John Crawley: “Mauritius is open to moving towards a new risk management culture”

Business turnaround specialist John Crawley is currently Chief Executive of The Finance Expert and financial advisor to the Dublin Docklands Development Authority. In an interview to Business Magazine, he reflects on the role of board members who must focus on quality not quantity.

BUSINESSMAG. Would you say the collapse of Enron Corporation in 2002 was a turning point in the history of financial risk management?

It was a significant event which we thought would be a turning point. Alas it was not, as the financial crisis of the last seven years has replaced it as the “latest perceived turning point”. We are not great at learning from mistakes. My view is that we have not yet tackled the core problem of board culture and risk appetite.

When I talk about board culture and risk appetite, I mean that boards are primarily responsible for setting risk appetite (what we, as a board, are prepared to do around here to deliver on our objectives). The culture part is all about “tone from the top”. How do we, as a board, lead by example? This is fundamental to the organisation in the same way as the example a parent gives a child in its formative years.

Part of the problem is that boards have two kinds of members: first, there are the non-executive directors. These participate a few hours a month and struggle to stay on top of the volumes of paper sent to them to read. They struggle to see the wood for the trees. The second kind are internal directors who report to the Chairman orCEO. They struggle with “independence” as their boss (paymaster) is on the board; so they migrate towards “group/boss think”.

With these pressures, where is the time, bandwidth or even encouragement to focus on risk? We need a new dynamic that says: “Directors should focus on quality not quantity”.

BUSINESSMAG. In Mauritius, we have seen recently the collapse of the BAI group due to related party transactions. Could we avoid such a crisis if the group had a sound risk management strategy?

Yes. But again that sound strategy needs board culture and risk appetite resolved in the first place. As I explained earlier, these are key elements in an organisation.

Risk appetite should be a core consideration in any enterprise risk management approach. As well as meeting the requirements imposed by corporate governance standards, organisations in all sectors are increasingly being asked by key stakeholders, including investors, analysts and the public, to express clearly the extent of their willingness to take risk in order to meet their strategic objectives.

BUSINESSMAG. What are the mains risks affecting businesses worldwide today?

Globally, there are a number of problems that affect businesses and organisations across the world. These are the top global risks in terms of likelihood and impact, depending on the prevailing political, economic, social and environmental conjunction. To name a few, there are those related to a country’s stability, such as interstate conflict, weapons of mass destruction, failure of national governance, state collapse or crisis. Then there are those which are environmental, such as extreme weather events, natural catastrophes, failure of adaptation to climate change, water crises, and biodiversity loss and ecosystem collapse. You also have to consider the economic factors, such as unemployment or underemployment, energy price shock, and fiscal crises.

BUSINESSMAG. There is a notable increase in risks and in the complexity of the risk landscape in today’s world. What factors have led to this situation?

There is a great phrase “never mind the quality, feel the thickness”. It epitomises many industries who load rules and guidance onto the ever increasing list of “things to do”. A real and present danger is overregulation and a desire to put more structures around risk management. There is also a risk of treating risk as something different to good management. There is also no doubt that the speed of change (risk velocity) is a major factor and a good example of that is in the area of reputation risk where social media plays a major velocity factor.

What is the answer? The truth is that it comes back to properly embedding sound risk management principles into organisational management. This is easier said than done – yet it makes common sense.

BUSINESSMAG. What about the increasing volatility of financial markets and its impact on risk management policies?

I wonder if this is such a major issue now. Since the financial crisis, the banking world has moved to separate its business into two: banking and speculative trading (with an emphasis on not letting the speculative trading drag down the core banking).

BUSINESSMAG. Can you elaborate on the changes brought about in the role of risk managers?

Modern day risk managers are now more business focused rather than compliance focused. This is not necessarily appreciated in many organisations. A key simple question to ask is “who does the chief risk officer report to?” If the CRO does not have a reporting line to the board’s risk or audit committee, then one must ask if they really have a CRO!

BUSINESSMAG. Generally speaking and from what you have seen as a consultant, are companies achieving their expected risk management targets?

Difficult to say, as there is little being shared in the industry to date. In my experience, it’s usually about 50:50.

BUSINESSMAG. What is your assessment of the risk management situation in Mauritius?

I would say that Mauritius is receptive to change and open to moving towards a new risk management culture. However, this change needs to be delivered by boards.