Risky times call for greater skills in the risk management field

Risky times call for greater skills in the risk management field

Risky times call for greater skills in the risk management field

There has been no doubt that this year has been one of high risk. In every business and financial field there have been calls for greater understanding of risk management and risk measurement in the hope that by so doing the awful catastrophes which have befallen so many can be avoided. It could be seen as a forlorn hope. Many of the disasters seen in the financial world this year have seemed inexorable and unavoidable.

This issue of Balance Sheet tries to show that this is simply not true. Good professionals dealing accurately in the field of risk management and asset management can turn the tide.

The first task is to understand the stock markets and their relationship with both inflation and the bond market. Our regular columnist, Dr Bill Robinson, guides us through a complex subject. With inflation stable and tax advantages attaching to bonds it is no surprise that the stock market has seemed to have no connection with the real economy. It is all a matter of yields, as he explains.

Then Tarlok Teji, the newest of our regular columnists, takes a look at how risk management systems need to be aligned with all the components of a business if success is to be achieved. “A risk management infrastructure must permeate all levels of management, forming the basis of a ‘sanity, not vanity’ approach to sound business management”.

This elusive goal of sound business management forms the basis of our central section of this issue of Balance Sheet. In “The risks of risk management” we examine the many strands which make up this all-embracing topic. First up is the risk management team at Marsh UK. They provide a short and punchy guide to the five things that a finance director or chief financial officer needs to know about the insurance market. Their guide should help many out of the quagmire. “Because of cost”, they argue, “risk and insurance has become significantly more visible and what has been an automatic nod-through at board meetings has become something vital to the cost of doing business in many sectors”.

Then, in the first of two contributions from the School of Management at the University of Bath, Andreas Krause provides an introduction to coherent risk measurement. He argues that some widely used risk measures simply do not bear up to scrutiny and suggests that, in particular, regulators are falling foul of this. Coherent risk measurement is the answer.

To put some of these ideas into context we then turn to a report produced by the Financial Reporting Committee of the Institute of Chartered Accountants in England and Wales. Much of their work in recent years has guided business through the trauma of increased corporate governance scrutiny of risk and this latest report is no exception. It provides an update on current thinking and suggests that more disclosure and more understanding are the answer.

Then it is back to the University of Bath for a contribution from Richard Fairchild who takes a look at financial risk management and raises the question of whether or not it is a value-adding activity. In particular he works through an investment appraisal model, as befits an expert in corporate finance, which encompasses total risk. After Fairchild’s thesis the baton is taken up by Mike Hammond, chief executive of Marsh UK. He argues the case for behaviour-based risk management. “In an era when corporate governance is a critical driver for risk management”, he says, “behaviour-based systems are key to embedding best practice throughout the organisation”.

Then, to conclude this issue, we turn to the finest book on asset management to be published this year. “Asset management; equities demystified”, by Shanta Acharya has stood as a shining light in a difficult year. Balance Sheet magazine is very pleased to be able to publish extracts from the book’s thought-provoking concluding chapter. This provides some prospects for the future, thoughts on the present and a clarion call in the final paragraphs of the book. “Knowledge management is an integral aspect of risk management” she suggests. “As knowledge is power, knowledge is more powerful today than ever before. Superior asset management revolves around the ability to manage risk effectively”. And that thought brings this issue of Balance Sheet, the last of a troubled year, full circle. Understanding risk and its management is the key to all.

Robert BruceEditor