‘People Risk’ Tough For ERM, Regulators To Manage

New York City—No matter how many regulations or internal fail-safe systems an organization or a government puts in place, preventing systemic economic collapses means challenging peoples’ worst instincts, an enterprise risk management conference was warned this week.
Following a wide-ranging panel discussion of the financial meltdown and its implications for corporate governance—entitled, “A Conversation About Risk: What Keeps You Up At Night?”—an audience member asked the experts to explain how companies and regulators can mitigate “people risk” to discourage behavior that is at best reckless, and at worst unethical or even illegal, when the specter of large profits loom.
“One of the clear weaknesses here is people,” said the attendee at the ERM conference put together by the events division of The National Underwriter Company, part of Summit Business Media. “How do you get board buy-in to proceed with caution on risk? How do you mitigate the inherent ‘people risk’?”

“There is a natural human reluctance when things are going well to challenge the status quo,” said Helen Galt, senior vice president, actuary and chief risk officer at Prudential Financial Inc. “Even though some of the markets were defying the laws of gravity, people were reluctant to miss the boat. More attention should have been paid to nightmare scenarios.”
She said CROs need to “challenge management to define their risk tolerance more clearly.”
Ms. Galt later added that collateralized debt obligations packaging subprime mortgages were “embraced because of the high ratings assigned to them by rating agencies”—a level of trust and confidence that turned out to be misplaced.
She suggested that “if you can develop your own internal capabilities to analyze these complex products, you must do so. But if you find you need 300-page documents to fully explain how the product works, it’s probably too complicated.”
Ms. Galt said her firm “basically decided we were not going to invest in CDOs. After they were sliced and diced multiple times, it was hard to understand what we were looking at.”