The Art of Risk Management (2017)

Summary

The Art of Risk Management, which discusses the ten principles that should govern an approach to risk management, is part of a publication series by BCG on CFO excellence. The Art of Performance Management looks at the critical components of a best-in-class performance management system and operating model. The Art of Planning examines the ten principles driving best practices in corporate planning. In the aftermath of the global financial crisis, companies worldwide have become more focused on risk management. What was once a concern primarily of senior executives in the financial services sector has now become a top-management priority in nearly every industry. In a global survey of close to 1,500 C-suite executives conducted in the summer of 2011 by Harvard Business Review Analytic Services, more than two-thirds of respondents said that risk management had become somewhat or significantly more important over the previous three years. And in a March 2012 survey of finance executives by CFO magazine, 72 percent of respondents said their companies had increased the amount of time and resources devoted to risk management over the previous two years, with 23 percent calling the increase “significant.” Risk management is essential in today’s volatile economy. And yet many of the very financial firms that took such dangerous risks before the financial crisis had some of the most sophisticated risk-management operations around. What’s more, some of the very few financial companies that had been praised for their deft risk management before the financial crisis have since gone on to make major errors. One dramatic example is JPMorgan Chase, which suffered a trading loss of $2 billion in 2012 due to trades that its CEO Jamie Dimon has termed “flawed, complex, poorly reviewed, poorly executed, and poorly monitored.” We worry that in their headlong embrace of formal systems of risk management, many companies are making the same mistakes that companies in the financial sector...