From my perspective, it’s really risk management to ensure that humans have the ability to go somewhere else in case there were to be some huge disaster on earth – Gwynne Shotwell
In the early 2000s, I noticed the rise of a trend towards a subject matter of great importance for the success of our individual lives, small businesses and mega-corporations, banks, and, yes, public sector governance. Risk management. It has existed for centuries, reflected in the Chinese symbol depicting the concept of risk and reward as two sides of one phenomenon. But besides traditional professions such as agriculture, insurance, banking, medicine and engineering, risk management was not, before the 1990s and the 2000s, fully appreciated as having a much broader application.
After taking a PhD at the London School of Economics as a part-time student while working as a senior executive in the UN system and The Global Fund in Geneva in the mid-2000s, I enrolled for and obtained an International Certificate in Risk Management at the UK Institute of Risk Management in London after 9 months. I invested in this training because I considered risk management a critical skill. Not too long afterwards I resigned from the UN system, set up and ran Sogato Strategies S.A. (Societe Anonyme) , a global risk management and strategy consulting firm in Geneva. This background played an important role in my being headhunted to the Central Bank of Nigeria in late 2009.
We live in a world and life of risk – from mundane ones such as slipping and falling down the stairs to “fat tail” risks like the Covid19 pandemic or the global financial crisis of a decade earlier. Managing it, then – trying to foresee dangers or factors that lie ahead and might affect us adversely, and consciously preparing to overcome or “manage” for such factors – is essential for success and progress. We can’t create and grow wealth, whether that of nations or individuals pursuing legitimate riches, without it. When governments and countries ignore it at a national or local scale of governance, the result is governance and institutional failures that prevent the strong achievement of their mandate. Poverty, high levels of crime and corruption are the result. The road to hell being often paved with good intentions, “President X, Governor X or CEO X means well” will become an excuse that does not affect one jot the reality of sub-par national, economic or institutional performance.
The reason the Independent National Electoral Commission (INEC) often has had problems with managing our national elections in the past is because it has not used a muscular risk and project management approach to an exercise that anyone knows is a difficult and vastly complicated one. In the same vein, as Nigerians experience many difficulties with the implementation of the Central Bank of Nigeria’s Naira Redesign project, my mind cannot help its flight back to the concept of risk and its management. Seriously applied to the management of such a gargantuan project, I think it could have made much difference in outcomes.
Being completely risk-averse does not yield much progress in life, or optimal value for a business or an investor. On the other hand, we must not be reckless, taking risks for the sake or thrill of risk itself. Risks should simply be assessed and proactively managed. If I want to invest in the stock market, I must understand that I might lose my investment if the company the shares of which I buy does not perform well. So I should manage that risk by diversifying my investment portfolio.
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There are several types of risks — operational risk, strategic risk, legal risk, reputation risk, political risk, regulatory risk etc. Once an organization has clearly identified the risks that it faces in its line of business, its first duty is to determine what risks or levels of risk are acceptable and bearable for it. This is called “risk appetite” in professional risk parlance. Enterprise risk management is an overarching framework that teaches how to manage risks. Here there are four main approaches to risk, called the “Four Ts”:
1. Terminate (eliminate/prevent) the risk;
2. Treat (reduce/mitigate);
3. Transfer (insurance – someone else bears the cost)
4.Tolerate (accept) the risk.
Reputation risk, political risk and operational risk were all red flags for the implementation of the Naira redesign project in terms of timing and, even more importantly, implementation (as I always said, the CBN has the right to redesign the currency if it deems such a move necessary, but the deadline of 90 days seemed unrealistic and some of us said so. )
Risk management is an integral element of modern and strategic governance. As I argued in my book Build, Innovate and Grow (BIG), we must make it an integral part of governance and government, for Nigeria’s politicians are all risk and no management. Muhammadu Sanusi II established a Risk Management approach and structures in the CBN early in his tenure as Governor of the apex bank. I for my part was concerned with the management of systemic risk to the financial system as Deputy Governor in charge of Financial System Stability. Active risk management played an important role in our success with the various reforms that stabilized the system after the 2008 global financial crisis.
Risk management is a culture. It is a way of thinking, leading, and governing, which begins and cascades down from the top of an organization. It does not appear that the CBN adequately anticipated and planned to avert the risks inherent in unleashing a policy of this magnitude so close to a four yearly national electoral cycle. Those risks, of course, include possible sabotage by some commercial banks and arbitrage trading of our national currency inside Nigeria, all induced by scarcity. As the apex bank and we all as a country scramble with the present difficulties, I hope we learn the necessary lessons, and begin to apply these lessons in the leadership and governance of Nigeria.
Moghalu, a former Deputy Governor of the Central Bank of Nigeria, is the CEO of Sogato Strategies LLC, a risk and investment advisory firm, and a Senior Fellow at the Council on Emerging Market Enterprises at The Fletcher School at Tufts University, USA.
