Risk Management – Art or Science?

The regulator recently announced in Inside Housing that “the time of leniency is at an end” with a tougher approach to compliance. Julian Ashby has reminded us that IDA’s will “inevitably have a strong focus on stress testing, asset and liability records and risk mitigation measures”.

Cathy Durham from our Strategy and Governance team reflects on the need to have sound risk management processes in place.

Can we learn something from the Great Masters when it comes to our approach to Risk Management frameworks and the management of risk?

Altair regularly reviews risk management frameworks; often within governance and board effectiveness reviews. The risk language we all use is now familiar; risk identification, assessment, treatment, risk appetites and attitudes, tolerances, target risk scores, mitigations and assurances Our observations of the processes used and our discussions with board members and senior executives have at times led us to reflect on whether risk management is an art or a science.

We see a variety of strategies, plans, maps, charts, tables and graphics, supported by scoring methodologies that are reassuringly simple but relevant to their organisation and understood by those who use them. We also see examples that are very formulaic; full of generic risks or at times are needlessly complex; having been updated and amended on numerous occasions they have lost their true purpose and value. Effective risk management is sound business planning and the framework used to deliver is a toolkit that should be readily applied and understood and genuinely reflective of the organisation and its environment.

Is risk management an art? Certainly, it should be visionary, challenging, thought provoking with the board being able to ‘see the big picture’; an informed view across the entire landscape; whilst maintaining an eye on the horizon. Well-constructed risk plans and registers also enable the board to have oversight of the relative perspective of the external and the internal environment.

But the devil is also in the detail. The science of using metrics to ensure complete and accurate data is key to being able to recognise the probability and the potential impact of future events and so mitigate risk. This includes stress testing the resilience of business plans, sound financial management, reliable assets and liabilities records with clear oversight of compliance, service delivery and performance. The board should have the ability to understand and test scenarios that the organisation may face and ensure continued viability.

Consider the amazing works of Leonardo da Vinci for a moment. He showed his genius in the ability to use and merge science with art. Combining the two gave his work great strength and depth. He was viewed as an individual of “unquenchable curiosity”. Although known primarily as a painter his diverse interests included mathematics, engineering, cartography and he has been credited with the inventions of the parachute, helicopter and the tank.

So maybe sound risk management practices can be a strong combination of both art and science. Although whilst also remembering a quote from Leonardo “Simplicity is the ultimate sophistication.”

If you need any help with Risk Management please contact me