Financial services companies are at last treating their chief risk officers like adults. No more sitting at the kid’s table when the grownups get together to talk strategy or make big decisions.
The four largest U.S. banks – JP Morgan Chase, Citigroup, Bank of America and Wells Fargo – raised the profile of their CROs quite a bit after the 2008 crisis. Following recommended best practices, all four risk managers report to their CEO directly and are members of the banks’ operating or executive committees.
It was widely reported that Bank of America’s former CRO, Bruce Thompson, was the highest paid executive at the bank in 2010, earning more than even CEO Brian Moynihan. Much of that compensation came from his performance as head of global capital markets at the Bank of America Merrill Lynch unit in 2009. But the numbers were dramatic and Thompson was promoted this year to B of A’s chief financial officer. In general, CRO pay and professional possibilities have increased substantially in the last 10 years.
Late last year the Federal Reserve Board issued proposed standards and early remediation requirements for risk management under the Dodd-Frank Act. Publicly traded bank holding companies with $10 billion or more in total consolidated assets must establish a risk committee of the board of directors that is responsible for oversight of enterprise-wide risk management. The risk committee must be comprised of an appropriate number of independent directors and include at least one risk management expert.
The proposal would require all covered companies to implement robust enterprise-wide risk management practices implemented by a chief risk officer with the appropriate level of independence, expertise, and stature in the organization in conjunction with the risk committee of the board.
It’s difficult for me to imagine a new generation of systemically important financial services company CEOs without strong risk management experience. Independent board members with risk management experience will also be in demand. The current generation of CROs is gaining the experience to lead as CEOs and board members in today’s challenging market and regulatory environment.
Stewart Goldman, a senior client partner at executive search firm Korn/Ferry International, tells me there’s a ''scarcity'' of candidates with the ''ideal skill set'' to be chief risk officers, so institutions are considering people with a broader range of backgrounds to fill the post.
A Chief Risk Officer who does a good job mitigating risk while optimizing opportunities can now have significant stature and sway. But, conversely, that new prominence gives shareholders, regulators, and the media an easy target for ridicule after a corporate stumble or failure.
MF Global’s seemingly sudden and spectacular crash in October sent journalists and angry customers looking for someone to blame. Chairman and CEO Jon Corzine made leveraged bets on sovereign debt using repo-to-maturity trades that moved the transactions off the balance sheet. When inquiring minds asked who was managing risk, fingers wagged at risk officer Michael Stockman, a recent Corzine hire.
His predecessor in that job, Michael Roseman, who reported to former MF Global CEO Bernie Dan directly and had broad responsibility, was pushed out of MF Global early last year after pushing back on Corzine over the trades. Roseman thought Corzine’s trades introduced unacceptably high concentration and liquidity risk.
So true. I'm not much for proscriptive, pure model-driven decision making. Nor am I a big fan of quotas for things like board diversity. Independence on a board, especially for the audit and compensation committee, is crucial. But risk committees are the "new black". The focus on risk management should be there but it needs to be thoughtful, based on experience and judgment and, for systemically important institutions, supported in spite of impact on profits.