By David Suetens
Organisations across the globe have focused on improving their approach to risk in the wake of the financial crisis. But what does risk awareness mean to asset owners and asset managers? To what extent are risk processes actually embedded in organisations and communicated across them? Do business managers and risk officers share similar views of the performance of the risk function and the value it delivers?
We recently commissioned research with the Economist Intelligence Unit (EIU). The survey, “Closing the communication gap: How institutional investors are building risk-aware cultures”, canvassed opinions of 297 professionals from investment institutions globally.
More than three-quarters of respondents (78%) feel their organisation has a “very risk-aware culture” today, compared to only 30% that made risk their highest priority in 2007. This shift represents a significant cultural change for investment institutions.
Despite a greater awareness of risk, there sometimes appear to be differences of opinion about the risk function role at many institutions. The majority of non-risk staff (52%) think the risk function exists primarily to fulfil regulatory obligations, while less than a third (30%) of risk professionals are of this opinion.
Furthermore, only 61% of executives/ managers in non-risk functions within investment companies have confidence in the opinions of senior risk managers, suggesting that risk managers may not be fully communicating their mission to the wider organisation. Given regulators are increasingly concerned to ensure that risk frameworks are embedded within investment institutions, it appears further progress may be required.
Benefits of a senior risk committee: The important role played by senior risk committees that bring together senior risk, compliance and audit representatives was also identified. Institutions with a senior risk committee are convinced that the risk function contributes towards better investment outcomes (68%), while only 51% of firms without such a function are of this opinion.
Around 69% of institutional investors have a CRO who attends executive board meetings, meaning risk issues are represented in a key decision-making forum. Conversely nearly one quarter of CROs do not attend such meetings, and in these cases, it is likely to be more difficult for them to report risks to senior levels of the business.
In conclusion, institutions are making substantial headway in instilling enterprise- wide risk awareness, which should provide assurance to all stakeholders such as investors, shareholders and regulators. However, important risk information does not always reach the right people, risk professionals encounter obstacles in communicating their role, and the risk function is often seen as simply a means of fulfilling regulatory requirements. Hence an ongoing shift in mindset and communication across investment institutions is still required to further raise firm-wide risk awareness.
David Suetens is executive vice president and international chief risk officer at State Street
Comments