Two years into the hard bite of the financial crisis, European companies and regulators are still scratching their heads over the tooth marks, and how to cleanse risk management factors which triggered the downward spiral
How far does the progress made to remedy risk assessment inspire confidence that there will be no repeat?
Brussels is not the most edifying place to start. Michel Barnier, the European Union’s internal market commissioner, is still considering the whole area of corporate governance in the financial services sector. But a consultation paper on corporate governance, issued last June, has yet to result in anything concrete.
Meanwhile the most solid risk assessments introduced by the EU, stress tests in the banking sector, have turned into an ongoing farce. Two rounds of tests implemented last year were insufficiently stringent: Allied Irish Bank and Bank of Ireland suffered a liquidity crisis, which brought on the EU-IMF bail-out of Ireland, just months after “passing” the tests.
As the EU embarks on fresh stress tests this year, disagreement is rife on whether these should probe liquidity and sovereign debt exposure. Barnier said in January there was an overall need to make the tests “more robust and credible”, but it is telling that he will not even reveal whether the parameters and results of the liquidity tests should be made public.
Meanwhile in the private sector John Hurrell, the chief executive of the UK Association of Insurance and Risk Managers, says those dealing in operational risk have sought to digest the chief lessons emerging from the crisis into their own sectors.
But he adds that many companies tended to ring-fence the banking crisis, believing that it to be “all about sub-prime” and irrelevant to their own risk exposure. As recent events affecting BP and Toyota have demonstrated, reputational risk spreads beyond the banks. Moreover, Hurrell says that the crisis has forced companies to carry out radical strategic and corporate overhauls involving new technology, intellectual property, product and supply chains, all of which entail new risk. There has not, he believes, been a proportional injection of risk-management restructuring to accompany these.
The holy grail for risk management: incorporating a strategy that will derive a competitive advantage from the downside risk, remains elusive, and can only really be attained by chief executives who deal directly with risk management as a part of their strategies, according to Hurrell.
Jorge Daniel Luzzi, the group risk managing director at Pirelli in Milan and vice-president of the Federation of Risk Managers, says that there have been some signal improvements arising from the crisis. “The voices of warning relating to risk are now being heard within companies, and committees for internal risk control are also being set up,” he says.
But just as unity over stress tests eludes Europe's leaders, unity within companies is proving one of the most challenging issues, according to Luzzi. He says that one of the main challenges facing groups in the wake of the crisis is to assess risk across the whole of their structures. “Avoiding silos is very important, the danger remains that different subsidiaries will be assessing risk according to separate criteria, without equalising risk across the corporate structure.”
Nor will regulation from Europe or individual countries do much to assist. According to Luzzi rules “simply promote a period of conformity followed by playing tricks to get around the rules”.
Hurrell agrees that companies can still take the rules as a box-ticking exercise and they will have little impact unless backed up by a genuine approach to integrate the risk-management function.
If the efforts of companies and regulators to head off further risk-triggering crises are mixed, perhaps the greatest dangers remain out of their control. At a recent UK corporate governance symposium Anne Kvam, investment head of Norway’s $500bn sovereign wealth fund, had a question.
She owns stakes in 1,100 Chinese companies and 400 in the UK, so why was she being asked to reform strategy for the UK, where corporate governance standards are already excellent, rather than China, she asked.
No true assessment of risk in the wake of the global crisis can avoid this poser.
“Rules simply promote a period of conformity followed by playing tricks to get around the rules”
Jorge Daniel Luzzi, the group risk managing director at Pirelli and Ferma vice president