Operational Risk: A Business Manager’s Mission

By M. Isi Eromosele

In today’s market, most financial services firms have a Chief Risk Officer or even more specifically a Head of Operational Risk. Few would argue that these roles exist as a means to solely satisfy regulators.

These roles are critical to protecting a firm’s earnings and reputation. In addition, many have found that having a solid operational risk strategy can deliver significant additional benefits.

Despite the importance of these roles, the day to day responsibility for operational risk does not lie with the CRO or Head of Operational Risk. These individuals are primarily responsible for promoting proper management of and measurement of the amount of operational risk across the organization. It is a firm’s Business Managers who control the resources that control operational risk.

Unfortunately, not enough Business Managers engage in formal operational risk strategies. As a result many firms face unnecessary threats to the successful achievement of their financial objectives.

This needs to be addressed. Today, global financial institutions face pressure to continuously tackle mounting regulatory change and growing market scrutiny while striving to increase customer confidence, drive competitive advantage, and optimize stakeholder value.

Paramount to their success is their Business Manager’s ability to accurately monitor internal processes and procedures to manage risks and business opportunities.

The Role of a Business Manager for Operational Risk

Business Managers play the most critical role in promoting a controlled risk culture. As a manager, they have an obligation to ensure that you and your staff are conducting business efficiently, honestly and fairly.

If your Business Manager does not keep this obligation, regulators can impose sanctions on the firm and individual staff members who have violated these requirements. Hefty damages, lost jobs and irreparable damage to the firm’s reputation may follow if you do not constantly pursue effective leadership and supervision.

Operational risk needs to be a priority in the management agenda. Business Managers have specific responsibilities that they must carry out in order to meet regulatory and fiduciary requirements.

A good operational risk methodology and management structure will promote appropriate behavior.

It is also important to understand that a management structure will need to complement the firm’s overall operational risk methodology. A good operational risk methodology should be collaboration between Operational Risk Managers and Business Managers to achieve well-considered risk assessments.

These assessments should be based on thorough research into all the risks which exist in each business unit, looking at the potential for a loss on a near term basis as well as a worst case basis.

This will also vary by organization as some may feel a more control based approach works for them, whilst others may believe examining risks and controls along processes is more in keeping with the way they consider things. This methodology will also likely include the usual questionnaires, scorecards, causal factors, etc.

How to Identify And Avoid Management Failure

Identifying and avoiding the potentially negative consequences of management failure or more importantly being a successful Business Manager takes a great deal of effort. One can considerably improve the chance of success by regularly reviewing the current management data and its structure and being knowledgeable about some of the common mistakes business managers make.

On a regular basis, Business Managers should examine and review their current management systems and execution, identify areas for improvement and make the necessary changes.

Critical to this review is the availability of timely, complete and reliable related data. Where in most cases the Risk Management team takes on responsibility for organizing, collecting and maintaining this data, it is the Business Managers who can extract real value from it.

Business Managers should be taking the lead in using this data to reduce losses by strengthening controls where necessary, perhaps stream-lining some processes after examination and consultation with internal audit.

More controls are not always the solution; simplifying processes can improve controls too in certain situations. In this activity, the Operational Risk Manager will prove an invaluable partner by doing nearly all the work leaving the Business Manager to do what they do best and that is make decisions based on recommendations.

There is usually a lot of data to be collected and kept up to date. In addition, this data needs to be analyzed and regularly reviewed. To maximize the benefits of this analysis, most mature financial firms should endeavor to rely on a unified computer system that gives flexibility to a manager to manipulate and analyze varied selections of related information.

This is very difficult to do when risk managers keep different Governance, Risk and Compliance information in spreadsheets or in different systems that were designed at different times with different architectures. This fragmented approach often produces data barriers across business units and leads to inefficient and costly maintenance and operations.

Firms that are able to readily access and use critical data across traditionally disparate business unit silos, will be able to increase their data integrity while more effectively quantifying, analyzing and measuring the effectiveness of their Governance, Risk and Compliance initiatives.

Having all this information in one, unified system that allows busy Business Managers to quickly see all the different types of risks and the state of controls in that part of the organization for which they are responsible enables them to make good decisions about whether changes are required.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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