Identifying and Addressing Risk in Times of Uncertainty
When Enron and then WorldCom went bankrupt in 2001 and 2002, they were the biggest bankruptcies in history. The billions of dollars lost in shareholder value, loss of confidence in corporate management and general overall risk aversion resulted in not only new regulations, but lessons learned in corporate boardrooms around the world. Suddenly, the importance of transparency, independent audits, and the ability to understand investment exposures were brought to the forefront.
That wasn’t the first time investors and allocators have felt the effects of volatility, and it won’t be the last. Shocks have come from within the markets, as in the subprime loans of the 2008 financial crisis, or from external factors, such as the coronavirus. Uncertainty can often create disruption, but investment committees can lean on the lessons learned from these disruptive events to help address risk.
Addressing Risk through Principle
Fundamentally, boards and committees need to understand that the importance of addressing risk lives at the institutional level, not just in individual silos. Members can fulfill this by applying four principles of Enterprise Risk Management (ERM):
- Assessing the impact of risk to both the operations and the mission of your institution;
- Developing and implementing responses to risks that you encounter;
- Creating mitigation plans to have in place when risk is present; and
- Identifying and monitoring both existing and emerging risk.
Addressing Risk through Policy
Dramatic swings in the financial markets reinforce the importance of maintaining an open dialogue about risk. Performing the four steps below can help you put your institution in the best position to face the unexpected:
- Establish and continuously review an investment policy.
- Design an asset allocation that aligns with objectives.
- Select managers who are best suited to execute your strategy.
- Evaluate performance to keep disciplined and well-informed.
Asking the Right Questions
Today, investors and allocators have a better view and deeper due diligence options thanks to new industry best practice standards and other changes spurred from financial events. But without a full and accurate picture of both volatility and risk, institutions tend to stay on autopilot. That can prove to be a terrible mistake if boards and committees don't ask the right questions and get the right answers.
Boards and committees must be engaged and embrace the concept of ERM in order to handle the challenges of a changing business model. ERM principles can be powerful tools to maintain an open dialogue about risk and ultimately benefit institutions, now and into the future.
Investment management services to individuals, corporations, trusts, endowments and foundations offered through CBIZ Investment Advisory Services, LLC, SEC Registered Investment Adviser. Investment management services to governmental and/or municipal defined benefit plans, 457 plans and related individuals provided by CBIZ Investment Advisory Services, LLC, dba CBIZ InR and dba CBIZ Retirement Plan Services.