Risk Management – Is it better now?
I have recently taken part in a roundtable discussion on Responsible Financial Management organised and facilitated by the Open University Business School drawing together experienced people from both the world of business and academia. In particular the discussion focussed on what has changed since the onset of the financial crisis, and most importantly what safeguards individuals and organisations should be putting in place to protect financial sustainability.
1. Firstly what has changed from the perspective of business owners and the providers of business finance?
For most of the period since 2008, for many businesses and the providers of finance, it has been a case of keeping their heads down, protecting existing clients and carefully managing resources in what has been in most cases a smaller market.
- Most financial institutions have reduced their appetite for risk in advancing business finance
- Tighter banking regulation
- An ever higher dependence on the use of IT
- Increasing use of the ‘Cloud’ to store data
- The invention of ‘Big Data’
- Dealing with the ever increasing power of the minority via Social Media
- The way we communicate – Twitter, Facebook, Linkedin etc.
- The way we pay for things – mobile banking is now the norm
Ironically whilst we have become significantly more risk averse in our lending, provision of credit to customers and investing in new projects or businesses; many of the above changes represent new risks to Responsible Financial Management.
2. What have we done to reduce risk?
We have shored up existing systems to manage risk and put in more safeguards where possible, and maybe subconsciously created an environment of ultra-caution, and indeed in some cases fear, in the workplace where our people are concerned about making any decision, let alone the wrong one.
Paradoxically governments throughout the world have on the one hand significantly increased regulation whilst at the same time supporting failed businesses, offering record low interest rates and major incentives to the banking industry to increase credit availability to both businesses and the consumer.
As we are experiencing here in the UK, since the economy has been on a growth trajectory, the cry from both the Chancellor and the Bank of England is for a more balanced recovery. What they mean here is one that is not predicated on the consumer spending a bit more money because his or her house is going up in value but more based on businesses feeling sufficiently confident in the future that they will invest in new projects.
Governments have realised that developed economies only work when credit is being offered, ideally in a responsible way. Every part of life as we know it has been at fault here, from Governments to Regulators, to Lenders and Borrowers, both business and consumer!
My point here is that it is differing agendas and individual situations, ranging from political expediency to how I am going to pay the mortgage this month, that create the real risks.
3. What can we do about managing these risks?
Based on this premise, it seems to me that the major factor in managing risk is how you manage people, both internally (the workforce) and externally (suppliers, customers and other stakeholders). We can put in place as many procedures and safeguards as we like but it ultimately comes down to relationships and the trust that is developed between you and your employee or client.
I believe it is about engendering certain set of behaviours that we as leaders of our businesses or divisions or teams, set examples of how to behave, and treat others as we would like to be treated ourselves. If the boss thinks it’s acceptable to be late or to overcharge a customer, then it must be OK for me to do the same, mustn’t it?
Is it a coincidence that some bankers have been caught rigging the LIBOR rate? I would suggest that these actions are partly driven by past behaviours of others within these organisations that have created an environment that almost encourages a slight bending of the rules.
We will always have people who are able to cheat the system, remember the cheats have access to the same technologies as the good guys, the trick I believe is in creating an environment where the desire to cheat the system is reduced.
If we look after our clients and our workforces then they will look after us……..
If you have any comments on this article or would like to discuss any aspect of it please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
John Thompson is Managing Director and founder of Trans Capital Associates
Image by:Caston Corporate