The Common Thread Between Bankers, Doctors and Enterprise Risk Management

One of my favorite books on enterprise risk management theory is a book titled, "How Doctors Think" by Jerome Groopman, M.D. The book isn't actually about ERM, but it provides helpful insight into how you and I think. In his book Groopman points out that most doctors will make a patient diagnosis in less than one minute. They will ask the patient a few questions, observe his or her physical appearance and perhaps go on to run other tests. However, the mental conclusion of the doctor many times has already often been drawn.

The reality is that many of us in business and in banking think the same way. We diagnose the quality of a loan, or a problem with the operation of the bank, or our ability to meet a compliance requirement in a matter of seconds. Our thought process is driven primarily by our own personal experience. We might take more risk when we have had good experience or more knowledge in a particular industry. When we know the people involved we might take more or less risk with a vendor than we would otherwise. When we have had a hand in building a certain process, we are more likely to expect the process to work as designed. When we have hired certain people, we are more likely to have more faith and trust in that person than otherwise would be prudent. This is a natural human nature.

Many decisions in our community bank are made by the senior officer in charge of that area without much outside input. This approach can be very powerful and rewarding when decision makers are thorough, intuitive and experienced. However, often this silo based decision making can leave dangerous blind spots that only someone with outside perspective can see. At a minimum, when decisions are left in the hands of one key officer these decisions are subject to the 60-second rule above. 

Regrettably, in some cases no one takes responsibility for decision making. Recently I interviewed all three levels of management within the lending function of one community bank. Each officer reported proudly that they were "hands off" managers. Each level communicated the benefits of empowering their people to make key decisions. At the end of the day no one took responsibility for managing the details. Unfortunately, the organization was strapped with the fruit of this approach. You can imagine that the outcome was not pretty. Some would say that committees solve this problem, but in many organizations we all know that the committee is likely to agree with whatever the senior officer (to whom most of the committee reports) wants to do. Committee decision making is often what accountants call "form over substance".

Enterprise risk management for our community banks helps to solve this problem. ERM provides better perspective. ERM provides a governance structure that supports bringing collective thinking of key decision makers to bear on every key strategic decision, risk management decision and resource allocation decision for the organization. ERM provides focus on key decisions. It lessens the focus on individual decision making. This approach reduces risk for individual decision makers and the bank. Collective thinking and ongoing measurement of key risk indicators provides better and more thorough perspective to the Board. More thorough analysis and better perspective provide better long-term decision making. Agreement on priorities across the organization provides better deployment of resources. Both of these improvements result in reducing the barriers between strategy and execution.