Highlights of the RMA Risk Management Conference

RMA Journal, The, Nov, 2003

This has been just a small sampling of a most valuable conference. Visit www.rmahq.org for complete speech text, and watch future issues of The RMA Journal for articles based on presentations made at this conference. Articles planned at this time include answers to pointed questions directed to a regional/large bank panel, an update on the hospitality industry, and more.

Excerpts from Address by RBC Financial Vice Chairman Suzanne Labarge

Over the past 10 years or so, financial institutions worldwide have experienced a marked increase in operational risk, due largely to the enormous changes in our industry. We also have seen a noticeable shift in the nature of operational risks. We often forget that risk never disappears. When we mitigate it in one area--for example, credit, we often pick it up somewhere else--such as legal risk.

The market. On the whole, the market seems to tolerate one-off mistakes. In other words, when bad news is announced, the share price will drop but recover within approximately 90 days. What the market does not tolerate are mistakes that raise questions about the strategy of the organization or contradict its professed risk appetite. In such cases, share prices have dropped and remained depressed until the bank reestablishes its credibility (usually at least 12 months) or, in many cases, is acquired by someone else.

The end result of mismanaging risks invariably is reflected in a severe pounding of share prices. Add to this the impact of the Sarbanes-Oxley Act. Anyone under close regulatory scrutiny knows the costs entailed in setting up risk management infrastructures that suit the regulators. Beyond the sheer expense of the exercise, the loss in strategic and business momentum as you try to get your house back in order should be an equally powerful deterrent.

Risk management value. A critical question we face is how best to manage risks in order to derive value. The answer of course lies in effective, enterprise-wide risk management. Used appropriately, risk management helps organizations shift from crisis response and compliance to being able to evaluate risks in business strategies proactively, enhance investment decision-making, and improve shareholder value. In this way, organizations that develop a successful enterprise risk management framework for linking critical risks with business strategies can become formidable competitors in the quest to add value for shareholders. In this context, what we do as risk managers is critical. We provide a structured and disciplined approach that aligns strategy, processes, people, technology, and knowledge with the purpose of evaluating and managing the uncertainties the enterprise faces as it creates value.

There are many indirect linkages between risk management and the creation of value. And I would add that the very process of identifying, measuring, and monitoring risk introduces processes that can influence shareholder value--whether that's by helping to shelter earnings from shocks, achieving higher PE multiples, or simply avoiding reputational damage.