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Notes from The Kellogg Risk Summit 2008
As the curtain is drawn on 2008, we head into the holiday season ripe for reflection on a difficult year in the world of finance. While no one is ready to pronounce the global financial crisis "over", risk experts worldwide have begun to gather to sift through the wreckage and consider what happened and how that might be prevented from recurring.
One such gathering took place on November 20, 2008, at Northwestern University in Evanston, IL. The Kellogg Graduate School of Management played host to the 2008 Kellogg Risk Summit where experts discussed the drivers behind the recent financial markets meltdown. The event, which occurred at the James L. Allen Center, was sponsored by the Zell Center for Risk Research in conjunction with PRMIA, the Professional Risk Managers’ International Association.
Featured speakers at the conference included Ali Samad-Khan, a principal and global leader in the operational risk consulting practice at Towers Perrin; Leo Tilman, president of L.M. Tilman & Co. and former chief institutional strategist at Bear Stears, and Marcelo Cruz, senior risk management consultant and former chief risk officer of Aviva.
Samad-Khan expressed broad agreement that business leaders need to take a more serious, and sophisticated, look at risk management. Too often in recent years, he said, executives, in part driven by market pressures, focused narrowly on performance and quarterly returns. As a result, risk management tended to be a secondary consideration. He argued that the risk models employed by many firms helped create the current liquidity problem in the financial markets. He offered several remedies for lax risk management practices, including addressing principle-agent and incentives problems within a firm.
Tilman discussed themes related to his new book, Financial Darwinism, a subject that he also introduced on Nov. 19 at the Kellogg Finance Conference. Managing risk, he said, is about adapting and evolving as a business. Tilman stated that as more firms work with what he called a static view of profit models, it makes responding to a dynamic world difficult. Further, he said that these poor overarching models were mostly to blame for the financial crisis, rather than investor or managerial “greed and complacency.”
Cruz, also a former Lehman risk manager, pointed out that only about a decade ago did firms really begin focusing on operational risk management. He provided a glimpse into the challenges of managing risk at Lehman, which filed for bankruptcy protection in September. Cruz said that risk governance and incentives were key problems at his former employer; because of the financial incentives in operation, he said it proved very difficult to convince managers to reduce their investment leverage. Today, he said, risk management should continue changing its focus from being considered “a cost of doing business” to a function that is involved in “value creation” for the firm. He said that companies need “parallel processes” to manage risk, alongside existing processes that manage profitability.
The summit concluded with a panel discussion featuring Kellogg School experts, including Sergio Rebelo, the Tokai Bank Professor of International Finance; Mitchell Petersen, the Glen Vasel Professor of Finance; William Quinn ’91, managing director, Goldman Sachs; and Steve Lindo, executive director, PRMIA. Moderating the panel was Kellogg Senior Lecturer Russell Walker, assistant director of the Kellogg Zell Center for Risk Research.
The Zell Center leads a growing list of organizations which intend to produce additional events focused on risk management. This heightened awareness of risk management is aimed toward preventing a repeat of the mistakes that led to the current financial crisis. Stay tuned to this space for future news about such gatherings.
For full text of the article, please visit Too Easy to Fall Off the Mountain, say Experts at Kellogg Risk Summit
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December 16, 2008
