RISK MANAGEMENT WATCH
By Robert Mbonu
This continues the previous writings on the importance of risk management with a mention of some history of the science and its direction.
Ancient times were full of brilliant scientists, mathematicians, inventors, technicians, and political philosophers; hundreds of years before Christ was born, the skies had been mapped.
Risk management is even older than ancient times. It goes back to the fight or flight response that is ingrained into the DNA of man and indeed all living creatures. It could be argued that the fight for survival, procreation and evolution are all forms of risk management.
There is evidence of risk management and governance at work in old Yoruba folklore for instance. A historical Yoruba legend has it that ‘certain women once went to the malevolent trickster god Eshu to ask for the power of witchcraft. Eshu was willing to give it to them but he had to refer them to Orunmila, the god of Fate.
Orunmila would not allow them to go out into the world with the power of witchcraft until they promised to honour certain signs and materials to serve men as protections against their power (http://www.arthistory.upenn.edu/summer07/curnow/princewitch.pdf) – the gods recognised the Risk that such power would create a threat, the risk assessment was that the threat could be great, thus it was decided that there needed to be a formalisation of the governance around this power – risk treatment.
Likewise there are several instances in the Bible, such as when the three wise men reported to Herod the king that they were led by a star in the east to signify the birth of a new born king of the Jews. Herod then instructed them to go in search and report what they found. He had recognised the risk of the new born King being a threat to his empire, and sought to destroy him. He asked them to return with their findings so he too could go and pay homage. The wise men did not return as instructed because they were warned in a dream.
In the last 300 years risk management has become more of a conscious and overt activity as risks have become more complex and organisations have recognised the need to use the techniques of risk management in order to survive.
The 18C was an enormous century for developing our understanding of risk; Insurance was regulated in the 18C although it had been carried out, somewhat haphazardly, for decades beforehand.
All calculations for risk (when one has the data) are based on the methodologies of scholars such as Thomas Bayes (1701 – 1761), who developed the Bayes theorem. Bernoulli developed The Law of Big Numbers and statistical sampling and Abraham de Moivre demonstrated the concept of ‘normal distribution’ commonly called the bell curve, leading to the concept of standard deviation.
Thus we moved towards the understanding of the Law of Averages. Harry Markowitz in 1952, demonstrated mathematically why putting all eggs in the same basket has an unacceptable and risky strategy and that diversification is the best alternative.
In the last one hundred years, the petrochemical, health, aviation, space and defence industries all began to formalise the way in which they operated safely (and learned from their mistakes). All these forms of risk management were around operational risk. In the past, traditional risk management tended to be relegated to the lower echelons of management. But things went wrong – sometimes very wrong – such as with the Chernobyl, Three Mile Island, Bhopal and Challenger disasters. It then became increasingly clear that an operational risk could lead to a huge impact on reputation, therefore risk management needed to be elevated to a higher level, even requiring Board involvement.
This is why in the last 30 years there has been a great deal more activity with respect to organisation wide risk management, otherwise called Enterprise Risk Management.
In Nigeria, there has also been a move towards embedding risk management into corporate governance regulations such that many public and private organisations are to comply with the requirement to have risk management embedded into their governance arrangements. The CBN, under the Basel Accords has made it mandatory for every bank to have first class risk management arrangements and activities. Same goes for the Insurance Industry under Solvency II.
Following the publication of several Standards, ISO 31000 became the recognised Standard due to its concentration on framework, structure and governance of risk management. The COSO standards was also developed in the USA for publicly listed corporations.
But has risk management made our world a safer place? From the Global Risks Report 2016, by the World Economic forum we can see how global risks are increasing and becoming more threatening to the very survival of human kind. However the World Health Organisation data indicates progress towards development goals, mortality and health estimates are all going in the right direction; people are living longer and healthier lives. Children in developed countries, born in this decade, are likely to see 10 decades, and that is all down to better understanding of risk and use of risk management in medicine and in healthy life practices.
In Nigeria, Risk Management expertise is needed to drive development if we are to succeed and compete with more advanced nations. The current situation of failed projects especially in the public sector will become a thing of the past when Ministries, Departments and Agencies are staffed with trained and knowledgeable risk aware project officers (risk champions).
The nation is facing challenges right now. The economy is in recession, oil prices continue to work against growth and oil production is down by almost 40 or 50 per cent. Despite the abundant resources we are blessed with, corruption, poor governance and lack of ethics still mean that businesses fail to grow and thrive. Public sector organisations suffer stagnation through lack of decision-making and poor management skills, and people do not take responsibility for decisions in their own departments. It has become imperative to employ risk experts in management and boards.
In order to build an open and accountable culture, which will ensure objectives are met, risk management, compliance and control must be improved, in all organisations across all sectors.
We recognise the efforts of the early scholars and philosophers of ancient times, and the mathematicians of the 18-century for the knowledge of risk and risk management, but we also need to hone our risk management skills as we look to the future to ensure the success of our collective endeavours.
• Mbonu, FERP, CIRM(UK), HCIB, MsRM (Stern), studied Engineering, is an experienced Banker and Enterprise Risk Management professional. Earned a post graduate degree in Risk Management from New York University Stern School of Business, and is a member of the Institute of Risk Management
-UK. Can be reached on 09092092046 (SMS Only); email: rm4riskmgt@gmail.com
