Risk management challenges in corporate culture

What it is about

Presentation from the First Breakfast Conference (May 2023) on how risk governance and a strong corporate culture determine whether risk management works. The opinions expressed are personal and do not necessarily represent the position of the Superintendency of Banks.

Starting from the concept of risk, it covers risk governance and its tools, the management process (avoid, transfer, mitigate or accept), the BIS principles for the board and management, the risk appetite framework, organizational aspects and a taxonomy of failures in the risk function. It has 20 slides, with references to studies and to securities market regulation.

Objectives

• Define risk governance and the characteristics of successful management.
• Explain the roles of the board, management and control functions according to the BIS principles.
• Identify the most frequent failures of the risk management function.

Key takeaways

1. Risk governance extends corporate governance: it formally defines risk appetite, involves the board in risk decisions and designs compensation policies.
2. Facing a risk there are four possible decisions: avoid it, transfer it, mitigate its impact with controls or accept it.
3. Managing risks reduces reputational risk, avoids financial strain, and reduces income volatility and the cost of capital.
4. The board must lead the risk culture and approve risk appetite; management must implement and maintain a robust governance structure.
5. Segregation of duties (front, middle and back office) and the independence of the risk committee are conditions for balancing risk taking and risk management.
6. A taxonomy of five types of risk management failure proposed by Stulz (2008) is presented.