Rick Beal has worked in Northern California for the past 35 years as an attorney and executive compensation consultant. Beal currently serves as the managing consultant for Watson Wyatt Worldwide’s Northern California offices, providing business strategy, total rewards and executive compensation consulting assistance to for-profit and not-for-profit companies.
Q. How has the role of risk management changed in light of the financial meltdown?
The global and national economic crisis that brought many financial institutions and some governments to the ground highlighted the systemic risks inherent in our modern global economy. The issues that linked together competitors as well as business partners and resulted in financial impacts far beyond the reach of individual enterprise issues, highlighted the need for enterprise risk managers to reach beyond their areas of traditional expertise to understand the sources of other possible risk. If you’re a risk manager and you’ve traditionally focused on other areas in your organization or the more obvious sources of risk, now you’re being asked to sort of step back and say, ‘Well, what are the sources of risk to us as an organization?’
Q. How should risk managers begin to root out the systemic sources of risk?
Appropriate identification and clarification of the sources of systemic risk is critical to developing effective mitigation steps. Risks are frequently identified by their outcomes rather than their source. It’s easy but not profitable to categorize risk by their outcomes such as reputation risk or ratings downgrade. Identifying causes at the strategic level rather than at a tactical level allows mitigation efforts to be properly focused.
Q. Where can they look to identify sources at a strategic level?
Managers need to partner with peers in finance, human resources and corporate governance to address the sources of risk from the enterprise strategic plans, outside business partnerships, incentive metrics and executive award designs. Conventional wisdom in these areas is no longer sufficient, fortunately the effects of the financial implosion of 2008-2009 has increased the analytics available to assess the sources of risk on the key business drivers.