Letter to the editor

News

Dear Editor,

Recent comments attributed to Robert Rubin, a director and chairman of the executive committee of Citigroup, reveal much as to how boards of directors have looked at risk management.

The media have reported Rubin as holding Citi's risk management executives responsible for the difficulties in which the company now finds itself. He is reported as saying "the board can't run the risk book of a company. The board as a whole is not going to have a granular knowledge (of operations)".

It is generally accepted that it is the responsibility of the board of directors of any company to set the risk appetite for the business and to establish the strategies that will be adopted for managing risk across the business. The board then, quite rightly, provides senior management with the mandate to implement such strategies. The risk management function is there to assist in the implementation and to monitor and report back to management what is going on.

The important issue here is that it is for management to act on the information being supplied to them by the risk function. It is not for risk management to make decisions for management.

For a director of a business such as Citibank to display such ignorance of the way in which risk management works is breathtaking and to attempt to lay the blame at the risk management function is nothing short of scandalous. I note also that Rubin is reported to have said "the board as a whole...", implying that at least some section of the board would have the granular knowledge of operations.

The three most senior executives of Citigroup serve on its board. If these individuals had no knowledge of the company's risk book, it might make one wonder what on earth they are doing in return for their not insubstantial remuneration. The rest of Citi's board might, quite rightly, be disappointed in the event such knowledge, if it did exist, was not shared with them.

This is a shining example to all of the importance of strong governance around the risk management function. The board must understand clearly that the ultimate responsibility for risk management lies with them and they must be held to account when it fails. Pillar II of Basel II states: "Bank management is responsible for understanding the nature and level of risk being taken by the bank and how this risk relates to adequate capital levels." This rather flies in the face of Rubin's reported comments.

Perhaps if greater attention had been paid, we would not be in the mess we now are.

Yours sincerely,

Philip H Martin, Chairman, Institute of Operational Risk.