Alpha under threat if organisational risk ignored

Ann OglanianReGroup is one of four firms providing resources to CalPERS as it embarks on its governance/risk management initiative. President and chief executive of the firm, Ann Oglanian, speaks with Amanda
White about risk management best practice and how pension funds can initiate organisational risk management change.

Risk assessment is a big part of any investment process and the risk/return tradeoff is one of the most talked about ratios in the investment industry. But while investment risk is well documented, organisational risk has been largely ignored in the pension industry as funds have grown in size and developed in bureaucratic complexity.

According to chief executive of ReGroup, Ann Oglanian, the pension industry has been particularly good at investment risk assessment but neglected wider risk management.

“Investment professionals know how to assess where and why you get alpha, and whether it is repeatable. But the industry has made the error that because investment risk is the most easily quantifiable, that is where all the attention has been turned. It hasn’t been transferable or translatable to the less quantifiable areas of organisations,” she says. “The pension fund industry is not just about investment performance, but people management and risk. I believe in the next 10 years there will be recognition that operational risk is not less important necessarily because it is less quantifiable.”

Recent turmoil in the financial markets, economic uncertainties and the desire for greater transparency has prompted the $182 billion CalPERS to undertake an organisation-wide review of its existing governance and risk management framework.

As part of that review, expected to take up to two years, CalPERS is calling on a number of project resources or independent experts and Oglanian is one of the consultants on the project. She believes CalPERS is to be commended for showing leadership on the issue of risk at a time when it may be easier to ignore a review.

On July 26 CalPERS will hold a public meeting, where the recently-formed ad hoc risk committee will get together to begin the discussion and develop an enterprise risk mindset.

“CalPERS has good risk management in silos and this is an opportunity to look more broadly,” she says. “The independent experts are resources that can provide background on a board’s role and governance, help create an understanding of the definition of risk, and the skills necessary to assess risk.”

According to Oglanian, organisational risk assessment in this industry is nascent, “it’s a baby”, and while pension executives have done an outstanding job in moving forward in investment risk, it takes a different skill to look at organisational risk.

“What is interesting for me is this is a challenge, and an opportunity, to teach people to be accountable for the identification and assessment of risk,” she says.

ReGroup, which was founded by Oglanian, primarily works with funds managers on strategic planning and compliance. The firm encourages its clients to undertake risk-based strategic planning at least once a year, where all departments can represent their views of risk, and every stone is upturned.

“That way an organisation can prioritise the risks together culturally, and there are no sacred cows. It is also important to have someone there to say, let’s not chase yesterday’s risk,” she says.

Oglanian likes to “borrow” from the IT sector and its approach to organisational risk.

“IT is so expensive and so essential they are forced to have procedures and apply dollars to the highest risk,” she says. “In prioritising risk they have a mitigation plan and a dollar budget. The process is smart.”

Olganian believes the pension industry should aim to apply the tenets of risk that the IT industry does – the ability to create a strategy that is transparent and create a shared understanding of risk.

“When they are tackling enterprise risk a lot of firms create a committee instead of looking at it in a way that the ownership of risk has to be at every desk, not just the executives’,” she says.

“It is essential to establish a shared language and a shared understanding of risks. The heads of business need a holistic approach, they need to understand the nexus. Alpha that gets created can be lost because of an operational mishap. The management of risk must be interdisciplinary and pension funds need to realise the risk management function should put you at a competitive advantage.”