Risk Professional, February 2009

cro interview

starting with politicians who had public policy aspirations to provide a house for every family, which has proven to be not realistic; to the regulatory organizations that had access to all the information but failed to consolidate it; to the credit rating agencies, banks and so forth. There is plenty of blame to go around. But we have to come back to thinking about risk management, what it is and what it needs to be. We have come through an era where there had been tremendous emphasis on models and modeling the outcomes of trading instruments. That has proven to be not as robust as we hoped it would be, perhaps because we were too quantitative.

What is the solution?

I think we can look forward to an era where risk management is not just quantitative, but also qualitative, and it will be about judgment and communication. Risk management will be elevated, and more companies will need to follow the State Street model of putting the CRO into the management group. Just having a Ph.D. in physics isn’t going to cut it anymore. You do need lots of those people; they are very important, because we are not going to throw all the models out. That means the CRO has to be a facilitator and communicator. There is a proper and natural tension between the need to take risk and the need to manage risk. The CRO needs to be facilitating the conversation about how much risk we want to take, what our risk appetite should look like, and what quality of shareholder returns do we expect to get for that risk. To engage in that conversation in a credible way, you probably have to have somewhat broader business experience than just having come

up through a quantitative discipline.

How quickly can this management and cultural change take place?

You can’t change it overnight. When you get to be a CRO, the likelihood is that you have a pretty sizable organization. Many traders understand risk, and with all the traders unemployed right now, you might say there are plenty who can do risk management. That’s probably true at some level. But the other piece of the job is managing the people, having a strategic framework for thinking about the kind of technology support those people need to do their jobs well. You also have a massive data collection problem, and once the data is collected, it has to be distilled into something that is usable. And you have to use influencing skills to reach the conclusions that allow the institution to take enough risk to deliver a return to shareholders, but not so much that it becomes dangerous or too concentrated. It’s a blend of past experience, some quantitative skills, the ability to ask tough questions and to challenge and to manage people. You also have to be something of a diplomat – and a dictator if all else fails after you’ve done your best to facilitate an outcome. On rare occasions you may end up having to go head-to-head.

Are there some client-facing aspects to what you do?

Yes, and it’s a part of the job I enjoy very much, talking to customers, advising them and telling them about State Street’s risk management practices. There is much greater communication between chief risk officers, at an informal level as we all try to do this

function better, and as CROs think more carefully about their counterparties. As much as they want to tell you about how great their risk management infrastructure and system is, they want to hear about yours too. That’s not just sharing of information; it’s also due diligence.

How does your relationship with top management work?

I report to the CEO, sit two doors down from him, and see him every day. The relationship I have with Ron Logue is what it needs to be, as it was when I worked with [Lehman CEO] Richard Fuld: If there is something I need to say, I just wander around the corner and pop my head in his office. I’m proud of the risk management story at State Street. Besides having the formal and informal communications, we are a very cohesive group who enjoy working with one another and have tremendous respect for each others’ skills. We have a clear mission that puts customers at the center of our strategy, and we basically come together to solve problems.

Your background was different from many in senior management. Was it hard to fit in?

I was the investment banking stepchild who joined the operating group – though I’ve since been joined by David Puth [executive vice president and head of investment research, securities finance and trading activities], who came from JP Morgan Chase & Co. I was the only woman there, too. It’s like waking up one morning and finding out you have seven or eight brothers. There is tremendous camaraderie.