Buy-in, talent, transparency
- First, there must be buy-in from the most senior levels of the organization and the board on the importance and necessity of an independent view of the risk profile. This includes both a broad enterprise view and, more narrowly, the risks within each product. Senior leaders must recognize the value provided by an effective risk function and understand that if executed properly, the value will exceed the cost of the added infrastructure.
- Second, a risk organization must be staffed with talent commensurate with the highest standards for technical competence across the company. This is important to building credibility with the business and will help to establish that opinions and views are respected and seen as adding value.
- Third, but likely most important, transparency must be the central tenet of a risk management organization — one that cuts across all aspects of decision-making. Transparency starts with the engagement of the entire organization at the beginning of the development process for models and metrics used in forming and managing the technical risk profiles. Regardless of who owns the models, their development must be open and transparent to all key constituents.
Once those three steps are completed, the role of Risk, and the professional knowledge embedded within, make it a valuable participant in the collaborative process and a critical ally in moving between constraints and stakeholders.
Key to achieving this is an effective Risk Appetite Framework that considers the balance of risks and resources across the firm and the perspectives of all relevant internal and external stakeholders. While Risk will serve as the scorekeeper, the entire organization must own the Risk Appetite Framework as a corporate asset so that the company remains within the desired risk profile while it pursues optimized financial outcomes.