Gilbert Asamoah is finance and accounting professional with nearly three decades of experience. His interest includes finance and risk teams’ value-added contributions to business strategy. Currently a doctoral candidate at Franklin University, he is researching financial risk management competencies. Gilbert presently serves as Credit Relationship Manager at NiSource Inc.
What is effective financial risk management?
Asking questions is a good thing even if we do not have a perfect answer. For people in financial risk management roles, stopping to ask ourselves “What is effective financial risk management?” is a pertinent question because it forces us to ponder if we are just carrying out mundane tasks or contributing to the strategic success of the organizations we serve. In the first part of this two-part article series, we established the functional scope of financial risk management and attempted to describe what effective financial risk management looks like, especially as seen as part of the broader domain of risk management. In this final article we conclude by elaborating on the key essential ingredient for effectiveness which is to start with the first step of understanding the risk context, scope and criteria.
Effective Financial Risk Management Starts with the First Step
The first step in the risk management process is to set the risk context, scope and criteria as the underlying framework for all activities. If that step is ignored, it does not matter how well the other steps in the process are conducted. At this initial step, the objectives of the risk management program should be set in harmony with the broader organizational strategic goals. The scope, boundaries and criteria for all risk management activity must be framed to capture key elements like the risk appetite, governance structure, business strategy and its implementation. If practitioners of financial risk management only develop expertise in the technical aspects of their day-to-day routines, including using the latest technologies to bring efficiencies for identifying, modeling, analyzing, evaluating and mitigating risks, but those activities do not tie into the overall business strategy, objectives and governance infrastructure of the organization, the function can easily be diluted into mere accomplishments of tasks that do not aggregate to add value to any of the strategic goals of the enterprise.
"Effective financial risk management begins with understanding the risk context, scope and criteria, ensuring that activities align with organizational purpose and strategic objectives"
Risk Management is not a One Direction Linear Path
Another caution is not to see the financial risk management process as a linear path down the list of ISO process steps. The steps are only isolated and labeled as such for study purposes, but in practice, they overlap each other in an iterative manner. Even the first step of understanding the risk context, scope and criteria is not a one-time but an ongoing exercise that intersperses with the subsequent steps in the process. A financial risk manager’s tasks often call for going back to the beginning to conduct the risk context-scope-criteria exercise as many times as necessary with applicable stakeholders. The personnel involved in the various stages of the process must not live in silos but collaborate to ensure program objectives are met.
In Conclusion
Practitioners involved with financial risk management necessarily need to have technical expertise and use the most efficient approaches to prevent or minimize financial loss. However, this paper emphasizes that technical expertise in the financial domain is not enough to be an effective financial risk management practitioner. Practitioners in any of the domain functions of financial risk management must not lose sight of the fact that they are primarily engaged in risk management, financial risk being the focus of their expertise. Therefore, the rigorous, systematic and yet iterative nature of the risk management process as proposed by the ISO and other standard-setting organizations like the Committee of Sponsoring Organizations of the Treadway Commission (COSO) must be brought to bear on managing financial risks. This process begins with understanding the risk context, scope and criteria, a step that must be stretched as far as possible throughout the spectrum of activities in the financial risk management function. That is the way to ensure that financial risk management activities are, in reality, meeting organizational purpose and objectives, which is to say, being effective. After all, what would be the point of solving a complex algorithm, obtaining the correct answer for that algorithm, only to discover later that the correct answer adds no value to the enterprise because it does not address the problem the organization is trying to solve?
