Switzerland

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  • Date: 4/11/2012

Risks pose threats and open up opportunities 

Interviewees:
  • Prof. Wolfgang Kröger, Managing Director ETH Risk Center
  • Dr. Lukas Gubler, Chief Risk Officer at EGL

In your opinion, which systemic risks should the Swiss business world be tackling as a matter of priority in the current environment?

Prof. Kröger: Clearly at the top of the list is the sovereign debt crisis and the related economic crisis. I am also concerned by how the sociopolitical framework is losing its stability, something that we are already witnessing in Greece. On a political level, I see the Middle East posing a fundamental problem as it is still having a destabilizing effect and a negative impact on the global economy. With regard to technical risks, I consider an imminent collapse of the electricity infrastructure to be the greatest threat. In Europe, countries such as Germany and Switzerland are struggling with capacity constraints in their power grids, which is alarming and could have widespread repercussions throughout Europe. This development is being intensified by the political debate about energy production, in other words the different strategies adopted by individual countries to the use of nuclear power to generate electricity in the future.

 

Lukas Gubler: Of course, the transportation and utilization capacities of electricity grids should be taken seriously, but I wouldn’t classify them as systemic risks. For me, too, the financial and economic crisis, the sovereign debt crisis and its impact on political stability are the number one danger. The state and, consequently, state infrastructure too are being weakened by the obligations of countries resulting from the economic crisis. This therefore links back to the issue of a stable power supply and expansion of the network infrastructure.

Can effective protection against systemic risks ever be provided at a reasonable cost?

Lukas Gubler: One of the features of systemic risks is the complex relationships between different factors. Risk management within a company must be capable of reproducing this interaction of various risk categories. So-called silo thinking in individual, well-defined risk categories is no longer appropriate and no longer takes account of the complexity and unpredictability of major systemic risks.

 

Prof. Kröger: That’s right. Before we think about individual measures we must understand the characteristics of systemic risks. Our current modeling approaches don’t allow us to do that satisfactorily. Research must make further progress in this respect in the coming years. In the practical implementation of risk management strategies, companies must adopt more flexible, more adaptive and thus more robust approaches to be resilient. The ETH Risk Center sees its task as being precisely to develop new approaches of this type for the private sector. 

Has the way the corridors of power in our corporations deal with risks changed since the financial crisis?

Lukas Gubler: Yes, absolutely. I have seen a significantly greater requirement for information on the part of boards of directors. Risk management topics appear on the agendas of meetings more frequently. The interaction between developing strategies and managing risk must, however, be linked more strongly. To date, these two disciplines have operated separately to a large extent and yet mutually influence each other. In future, strategy development and risk management must work together seamlessly.

 

Prof. Kröger: From my experience of talking to CEOs, they used to try to simplify topics and issues whereas today they all agree that they are trying to analyze and understand the enormous complexity of the subject as a whole. For me, that is one of the lessons learned from the financial and economic crisis that has benefited from practical application.

Does that mean that more stringent risk management restricts business operations, in other words companies become too cautious in their core activity?

Lukas Gubler: Risk management must support business activity. If risk management leads to strategic and operational decisions being looked at from various perspectives and not simply being blindly evaluated on the basis of maximizing revenue and profit, the company will also benefit economically. Risk management should stimulate business long-term and not inhibit it.

How can you ensure that risk assessments aren’t just “exercises” carried out by boards of directors but become an integral part of operational risk management?

Lukas Gubler: For every risk we address, we draw up a package of measures that specifies clear responsibilities and a timeframe. On top of that, there is a risk management organization, which plays an important role within the company. When the subject of risk management is alive at the top level this spreads to the whole organization. That means the attitude and commitment of the board and executive management are decisive factors in the credibility of risk management.

Is thinking in crisis scenarios, i.e. short-term risk management, becoming more important?

Prof. Kröger: Thinking in scenarios is in any case better than adopting the famous “worst case” – because it’s often not even possible to identify the “worst case.” In addition, such case studies give the impression that, if an event occurs, it will unfold exactly as imagined. But experience shows that it’s precisely the worst case that cannot be foreseen. Scenarios are, however, not glimpses into the future but illustrate a potential route, based on plausible empirical values.

 

Lukas Gubler: The development of possible scenarios depends heavily on how able an organization is to recognize relevant changes within its environment. Here the key lies in the company as a group of entities. This means that information flows in the company and the transparency of the data and facts made available must be open. The company should be able to benefit from the awareness of every individual employee.

How can we better integrate the triangle of politics-economics-science to cope with systemic risks?

Prof. Kröger: These interconnections are certainly in need of improvement, although there are naturally already various points of intersection. There are already many attempts being made to cross-pollinate between science and industry. We are still looking for better links to politics. Getting all three disciplines around the table is naturally the ultimate and most important goal in order to deal with the increasing complexity and interlinking of the subject matter.

KPMGnews: Is more transparent risk reporting needed in companies’ annual financial statements?

Lukas Gubler: Much has been done here with regard to financial risks. We have a wide range of tools available to us for presenting and interpreting risks. As far as the wider risks to a company are concerned, as the reader of a company’s balance sheet I would like to be able to form a picture for myself of the risk situation using the facts presented. In other words, I believe that risk reporting should leave enough open to the reader’s interpretation.

 

Prof. Kröger: I would like to move away from the purely corporate viewpoint to the more general risk perception of society. How does the public treat the concept of risk? On the one hand, people don’t want to deal with risks every day; on the other, there is a distorted perception for example with regard to the concept of probability in comparison with the magnitude of a potential event. Among other things, we consider it our duty to give the concept of risk not just negative connotations but also to reveal the opportunities hidden behind every risk. In addition, we shall never be able to meet society’s need for a more exact and accurate risk assessment in all situations and we must put this across time and again. Dealing with risks, consequences and probability of occurrence remains inexact even with the best computer models.

 

Interview: Philipp Hallauer, Head of KPMG Audit Comittee Institute

 

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