The Emperor’s new clothes

A Treasury Select Committee found HBOS removed its head of risk because he highlighted problems in the run up to the current credit crisis. The message was distasteful so the messenger was killed. If this confirms the bank’s attitude to risk, should we be surprised? This is not the first corporate culture where risk is a two edged sword.

The money makers of investment baking are inherently risk takers, sitting alongside internal audit and risk compliance officers who are naturally risk avoiders. This is a marriage of inconvenience. After all, in a bull market nobody wants to be held back by compliance officers who don’t understand how money is made.

How did the risk function sink so low in the boardroom hierarchy? The answer is of course cultural: take a look at the annual reports of leading UK banks and insurers over recent years. The risk section details operating and market risks with the processes in place to control them, risk is seen as a governance function not part of strategy. Conversely the strategy section details future opportunities for growth and never mentions the word risk. Risk is treated as a threat to business continuity and so the nature of it is given scant consideration, when it should be addressed in the strategy section. The problem is, risk has become a negative word, the antithesis of growth.

This absence of linkage means that any risk in the business strategy is not mentioned. This may be for one of two reasons: either it is known but not reported as it might detract from inspiring potential investors; or it is unknown because nobody has responsibility for examining strategic risk. With hindsight, the latter was probably prevalent in the banking sector. A chief risk officer who fails to identify strategic risk is not fit for purpose, yet if he does identify it he is liable to be shown the door.

Risk in UK organisations has too long allowed itself to be pigeonholed into a governance role when it has so much more to offer. Risk doesn’t have to be a threat to business continuity, it can be an opportunity for competitive advantage. The banking crisis offers an opportunity to adjust our view of how the risk function should be engaged. There is a case for greater integration of risk and strategy with a discussion of business risks within the strategy section. Investors seek assurance that a board is capable of managing risk not that risk has been eliminated. More honesty in risk reporting will bring its own rewards.

Garry Honey is a senior fellow at the Centre for Risk Research at Southampton University.