A recent survey conducted by Thomson Reuters attempted to gather information about how worldwide risk management professionals are approaching “conduct risk.” The report defines conduct risk as “the concept that encompasses the risks associated with the way in which a firm and its staff conduct themselves.” With CFOs playing an increasingly important role in the overall strength and health of a corporation, involvement in risk management strategy development is becoming a priority. Let’s take a look at Thomson Reuters’ findings.The Results Are In
Thomson Reuters’ survey was conducted with over 200 risk management and compliance professionals working in financial services firms. The study’s participants represented six continents and found that both the Middle East and North America struggled to truly address conduct risk, whereas Europe, Asia, and Australia made the most progress. According to Thomson Reuters’ report, “84 percent of respondents did not have a working firm-specific definition of ‘conduct risk.’”
Factors Contributing to Conduct Risk
While many CFOs are concerned with financial risk and operational risk, conduct risk is considered equally important. This form of risk is capable of harming a brand’s reputation and losing loyal customers. According to Thomson Reuters, there are three identified factors that contribute to an increase in conduct risk.
- Corporate culture. Results indicate that corporate culture was identified by 76% of respondents as the most prominent contributing factor.
- Corporate governance. Coming in second, corporate governance was listed as a major factor by 74% of respondents.
- Conflicts of interest and reputation. After culture and governance, these two factors were tied at 68% for the most important factor in conduct risk.
Mitigating Conduct Risk
With CFOs playing a larger part in strategic planning processes than ever before, mitigating ‘conduct risk’ has become a top priority. Let’s look at two ways CFOs can help financial firms complete risk management planning.
- Review incentives. Statistics indicate that some firms are reviewing their employee incentive programs. Some feel that incentive programs increase conduct risk frequency.
- Measurement. A strong emphasis is being placed on measuring the effectiveness of conduct risk strategies. Recommended metrics include corporate governance, financial capabilities, and customer relations.
In 2014, CFOs need to play an active role in the development of conduct risk management strategies.
How do you contribute to your company’s risk management strategy?