February 29, 2008

Before answering the question of whether CEOs should ultimately be responsible for risk management, I think we need to get some basic ground rules and assumptions out of the way. Then I shall attempt to answer the question.

- The role of the CEO and senior management is to ‘enhance shareholders’ value’.

- Enhancing shareholders’ value can take on many different forms, but the most obvious is the increase in the firm’s share price.

- Under ‘normal’ market conditions, share prices are ‘driven’ by profits or revenue (or the expectation of future profit/revenue), depending on what ratio you want to look at.

- We all work in investment banks or similar functions of financial institutions. Investment banks are supposed to take risks.

- Profit/revenue is typically ‘enhanced’ by the usage of leverage, either on a transactional level or on a balance sheet level.

- Greater leverage equals greater risk.

- Reward, in the shape of profit, is a function of risk (perceived or otherwise).

So, all things being equal, and given the above ground rules and assumptions, I think we can answer the question: CEOs should ultimately be responsible for risk management. If the CEO doesn’t want to be or doesn’t know how to be involved in risk management, there should be someone in senior management who is.

Link to Here is The City