans that are less about looking like you are doing something, and instead are actually making things better. This goes to the core of risk management: It isn’t about eliminating all risk, it’s about managing the risk so that it doesn’t become terminal to the company. And the money spent on risk management shouldn’t exceed the costs associated with not responding to the risks at all.

Who owns risk management?
It might be easy to say that in a way, every employee in the firm has some responsibility for risk management and that every executive rolls this up into their related organizations. But who ultimately has this responsibility?

Not the CEO, but the owners of the company or the board that represents them, which has the responsibility of protecting investor assets. If the buck stops anyplace, it stops in the boardroom. Internal audit, meanwhile, owns compliance, and that goes to the core of risk management. Internal audit is supposed to report to the board, so they can perform their role of protecting the company’s assets. Often, however, this is passed off on the CFO, and then the board wonders how things like option post-dating come about.

More important is that the higher an executive is in a company, the more likely he or she is to think that the rules only apply to his or her subordinates. I can’t tell you the number of times I’ve seen a CEO or direct-report do incredibly stupid things like have sex in stairwells and offices with employees; misuse company assets for personal recreation; or outright steal from the company – all because they figured they had the authority and the right to do so. In security, I’m sure you’ve seen executives ignore security practices like bag checks and ID verification because they figure the rules simply don’t apply to them.

Companies like Enron and WorldCom had executives who clearly thought it was OK to outright steal from their customers and investors, all going back to their perceptions that no one was in a position to police them outside of law enforcement. By the time law enforcement is called in, it’s usually too late to save the company.

Why not a risk manager?
One of the basic rules of business is to make sure responsibility and authority are in balance. Having too much authority and not enough responsibility usually results in things that should get done not getting done. And having too much responsibility and not enough authority results in the poor sucker becoming a target for blame.

The responsibility for compliance largely resides at the board level, so the placement of the risk manager should be below the board. Then they have access to the information and resources they need to identify the biggest risks to the company and access to the power needed to prevent those risks.

Another problem with the risk manager position is that he will never get credit when he takes the right risk that pays off for the company. He will just get blamed if a risk results in a problem – even if the risk initially appeared to be reasonable.

Unfortunately, people generally don’t understand the risks they are taking. And while there are often folks who believe a decision may be bad one, they often don’t have the data to back up this belief. So that either prevents good decisions or makes them prone to bad ones.

Delegating management responsibility to reduce personal risk is a bad idea. What is needed instead of a risk manager is focused risk analysis, and people willing and able to stand up and present information that can lead to better decisions. There’s no lack of decision makers, but few decision makers make informed decisions. The focus should be on informing – rather than adding another level of redundant management.

— Rob Enderle is President and Founder of Enderle Group . Special to Dark Reading.