A new report from the Economist Intelligence Unit and Oracle Financial Services sheds further light on the elevation of risk management since the financial crisis. The general conclusion is similar to the one we have been hearing ad naseum since a failure of risk management tanked the global economy.

As stated in “Transforming the CFO Role in Financial Institutions:  Towards Better Alignment of Risk, Finance and Performance Management” (PDF):

In such a challenging environment, financial institutions must now devise a sustainable growth strategy and be better protected against new or emerging risks. To do so, many finance departments are recasting their business processes in an effort to provide better access to information for internal decision-making, risk management, financial reporting and regulatory compliance.
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Blah blah blah. Same ol’, same ‘ol. Rhetoric and platitudes.

Right?

Maybe not.

This report, in addition to re-stating the need for better risk and finance alignment is actually speaking about evidence directly rooted in the bottom line. The execs surveyed are reporting that financial firms are more profitable when these two departments are in sync.

Financial institutions that benchmark themselves well on aligning their risk and finance functions also say they are doing better financially. Among survey respondents, of those who rank themselves much better than their peers at alignment between risk and finance, 60% are also much better at financial performance and 92% are above average. The equivalent figures for those who are average or worse at alignment are 8% and 32% respectively. The benefits are both specific, such as identifying potentially profitable clients, and general, such as providing a greater understanding of the global context in which major strategic decisions are made.

Those numbers seem substantial.

And this is not just a reality in 2011; this was the case all along. Those firms that prioritized risk management the most — not just rhetorically, but by paying big bucks for talented risk managers with decision-making insight — fared much better in 2008 than those that didn’t.

Research shows that at the 15% of US banks where the chief risk officer (CRO) was among the five highest-paid executives in 2006, the proportion of total assets made up by mortgage-backed securities at the time of the crisis was one-fortieth that of banks where the CRO was less well paid.

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There is even a correlation between higher CRO pay and lower stock volatility.

One-fortieth. That’s 1/40th. Or 2.5% if you prefer.

So you’re telling me that companies that committed to paid risk managers who they valued as decision makers to foresee, navigate through and mitigate pitfalls did much better in avoiding risks than those that didn’t? You don’t say?

For the past three years, we have repeatedly been saying that if this financial meltdown isn’t enough to move the needle on pushing risk management up the corporate hierarchy, nothing will be. But as more and more insight like this in unveiled, it’s hard to believe that companies can continue to ignore the obvious: risk management saves — and makes — money.

Similar Posts:

• Aon Unveils “Global Risk Management Survey ’09” at RIMS 2009
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• Banks’ Inability to Protect Info “Almost Shocking”
• Did the Bailouts Create More Risk?