When it comes to risk reporting, do you ever feel that you are trying to push a square peg into a round hole? According to Gordon Goodman, that may happen rather often for companies that are not in the finance industry. Goodman, Director of Governance and Enterprise Risk Management at NRG Energy, was the first of two presenters at the June 16, 2015, webinar on Effective Risk Reporting sponsored by the Global Association of Risk Professionals.
According to Goodman, there has been a push by banks to “bring their metrics to the marketplace, but this has created problems” for non-financial companies. Such companies “have a natural long position” in their industry sector whereas banks hold both long and short positions on a variety of industries.
Like a good tailor, a good risk reporting system should take into account the specific needs of the company, not just producing a one-size-fits-all garment.
“Do not ignore powerful risk metrics just because they are simple,” he said, noting that some of the best risk metrics are “nothing more than coarse-grained quantifications” of things that are important to the company.
When it comes to effective risk reporting, Goodman drew a distinction between the dashboard and the library. “A dashboard contains things you want to see quickly on a daily basis,” he said, but the space is limited. Some questions require a deeper and more complete answer, and these require a library of knowledge.
“As a corporation’s requirements change, the dashboard should change,” he said, but it can be difficult to remove certain metrics that some departments or senior executives have grown comfortable with. To counteract the natural hoarding tendency, Goodman recommends annual culling. “At least once a year, all risk metrics should be reviewed … and the less useful metrics should be removed from the dashboard.”
Goodman has a soft spot in his heart for outliers. Exceptions prove the rule. Rather than excluding outliers, as standard value-at-risk (VaR) prefers to do, a company should examine and learn from its outliers. “When outliers are identified,” he noted, “they need to be reviewed and discussed as a first priority for the risk organization, and new metrics may need to be developed to make them more visible.”
Although individual departments are quick to separate market risk, credit risk, and operational risk, Goodman urges a more consolidated view. The cross-pollination encourages innovation. “Many of the best risk indicators arise from viewing risk through multiple lenses including operational risk, regulatory risk, and performance risk,” he noted.
Goodman fielded numerous questions from the audience at the end of the talk. He elaborated on the increasing trend to “financialize” risk reporting, which can obscure the goals within an industry.
He emphasized that risk managers must have personal courage. “Good risk managers must be fearless,” he said. “Your job is to report the bad news—to talk about the things that aren’t going right.” ª