Is there a cadre with the experience and skills to become Sir David Walker's new generation of BOFI1 Chief Risk Officers? The largest insurance and reinsurance companies and some big banks, have had CROs for a few years, but the arrival of these pioneers has been haphazard.
A recent report by Hedley May , drawn to my attention by the FT's Megan Murphy, makes interesting reading. Propelled by Sir David Walker's insistence on universal CROs for BOFIs, with near-board-level status, HM suggest that a new, high-flying breed of CRO needs to emerge. It does. And the breed, with its status, should spread to all large complex enterprises.
There is no specification of this new breed. What should it look like? Here are some ideas. Some are borrowed from HM's report. Please hone them using the comment space below. Characteristics should include:
- very high intelligence
- sophisticated, practically-oriented numeracy – perhaps engineers and statisticians rather than pure mathematicians and physicists
- CEO potential
- a deep understanding of the entire business
- an independent and questioning mindset
- a nose for 'something not quite right' and the inquisitiveness to follow through
- forensic and policing skills
- people, mediation, problem-solving and negotiation skills
- the imagination and flair to turn problem risks into sound commercial opportunities
Three difficult areas are incentives, promotion and education.
Pay, bonuses and other incentives will need careful thought. The CRO's overwhelming motivation should be to ensure that the company is able to continue through whatever vicissitudes fate, its staff or its leaders throw at it. Total loyalty to the company, not to the team, will be essential. CRO pay, rations, life and death will probably have to be in the gift of the NEDs, not executives.
Promotion is problematic for such high fliers. If the CRO job is seen as a route to internal promotion dependent on the C-suite, it will corrupt a CROs' loyalty. To be effective, a CRO needs unqualified loyalty to the company, not the C-suite. And the notion that "CRO" is a 3 year job on the way to CEO will produce inexperienced and ineffective CROs tuned to the short term and gaining favour rather than long term stability of the company.
Different solutions will be found, but all are likely to involve primary loyalty to non-executives rather than executives and the means to make the job sufficiently high status, interesting and rewarding that potential CEOs are prepared to spend 10 years not three in the job. In the longer term, many CROs may be of equivalent status to CFOs - and content to stay that way.
Thirdly, specialised education will be essential. Few if any MBA establishments teach about risk to the depth and breadth necessary. Most will find, if they are honest with themselves, that they lack the skills to teach it properly. New specialist education will be required, with teaching by risk specialists that operate at business strategy level as well as understanding the nuts and bolts of risk. A range of risk-strategy MSc courses may be needed for budding CROs.
Risk has long been been a Cinderella area. BOFI CROs are being created and invited to the C-suite ball. Once they have gained the skills and performed well, many will see top positions opening up to them. Other large complex companies should follow the trend. The challenge for boards will be to keep the best CROs in post for long periods.
Upate 24 March: See also the discussion on this FT article about McKinsey's reputation
1Bank or Financial Institution, a term coined by Sir David Walker