by Noriyuki Morimoto
The current state of the management of financial institutions is that they are simply taking the risks allowed by regulations, to the extent allowed by regulations, in the areas defined by regulations as inherent business, without even being aware of the risk-taking involved. If deliberate risk-taking is the essence of management, then management is absent from financial institutions.
Absence of management inevitably results in problematic situations. First, there is the consistent decline in management strength resulting from futile competition over interest rates, offering mutual funds and insurance policies that diverge from customers’ needs, and cost-cutting without strategy, all the while lacking conscious risk-taking decisions.
To address this situation, the FSA has called for customer-oriented value creation to be positioned as an object of conscious risk-taking, a natural measure to take.
The second problem is deviation in risk-taking, i.e., behavior that technically does not violate regulations, but is contrary to the intent of the regulations. For example, in offering mutual funds or insurance, even if the sales procedures are in compliance with laws and regulations, the products being sold are not in the best interest of the customer.
The only way to stop this situation is to foster what is called a risk culture. In other words, if every member from management to rank-and-file feels personal pride in the realization of the social function of finance, someone somewhere is due to speak out against any deviation that hurts that pride in order to protect it. And unless the organizational culture holds such an alertness, deviations will not be prevented.
In fact, having a risk appetite framework in finance means that as its culture, as a kind of atmosphere, the entire organization has a common understanding of the establishment of conscious risk-taking, control and minimization of risks associated with risk-taking, and elimination of risks that should never be taken. In other words, it comes down to the establishment of a risk culture.
And the key to fostering and maintaining a robust risk culture is for members to share the spirit of fighting for the benefit of customers, for the preservation of pride and for self-actualization.
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.