Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. RISK MANAGEMENT
September 29, 2014 01:00 AM

Kick-starting an internal risk-management dialogue

Frederick D. Funston and Randall W. Miller
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Conventional risk management efforts are often designed to manage risk when conditions are considered normal or in a business-as-usual environment, but not during extremes, which is when risk management is most needed.

    Effective risk management must be risk-intelligent, because a diet of pure risk aversion is a recipe for disaster just as much as swinging for the fences at every opportunity. While each retirement system is unique and likely at a different stage of capability development, they are grappling with some common questions and issues.

    Retirement plan executives increasingly are recognizing the need to take a more integrated and holistic approach to risk management. Frequently, this approach is referred to as enterprise risk management. A successful process is not only enterprise-wide but also enterprise-deep and becomes part of everything everyone does every day, not just a check-the-box exercise.

    An effective ERM process should help to establish a meaningful dialogue between the board and the executive about the nature of risk and the acceptability of exposures the organization faces in fulfilling its mission. So how do you kick-start a risk-intelligent dialogue?

    First, it is important to come to a common understanding of what is meant by risk. Unfortunately, the answer too often depends on whom you ask. Those with deep specialist expertise naturally develop their own language. Actuaries might define risk as the frequency and severity of losses and the correlations between contracts; investment operations might see risk as unexpected variation; human resources might see risk as loss of key personnel; while legal might see risk as the potential for litigation.

    Investment risk and the potential for profit are related to uncertainty. Greater uncertainty creates both greater potential for loss and also returns. For this reason, the discussion of value and risk should never be separated.

    If risk is the potential for failure resulting in loss, harm or missed opportunity, then there are many risks facing retirement systems. For instance, from the perspective of investment performance, if failure is an unacceptable difference between actual and expected performance, then what is acceptable or unacceptable? How much risk are you willing to take to achieve a valuable result?

    Second, once you have identified a risk, who owns that risk; the board or the executive? Typically, the board is responsible for managing certain key risks such as asset allocation policy and hiring, evaluating and compensating leadership, especially the chief executive.

    The board is also primarily responsible for risk oversight. Board members need to ensure there are capable people, processes and systems in place to effectively manage the system. They also need to understand that risks are being effectively managed so objectives are achieved and risk exposures are acceptable.

    Executives are primarily responsible and accountable for risk management. At the outset of any ERM process, once specific risks have been identified, risk owners should be clearly assigned for assessing, mitigating, monitoring and reporting on those exposures. In most cases, the appropriate risk owner should be obvious by the position, e.g., the chief investment officer for investment risks. In other cases, the CEO or executive director might need to assign responsibility.

    Quickly establishing a single point of accountability with specific risk owners provides a focus for obtaining reasonable assurances from executives about the effectiveness of risk mitigation and the extent of residual exposure. Clear executive accountability sets the stage for an ERM process to provide support and assistance to risk owners in developing a common understanding with the board by developing a common language of risk, a common process and common tools. Obviously, this won't happen overnight. It takes time to migrate to a common understanding from divergent specialist perspectives.

    ERM programs often run into difficulty when they spend too much time on the process and not enough time on the product. Even when they do focus on the product, a report on risk ought to be the beginning of a risk-intelligent dialogue not the end. The ERM process can also provide important independent reassurance about the reliability of risk owner's reports.

    Third, a growing number of systems are considering appointing a director of ERM or chief risk officer to coordinate their risk management efforts. What are the CRO's responsibilities? To whom should the CRO report; the board or the CEO?

    The reporting relationship depends on their responsibilities. The CRO should report to the CEO if he or she is primarily responsible for risk management (e.g., credit risk/market risk) as a member of operating management. Otherwise, the CRO should report to the board if the ERM function is primarily responsible for developing organizational risk management capabilities, e.g., risk policies, people, processes and systems, and providing independent reassurance.

    Fourth, what is the preparedness of the system to prevent, detect, respond and recover from a risk occurrence or interaction of multiple risks? While there is no such thing as perfect prevention, the ability to prevent a risk from occurring depends on the ability to control its causes. Is the risk caused primarily by external or internal factors?

    If the causes are largely external, you will have little or no control over risk prevention. Instead, you need to focus on mitigating the effects of risk through preparation.

    If the causes are primarily internal, e.g., people, processes or systems, you ought to have much greater control over both cause and effect.

    Fifth, possibly the most important part of an ERM process is the risk-intelligent dialogue it should create between the board and executives. Successful ERM is much less about crafting perfect policy and process than it is about getting the right focus on understanding and mitigating exposures and clarifying risk management accountabilities. ERM can help support risk owners in building capabilities and providing independent reassurance to the board that executive's reports about risk exposures are reliable.

    Frederick D. Funston is managing partner and Randall W. Miller is principal of Funston Advisory Services LLC, a Bloomfield Hills, Mich.-based firm whose focus includes pension fund fiduciary, governance and operational assessments and risk management.

    Recommended for You
    Owais Rana
    RiskFirst recruits Conning veteran to lead business development
    National Grid U.K. secures $3.4 billion buy-in with Rothesay
    National Grid U.K. secures $3.4 billion buy-in with Rothesay
    Pension plans gauge risk amid quest for gains
    Pension plans gauge risk amid quest for gains
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    July 29, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright Ā© 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit