What's the risk for the risk manager?

By Andrew Bass | Newsletter

Originally appeared April 2009

Andrew Bass’s Letter to Leaders

Practical techniques and thought-provoking ideas
The main article takes under 4 minutes to read. 

What’s the risk for the risk manager?

Have you ever said to yourself: “I have told them a million times, why don’t they:

  • Come up with innovating ideas?”
  • Act more entrepreneurially?”
  • Sell the new product line rather than the old one?”
  • Look after existing profitable clients, and not just chase after new ones?”
  • Go networking more often?”
  • Challenge me when I am wrong, or at least offer me another perspective?”

If you want to understand apparently crazy behaviour in organizations, the answer will usually be found by working out the informal incentives. These incentives may be financial, but they are at least as often other factors such as peer acceptance, job security and freedom from micromanagement.

Here’s a topical example: risk management in banks – with thanks to a couple of risk managers in a well-known bank who must remain nameless.

(Although the example is from investment banking, you’ll find the same process behind other problems, from the dramatic, such as transport accidents and hospital scandals, to the common-or-garden such as excessive employee turnover or “creative” sales reporting).

The crucial thing to understand about risk managers is this: they are rewarded when they say everything is ok and there is nothing too much to worry about, and they are punished when they identify risks. Here’s how this works:

Let’s say you are a risk manager and you have identified a risky position that the bank has taken. Do you speak up or not? If you don’t speak up when you perceive an issue, and the nasty risk doesn’t happen, you’ll have toed the line and been a good team-player i.e. you’ll get a (powerful, informal) reward. If the problem actually occurs, you have no more chance of losing your job than anybody else, because your extensive records show that you produced vast amounts of daily analysis and got a green audit report: reward, or at least neutral.

In fact, if it all goes wrong and you haven’t warned of the risks, you have a better chance of keeping your job than most people because the bank will need risk managers to shut the stable door after the horse has bolted, as a demonstration to auditors, regulators and investors that the bank has a zealous risk management function: reward.

If however, you speak up and the bad scenario doesn’t transpire, you’ll be accused of crying wolf and not having a business perspective – punishment. Do this a few times and it will be extremely “career limiting”, as people at HBOS discovered, for example: punishment.

What about the fourth possibility: you correctly warn of a risk? Well, then you probably still get punished, because there’s usually a delay between a warning and the event. During the delay, you still get treated like you are crying wolf, and then if it happens and they didn’t listen to you, you are an embarrassment.

My source said this: “Remember a risk manager is supposed to talk about risk – the nasties that probably won’t happen, but might. There’s supposed to be an organisational culture that supports you saying “look, there’s too much risk here, we’ve got to reduce or hedge our exposure”, but in reality you reduce your personal income and job security by doing anything other than rubber stamping everything. And most of the time, everything will turn out alright – even when it doesn’t, the risk manager is unlikely to take the blame.”

What this mean for your business

Why don’t risk managers speak up? Well, would you?

What about your organization? If you’re racking your brains trying to understand why people say and agree to one thing, and then do another, I’m willing to bet the answer is in your informal incentive structure. Find out what really happens when people do or don’t do what the business needs from them. Are those consequences encouraging the behaviour you need, or undermining it? What needs to change?

If you’re the boss, it can be very hard to get the answers to these questions (again the reason is that the incentives, or at least the perceived incentives, work against people telling you) so if you’d like to talk about how to work round that, let me know. 

Copyright 2009 Andrew Bass. All rights reserved. Permission granted to excerpt or reprint as long as you include attribution.

Published by:
BassClusker Consulting
15 Kings Rd
Sutton Coldfield
Birmingham UK
B73 5AB
t: 00 44 (0) 121 427 7217
e: andrew@bassclusker.com 
w: www.bassclusker.com