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Case Studies
13 Questions on Risk Management
Lapses in risk control often lead to substantial financial losses by a company. Barings, Morgan Grenfell Asset Management, Daiwa and Sumitomo Corporation are household names because they lost huge amounts of money as a result of failures in their control systems. A break-down in risk control eventually costs the shareholder money, directly or indirectly, either by being forced to inject more capital or by seeing the equity loose value when losses resulting from risk control failures become public knowledge.
It is thus within every shareholder's interest (let alone right) to question the company's board and senior management on how the firm manages and controls risk, since good risk management must start from the very top. But what questions can a shareholder justifiably ask you, a director or senior manager? And what reasonable answers can you give?
There follows a list of questions which shareholders should ask their board and senior management. The answers contain risk management and control guidelines which shareholders could use as a template to evaluate whether their company has a firm grip on risk control. The questions are straightforward. The answers may also seem obvious, but then the best risk control systems are based on common sense. However, as experience has shown, common sense does not always prevail among the higher ranks of management in even the most prestigious institutions.
The bare bones of good risk management are summarised in the flowchart below. How they are fleshed out is what makes the difference between a first-class and second-rate risk management system.
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