Revolutions, rogue traders and roller coaster markets have one thing in common: They make risk professionals fashionable. While the fourth quarter of 2011 will see bloodletting in the front offices of many high street banks, risk professionals will sit comfortably and benefit from what is now being coined as “The Rise of the Chief Risk Officer (CRO)”.
As globalization gathered steam in the early 1990s, corporations began to realize that managing their downside had a huge upside and so began to anoint executives with the remit of ensuring their organizations had the appropriate risk controls. This innovation has taken hold of the global corporate community with breathtaking speed. In 1993 James Lam was hired by GE Capital as the world’s first CRO. Since then the role has spread to all four corners of the earth, across industries and sectors, and is now being considered the fourth C in the C-suite.
Risk has experienced explosive growth over the last 10 years. In 2000 only 45 percent of financial services companies had a CRO, now more than 80 percent do. Companies are hiring risk professionals both vertically and horizontally throughout the organization.
Risk teams were first assigned to cover critical areas such as liquidity risk, market risk and credit risk. Since then the spectrum has broadened and today risk teams deal with operational risk, enterprise risk, industry risk, investment risk, political risk and many others. In fact new areas of risk are probably being created as you read this article.
This translates into an ever-growing demand for risk professionals in every world region, including the Middle East. In the Gulf Cooperation Council (GCC) we have seen a steady increase in the number of CROs on the ground, with most high street banks having one for each country, where previously there was one for the region. In 2000 there were less than 20 CROs based in the United Arab Emirates, whilst today there are more than 100.
Culture clash
Unfortunately it is not enough that organizations hire risk professionals and create risk policies and procedures. Most organizations had risk professionals among their staff in 2006 and 2007. When the financial crisis struck, the problem was that they did not have risk cultures. An organization’s culture is dictated by the values of its leadership and the preponderance of chief executive officers (CEOs) coming from the front office means middle office and back office staff are the underdogs in any boardroom discussion.
The 2010 Dodd-Frank Act in the United States requires banks with $10 billion or more in assets to create a board level risk committee. This marks an important step forward in developing risk cultures where the authority of the CRO is underpinned with direct access to the board, enabling him or her to circumvent the CEO and highlight risk issues. In early 2000 only a minority of CROs had access to the board and CEOs could easily mute, or in extreme cases remove, their CROs if they did not march to the sound of the boss’s drum. This change in legislation and reporting line will cause a cultural change and require the front office to adapt a more risk-conscious approach to their work or face the wrath of a CRO.
There were a few brave candidates, both CROs and chief investment officers (CIOs), who resigned from their posts in 2007 and 2008 because their leadership refused to listen to them. These men and women were facing extreme pressure to fall in line as their organizations gorged themselves on risky derivatives. Standing up for what was right was a fatal strategy in these companies. We all saw the effects of such cultures as Bear Sterns and Lehman Brothers came crashing down, causing unprecedented damage.
A growing trend
A recent study by Deloitte has shown that more than 50 percent of CROs are currently reporting to the board. This is an improvement on 2008, where that figure was 37 percent. This represents a gradual shift in the skill sets an organization requires at its helm and also raises questions about whether we have the right kind of leadership in the CEO seat. CEOs of the future will be required to have an understanding of risk, compliance and legal in order to effectively manage their organizations in the new market place.
This change was not sudden and contrary to popular belief it is not the love child of a vicious bear market. While the correlation between tough economic data and the increase in risk professionals over the last three years suggests a causal link between increased economic risk and the corporate demand for CROs, this demand is in reality a long-term trend of risk management that has been growing steadily since the late 1980s. Behind what seems like a recent phenomenon of CRO empowerment we have been witnessing the ascendency of the middle office as operations, information technology, compliance, legal and risk have all been slowly growing in influence over the last three decades.
What we are experiencing now is a trend which really began in the late 1980s and was first felt in the early market crash of the 1990s. At that time globalization and technology first began to change the way we did business and several mammoths such as IBM almost went bankrupt because they were not quick enough to adapt. In the 1990s companies had to think globally but act locally as clients wanted standardized services across the world. This is the tail of the same trend that is now past its tipping point. Throw increased volatility into the mix and large companies now have a significantly increased risk profile, a risk profile which has been slowly inching higher for the last 30 years.
In conclusion, the rise of the CRO is a trend with a convincing track record, bound to accelerate further as it is authenticated with legislation and enforced with new regulation. Stanton Chase International has seen a 400 percent increase in demand for risk professionals over the last five years and we predict a further 44 percent increase in 2012. As organizations strive for better corporate governance and move to defend their profit pools from downside risk, CROs will continue to see their equity price rise.
