How do your organization's risks stack up? Lessons learned from the financial meltdown.

• Author: Lemieux, Victoria
• Position: Cover story

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In the wake of the economic meltdown, all industries are paying closer attention to how they can minimize risks. Records managers have an important role to play in developing a strategy to protect their organizations' information assets.

As marked by the recent growth in the number of publications related to information risks, records managers have increasingly begun using risk management principles and practices to make decisions about retention periods, destruction of records, and technology spends, as well as to protect vital records and ensure business continuity.

Risk management is also a framework through which records managers can demonstrate value to their organizations (e.g., by showing how effective records management can help organizations avoid or mitigate risks, such as litigation risk). Many organizations have established risk management oversight groups, with which records managers may have to interact in performing their functions.

For these reasons, lessons learned about risk management from the financial crisis are as relevant for records managers as they are for bankers or banking supervisors.

Recapping the Global Financial Crisis

The first obvious signs of trouble occurred well before the September 2008 collapse of Lehman Brothers, generally accepted as the point at which global financial troubles escalated into crisis mode. In March 2008, Bear Stearns was pushed into the arms of J.P. Morgan Chase for $2 per share, sending an early warning of things to come. By the time Lehman Brothers collapsed, the crisis was truly under way.

After Lehman failed, no financial institution seemed safe; lending froze and global economies went into economic meltdown. This forced the U.S. Federal Reserve to open its discount window for the first time since the Great Depression. Central banks around the world cut interest rates to historic lows. Most shocking was the spectacle of the U.S. and UK governments taking stakes in banks.

Thus began the search for explanations for what went wrong and plans to introduce new regulation to ensure "this will never happen again." These efforts offer a number of valuable lessons on managing risk--lessons learned the hard way.

Lesson I: Identify risks--search for the unknown unknowns.

One of the lessons to be learned from the global financial crisis is that we do not always see "black swans,"--a term Nassim Nicolas Taleb uses to refer to fortunate or unfortunate high impact, random events; that is, we do not always see risks. This requires understanding much more about the processes by which risks are identified--not only in relation to methodologies or frameworks but also in terms of cognitive processes.

The banks' success relied upon the quality of managers' risk analysis. Yet, in hindsight, though the stakes were high, managers' risk decisions suffered from huge blind spots, which spawned grave consequences...