Risk awareness rises sharply since financial crisis
Written by staff reporter
Investment institutions are more acutely aware of the risks they face since the global financial crisis but many still need to improve the way those risks are communicated internally, according to new research by the Economist Intelligence Unit.
The survey of global asset managers and asset owners found that more than three-quarters of respondents (78%) said their organisation had a very risk-aware culture today. This compares with only 30% that made risk their highest priority in 2007. This shift represents a significant cultural change for investment institutions. The proportion of organisations placing risk management as their highest priority has more than doubled since before the 2008 financial crisis.
The survey, Closing the communication gap: How institutional investors are building risk-aware cultures, was conducted in the first quarter of 2013. Respondents included nearly 300 executives of investment institutions – 48% of which were asset managers, 35% asset owners and 18% intermediaries. Approximately 39% of respondents were headquartered in the Asia-Pacific region, 33% were from Europe and 19% from North America.
David Suetens, executive vice-president and international chief risk officer at State Street Corporation, which commissioned the research, says, “Investors and regulators will be reassured by the survey’s conclusion that asset owners and managers have improved their risk awareness ‘beyond recognition’ since 2008. But a mindset shift still needs to occur at many organisations to improve levels of trust and dialogue between the business and risk functions and ensure they are developing a real culture of risk-awareness across the whole enterprise.”
Reputational risk is now seen as one of the top risks for institutions, the survey found. More than half of all respondents (56%) ranked reputational risk equally with risk arising from market volatility, or risk, as among their organisation’s highest priorities.
However, despite the greater awareness of risk, the study also found a disconnect between business and risk functions and differences of opinion about the role of the risk function at many institutions. The majority of non-risk staff (52%) think the risk function exists primarily to fulfill regulatory obligations, while less than a third (30%) of risk professionals think this.
These findings suggest that risk managers are not fully communicating their mission to the wider organisation and also that the risk function itself is keenly aware of this.
“[The survey] indicates a certain amount of frustration from both perspectives, possibly hindering the development of risk-awareness across the enterprises,” adds Suetens.
The survey also identified the important role played by a senior risk committee or governance body that brings together senior risk, compliance and audit representatives. The findings suggest that these committees are linked with better risk awareness, better quality risk information, better co-ordination between risk, compliance and audit and fewer misunderstandings between risk and business functions.
Wai Kwong Seck, executive vice-president and head of Global Markets and Global Services across Asia-Pacific, for State Street, said, “Senior risk committees play an important role in improving the risk culture. 83.3% of respondents from organisations with strong committees report that risk is given the highest priority, compared with only 64.1% of respondents from organisations without them. In fact there is clear evidence across a number of risk measures that strong committees have a tangible impact on closing the communication gap.
“They are also more likely to have their CRO on the executive management board and for the CRO to play a significant role in strategy and business planning. In turn those institutions with a senior risk committee and a chief risk officer sitting on the executive management board believe the risk function helps produce better investment outcomes.
“The survey confirms that a strong risk committee and risk governance closes the communication gap significantly, delivering better investment outcomes and achieving an enterprise-wide culture of risk-awareness,” adds Seck.
Despite the significant shift in mindset the report acknowledges that closing this communication gap further will ensure that investment institutions can better fulfill their ongoing responsibilities to shareholders, clients and regulators