Six ways companies (mis)manage risk
Authors: R. M. Stulz
Publication Year: 2009
Journal: Harvard Business Review
As investors tot up their losses from the financial crisis, many will be asking themselves, How did Wall Street mess up so badly? What went wrong with all those complicated models? Even back in November 2007, before the crisis had really hit the stock markets, one commentator in the Financial Times wrote, “It is obvious there has been a massive failure of risk management across most of Wall Street.” Idea in Brief, Of course, financial institutions can suffer spectacular losses even when their risk management is first-rate. They are, after all, in the business of taking risks. When risk management does fail, however, it is in one of six basic ways, nearly all of them exemplified in the current crisis. Sometimes the problem lies with the data or measures that risk managers rely on. Sometimes it relates to how they identify and communicate the risks a company is exposed to. Financial risk management is hard to get right in the best of times. In the following pages I’ll explore the six paths to failure in detail.