Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
Quick links:
  • Home
  • The Actuary Issues
  • June 2016
06

Managing management risk

Open-access content 25th May 2016

Paul Harwood suggests management risk should be considered as a category on its own, to the benefit of business results

2

I may have discovered a new risk: 'management risk' - defined as 'the risk that management doesn't deliver the planned results'. This type of risk is strangely absent from much of the enterprise risk management (ERM) literature.

Isn't it just operational risk? It could be, particularly given that operational risk is a balancing category, a convenient label for a diverse set of 'no upside' risks. But I've never seen management risk as an operational risk sub-category. Plus, it has an upside.

What's the nature of management risk? Boards hire management teams to deliver a defined plan on agreed assumptions within a reasonable corridor. The great thing about a plan is that you can subject it to a whole host of tests, stresses and scenarios. You can assess how results benefit from better - or suffer from poorer - management, and whether assumptions are reasonable. This feels like productive, meaningful analysis.

Luck or judgment?
Yet business results happen by luck as well as skill. Colleagues tell me that when results are good, management takes the credit; when they are poor, it's down to bad luck. That can't be the whole truth of it, regardless of the cynics. Certainly, performance is a mixture of luck and skill. A good result might have been better with more luck, a bad result might have been worse with less management skill.

Do boards hire management teams for their luck or skill? It should be skill - assuming that luck is not a part of a team's composition. Shouldn't we be pressing to understand how much of management's performance comes from skill and how much from luck? This, I suggest, is about understanding the nature of management risk.

Ideally, remuneration and skill would be correlated. Maybe that's not consistently the case in practice. I'm not offended by that; it is the way of the world. What does concern me is a default approach to risk management that does everything but put management under the spotlight. The closest we get is to talk of culture. These discussions can be interesting, but they tend to explain, rather than help manage, problems.

We must take care in financial services. Decision-makers, often not close enough to the models, rely on the analysis and synthesis of actuaries and risk officers. Sometimes the synthesis is wanting, and voluminous analysis serves as a proxy. Management can mistake the volume of their choices and the breadth of their discussions as symptomatic of good culture and an open environment.

The reality is that risk management crystallises when decisions are made, and culture radiates most strongly from decisions made (what is rewarded, what is punished), not the tolerant, friendly, anything-can-be-raised atmosphere in the boardroom.

What better risk management strategy than to expect management to deliver what it promises? That sends a very strong anchoring message for the culture: "We mean what we say."

Assessing management risk brings executive performance management and risk management together. This can only be a good thing.

Operational risk is no longer a little-understood silo report but central to the evaluation of executive ability.

Does this introduce incentives to game the system? Yes, theoretically.

But boards already have to ensure that their management information systems needs are met and that board challenge is robust, regardless of any gaming that is going on. There is no reason why management risk can't be part of that.

A common plan
'Management' follows from the accumulated decisions of, maybe, hundreds of people. So it could be argued that focusing on management risk overly concentrates challenge on the few people around the table.

But all ERM work starts with those very same people. They need a common language, drivers and intent to support their decision-making.

The plan conveys that.

Furthermore, the overarching plan is made up of many smaller plans that should, diversification aside, add up. Management risk should be additive. Focusing on the same things throughout can't be deleterious.

In summary, management risk may be the missing link, the driver of culture, and a risk component that boards can use to manage their firms to good effect. Let's have more managers doing what they said they would, or explaining why, in the context of risks faced and skills executed. The result should be a proper appreciation of high-quality management teams that can drive and protect business results.


Paul Harwood is a consulting actuary specialising in strategy and risk management
This article appeared in our June 2016 issue of The Actuary.
Click here to view this issue
Filed in:
06
Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Reinsurance Pricing Lead

England, London
£40000 - £75000 per annum
Reference
118905

Senior Pricing Actuary

London, England
£60000 - £110000 per annum
Reference
118904

Pricing Actuary (Casualty)

England, London
£60000 - £80000 per annum
Reference
118903
See all jobs »
 
 
 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2020 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited, Level 5, 78 Chamber Street, London, E1 8BL. Tel: 020 7880 6200