Risk Culture

Risk culture versus opportunity culture: When things are looking up, it’s all about seizing opportunity. When things are heading down — like now — our attention turns to risk. That’s the way things go. But they shouldn’t. We should always develop and operate in a risk culture.

Risk culture at University of California: During the five years I was the Chief Risk Officer for the $160 billion University of California pension and endowment, the CIO Jagdeep Bachher and I embarked on a program of creating a risk culture. Risk management went hand-in-hand with looking for opportunities. Indeed, one of our annual reports could be opened two ways. The cover on one side of the annual report had “Opportunity”.  Turn the report around, and the cover on the other side had “Risk” with the text going the other way.

Here is our manifesto for Risk Culture at the University of California website.

Risk culture involves creating a common language for measuring and evaluating risk: The essence of a culture is a common mode of communication which can only occur if everyone, from the portfolio management teams to the CRO to the CIO to the Board are all speaking about risk in the same way. And “speaking” means more than reciting numbers. It requires sharing risk narratives, and stories of how risks might evolve.

Risk culture means taking action: Having periodic meetings to go over risk reports is a risk ritual. A culture is active, it requires taking action to stay alive. And having accountability for those actions. But accountability does not mean apportioning blame for the adverse effects of market uncertainties. I have worked in many investment firms, and when a bad event occurred, the last thing on anyone’s mind was pointing fingers.

Culture is the essence of our human condition, and risk is human as well: This is a point at the center of my book The End of Theory, published by Princeton University Press. We learn from experience, we innovate and create. We change in our tastes and risk tolerance. And this has to be part of understanding risk.

Culture is slow to develop, and reaches into the long term: This is not only about the time frame of asset owners, which of course is generally at variance with that of those who are investing their assets. It also is that longer-term issues like climate change and demographics are dominant risks. Even though longer-term, the market will seek to adjust to them in the present. Which is to say that risk culture is patient and long term.

Risk is dynamic: Which gets to the need for a flexible approach, and one that allows for dynamics. Thus a culture rather than a rule set. This is part of being human, it is the outgrowth of people learning, experiencing, and innovating. A culture is a bulwark for facing the surprises that emerge from the very nature of market risk. Addressing these with a common attitude and understanding.