Risk Management has certainly failed in some companies, but you can't blame a single function for the crisis, says Lisa D. Zonino, consultant at Egon Zehnder International, New York, who answers five questions about the Chief Risk Officer in the light of the current crisis in the financial markets.

In view of the current crisis in the financial markets, have Chief Risk Officers (CROs) failed to do their jobs?

Lisa D. Zonino: Risk Management has certainly failed in some companies – but not in all. Our Financial Services Group is examining the question right now to gain a truly profound understanding of best practices adopted in the past and to identify where there is room for improvement in the future. The results of our analysis should be available soon, but to answer your question: no, you can’t blame a single function for the crisis. You have to look at the role on a company by company basis. In each case you need to ask: how is the risk manager function positioned, how much influence does the CRO really have? How well-equipped is the CRO and what are his/her competencies? In other words; finger-pointing is not the answer. To emerge as a winner in the future, you need to study the past in a disciplined and professional manner.

How do you think a Chief Risk Officer should be positioned to perform effectively?

Lisa D. Zonino: It is vital that CROs enjoy close relations and direct contact to a company’s top management. Many of the biggest losers in the recent crisis made the fatal error of relegating risk management and the needs of the trading function to a back office function. Core senior talent needs to be in touch with the market if it is to make the right decisions. It is also important that CROs wield greater influence in companies and can implement a culture of controlled risk. They should have the power to spot promising opportunities and stop reckless trading operations. This will allow them to add tremendous value in the long run. In other words, the Chief Risk Officer should be positioned as a valuable strategic advisor.

Have companies just recently discovered the importance of risk management?

Lisa D. Zonino: No, not really. Companies have always managed risk in the past. What is new for today’s companies is the growing complexity of this task, with the speed of new product development on the one hand and globalisation on the other. All of today’s major financial players operate internationally. You will not find a single major company that only does business in one country. This makes the Chief Risk Officer position a very challenging role requiring the highest level of talent. The problem is that candidates with market-savvy, technical expertise and soft skills are hard to find.

If companies have been managing risk for so long, how did the recent crisis in the U.S. subprime market happen?

Lisa D. Zonino: Certainly one major factor in the crisis was a systemic problem related to the availability of credit in the financial markets and the lack of strong underwriting standards. It was simply too easy to get money in the U.S. and many companies failed to adequately factor the importance of liquidity into their risk analysis. The situation was slightly different in some parts of Europe, but these markets are now in the crisis as well due to the interdependencies of today’s global financial community. Another factor may have been that the right talent and organizational treatment of risk simply failed to intersect in many cases. That said, there is no straightforward, single answer to this question.

How do you think the risk manager’s role will evolve in the future?

Lisa D. Zonino: The subprime upheaval has definitely encouraged companies to rethink the risk manager’s role and we can already see some clear trends emerging in terms of a new profile for the position. The next generation of risk managers will need far broader competencies, ranging from hard technical expertise to leadership and influencing skills. CROs should also enjoy greater seniority, as they will report directly to the very top management. More importantly, risk managers will have an active role to play in establishing a healthy culture of risk and should be positioned to act as valued strategic counsellors to the executive team. The higher level of talent and greater responsibilities attached to the role will naturally mean better pay for top risk officers in the future. Many companies are now offering market-savvy risk managers the same kind of pay as a business unit leader. But compared to the billions that companies have recently lost, top talent still seems a bargain despite increases in compensation. The real problem in the future will be finding qualified individuals for the top Risk Officer position as demand is high and the supply of candidates is relatively fixed.