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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A chief risk officer (CRO) at a diversified financial group reports functionally to the CEO but also has a direct, unrestricted line to the board risk committee, and the committee alone approves the CRO's appointment, removal and compensation. A director argues this is excessive and that the CRO should be accountable only to the head of the largest business line to keep risk aligned with strategy. Which assessment is most consistent with sound risk governance?

The director is incorrect. A CRO with direct board access and board control over appointment, removal and pay is independent from revenue-generating units, which protects the risk function from pressure. Reporting to a business head creates conflicts of interest and weakens challenge of risk-taking.

  1. AThe director is correct, since alignment with the largest business improves risk decisions
  2. BThe director is correct, provided the CRO also has authority to approve all trades
  3. CThe director is incorrect, because the arrangement protects the independence and stature of the risk function from pressure by revenue-generating unitsCorrect
  4. DThe director is incorrect, because the CRO should report only to regulators

Explanation

Sound governance requires the CRO to be independent of revenue-generating units, with board access and board control over appointment and pay. Reporting to a business head creates conflicts of interest. Approving all trades would make the CRO part of first-line decisions and blur ownership; reporting only to regulators is not standard.

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