Wednesday, July 22, 2009

6 Ways to Mismanage Risks

How did so many financial companies do such a poor job of risk management during the recent financial crisis? Numerous factors contributed to the problems including (as I argued in an earlier blog entry) problematic government regulation. In a March 2009 Harvard Business Review article, Rene Stulz offers his own insightful take on “6 Ways Companies Mismanage Risks”.

As we’ve seen in responses to previous crises, organizations both public and private have not done well at making the kinds of changes that effectively prevent a different set of problems cropping up in future. Attention to the six problem areas Stulz discusses would probably help. These are: 1. Relying on historical data. 2. Focusing on narrow measures. 3. Overlooking knowable risks, such as those outside the class of risks normally associated with particular units, and those related to the hedging strategies used to manage risks already identified and assessed. 4. Overlooking concealed risks. 5. Failing to communicate. 6. Not managing in real time.

Stulz concludes by calling for “sustainable risk management”. This includes using scenario analysis to take into account catastrophic risks. You can find my more detailed review of Stulz’ article and a link to the article itself here.

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