If you take risks you need to have risk management

The recent meltdown of the US sub prime loan market and the Société Générale rogue trader losses, although perhaps only loosely connected, highlights some issues around the value of risk management.

Most organisations pay lip service to their risk management functions. They see it as a compliance/assurance activity largely focussed on protecting boardmembers. Nothing wrong with that. Why should someone have to risk all their assets for helping to run a company? However it becomes a problem when it is only about that because people tend to then focus on reporting and process and lose focus on getting to the heart of the key risks. And in doing so they actually make the directors more exposed.

Evidence based risk management cannot defeat power. When risk matters are routinely overridden because of "commercial reasons" the enterprise gets a whole lot riskier. A wonderful example of this is the role of the Risk Assessment and Control department of Enron, entertainingly detailed in The Smartest Guys in the Room.

An enterprise risk management system can be effective when it doesn't drill down too far. Concentrate on where the big risks are and let the others take care of themselves. And I mean really concentrate.

The Future Will Take Care of Itself

There was a futurologist (is that their name) on the TV this morning opining on what is in store for society for 2008 and beyond. He was ambitious. He predicted all the way out to 2050 with remarkable certainty. My turn to make a prediction. He will almost certainly be wrong and he will never be called to account. That is the beauty and the weakness of the prediction industry and one of the reasons companies shouldn't plan too far ahead. Events are far too complex to predict with any kind of certainty. The winners are those that get lucky. Of all the globe shifting events that have occurred in the past 50 years - September 11, the collapse of the USSR, the rise of China and India etc - who predicted them? These events - described by Nassim Nicholas Taleb as Black Swans, - drive history but are near on impossible to predict.

It is one of the reasons why we should all calm down a bit when it comes to climate change. If there is a more complex system than the world's climate then I'd like to know what it is. And yet we have people predicting with absolute certainty what the weather will be like in 50 years. When I hear an opinion on climate change I do what Deep Throat suggests - "follow the money". Sensible people and organisations stress the uncertainty inherent in modelling climate change. An iterative risk management approach is requried which means making adjustments as the science gets better and the actions of individuals, organisations and countries demonstrates what can be done while changign the future before it occurs. Overreacting to the climate change risk could waste precious resources making it doubly harder to adapt to changes that are now seen as inevitable.