smarter thinking about risk

& risk management

Introducing

Paradigm Risk Consulting • London

What is the problem with risk management?

The financial crisis beginning in 2007 highlighted the extensive conceptual and practical problems with risk management. In response to the crisis, regulators and firms alike have sought to identify and address these problems but, so far, we simply seem to be confronting ever-greater crises. Some interventions seem almost to have made things worse.

We believe the problem springs from some fundamental misconceptions about risk management, Risk is not a compliance issue and treating it as one, often at the be-hest of regulators, is a large part of the problem – wheth-er in financial services or corporate business. Risk-taking is the essence of entrepreneurship.

Effective risk management cannot be attained by impos-ing structural solutions or mandating specific analytic solutions to known risks. It requires balancing struc-ture and analysis with capabilities and behaviours in the firm that support robust anticipation of major risks, systematic detection of unknown and emerging risks and developing resilience operationally and financially to ab-sorb or respond to risks should they manifest. The firm must also address the limits of knowledge of the

future – coping with uncertainty – and recognise that all models are reductions of reality which must, ultimately, be wrong.

To achieve effective risk management, every firm must apply itself to establishing routines to identify, price and allocate risk realistically. By ensuring that all major deci-sions in the firm involve a correct understanding of and pricing for risk, the firm seeks to align the risk-assumption and risk-bearing incentives of each decision-maker with those of the firm as a whole. Regardless of firm type, this means incorporating an understanding of behaviour and decision-making into the firm’s risk perspective: it means creating a new risk synthesis.

Risk is a complex and critical governance and manage-ment challenge. It requires sourcing extensive and mean-ingful data, both from within the firm and from elsewhere; the data must be classified and stored so that it can be retrieved as required; it must be assembled and analysed robustly and presented with clarity to the right people at the right time. Above all, risk information must be sought and used to make important decisions in the firm. Noth-ing less will be persuasive to investors or regulators or be effective over time.

A long habit of not thinking a thing wrong gives it a superficial appearance of being right.

Thomas Paine (1737 – 1809)

No great improvements in the lot of mankind are possible until a great change takes place in the fundamental constitution of their modes of thought.

John Stuart Mill (1806 – 1873)

Our services & our clients

No sector has a monopoly on misconceptions about risk or flawed risk assumptions. We assist our clients across sectors from financial services to corporate business to government to regulatory agencies to meet the chal-lenges of risk, uncertainty and complexity wherever those challenges arise.

The risk services we offer reflect our core competence in integrated perspectives across strategy, structure, analy-sis and behaviour to ensure the firm covers its risk bases. The firm must acquire and have the capacity to access the risk data it requires, have the analytic capabilities it needs, prepare, present and use risk analysis properly to support risk decisions and provide meaningful assurance and reporting on risk.

RISK STRATEGY We offer a range of services from under-standing the impact of uncertainty on the firm’s strategy and capital to setting risk appetite and tolerances to risk quantification and analysis to working with risk & behaviour in the firm. We assist firms to identify their comparative advantage in risk-taking to ensure their strategies are resourced and sustainable over time and before the relevant audiences.

We also focus firms’ RISK & CAPITAL FRAMEWORKS from enterprise to subsidiary to specific risk level to ensure they direct the firm’s attention to the right things at the right time. This means ensuring the firm’s analytic core of data, modelling and capital supports the firm’s risk strategy and that its risk reporting and deci-sion routines align behaviour – from the boardroom to the front line – with the firm’s objectives. From scenario specification to stress testing to understanding ‘risk cul-ture’, we offer risk and change programmes that focus on results – better anticipation of risk, improved detection of emerging risks, greater operating and financial resilience and improved management of crises.

RISK REVIEWS The starting point is often to understand a firm’s current capabilities in these areas: to review board performance, governance, the firm’s risk functions, its frameworks in risk and how they are used and the impact of these functions in manag-ing the firm’s risks. We also assist firms to ensure their assurance processes are robust and effective and that their systems and routines for compliance focus effort and attention where it is required. Ensuring that all parts of the firm’s risk system operate as they should is a vital discipline.

The illiterate of the 21st Century will not be those who cannot read or write, but those who cannot learn, unlearn and relearn.

Alvin Toffler (b. 1928)

Governments never learn. Only people learn.

Milton Friedman (1912 – 2006)

Peter Bonisch is a leading con-tributor to debates on governance and risk across sectors in the UK. He is a former national director of a big-four accouting firm and a highly experienced executive. He studied economics and has a post-graduate degree in international relations and writes extensively on risk and governance issues.

e. peter.bonisch@paradigmrisk.com

Colin Johnston PhD has held lead-ing risk roles in some of the world’s major financial institutions. Most recently, he was chief risk officer for a global inter-dealer broker; earlier roles include leading risk functions in investment banking and asset management. Colin has a doctorate in laser physics from St Andrew and is an international level marksman.

e. colin.johnston@paradigmrisk.com

Mustafa Cavus PhD is an special-ist risk analyst and a recognised authority in analysis and pricing of real options. He has extensive ana-lytical and modelling experience in across financial services and energy sectors. Mustafa has a doctorate in financial mathematics from Man-chester and degrees in economics and management.

e. mustafa.cavus@paradigmrisk.com

Introducing our partners

What makes us different?

We are a multi-disciplinary firm that combines excel-lence in analysis with penetrative insight in to the role of behaviour in the management of risk in the real world.

We are realistic about what works and what does not and we have the practical experience to judge. We won’t waste your time with trendy, unproved ideas.

We are unapologetically a knowledge-based firm. Our advice is backed by extensive and on-going research and leading knowledge on risk and risk management in a firm setting.

We ‘speak truth to power’ so that you know that we will always give you an objective and informed opinion.

The most dramatic instances of directed behavior change and ‘mind control’ are not the consequence of exotic forms of influence, such as hypnosis, psychotropic drugs, or ‘brainwashing’, but rather the systematic manipulation of the most mundane aspects of human nature over time in confining settings.

Philip Zimbardo, 2006.

www.paradigmrisk.com

strategy & uncertainty

risk & the enterprise

governance for performance