Former Head of Risk at the £25bn Wellcome Trust, Sarah Fromson on how technology widens risks

She retired from her full-time role at the Wellcome Trust just weeks ago, but Sarah Fromson has already built up a fulsome portfolio career, with four current roles and another on the horizon. She’s a NED and Audit Committee Chair of asset management firm Arrowstreet Capital, Chair of JP Morgan’s £400 million-plus Global Emerging Markets Income Trust, and on the board of the Wellcome Pension Plan whilst her latest, Nurole-appointed role, is a Non-Executive Directorship at venture capital trust Baronsmead Second Venture Trust.

You were at the Wellcome Trust for 12 years, and covered investment and operational risk as Head of Risk at the charity: what changed during your time there?

When I first arrived at Wellcome, the focus was on VaR [Value at Risk] - at that time, it seemed to be a unified measure of investment portfolio risk. But, after it was discredited during the financial crisis, (when outcomes diverged from that forecast by historical models), VaR as the holy grail of models lost its credibility.

We moved on to using a more holistic approach to risk management, focusing on cash flow forecasting, equity and other market factor exposures, currency, diversification, and the expected ability to withstand inflation.

The other side of portfolio risk is the operational aspect - that’s always been there, but historically many people forgot about it or thought it less important. Yet the operational side - where you can lose money because you have either exposure to a fraudulent player or because people make mistakes and don’t conduct executions or transactions appropriately - is something you always have to guard against.

How can you plan for ‘bad apples’?

It’s obviously difficult to assess people - and reading Malcolm Gladwell’s Talking to Strangers has highlighted to me how we think we’re better at doing that than we are - but it’s vital. The risks of technology have expanded the damage that a fraudulent, mistaken or negligent internal or external player can carry out. We used to worry about a [Bernie] Madoff situation, where one very senior person could unleash havoc, but now even a junior person can cause so much harm. So we need to build systems and processes, and IT barriers to help a firm to screen out problems, catch any that arise, and be resilient afterwards.

How can smaller-scale businesses or start-ups deal with risk without the resources of major firms?

Risk management is not about always reducing risk, it’s about accepting the risks you want to take, whilst thinking about how to manage them and what they could do to you. So I’d recommend a CEO sit down with their most senior colleagues and a blank sheet of paper and think: what are my firm’s biggest risks? Perhaps not achieving a strategic objective; regulatory or tax problems, reputational damage; financial losses. Then, what are you all doing about these? Who’s doing it - and by when? What is the cost?

Most business owners will be thinking about these issues late at night and early in the morning anyway, but that piece of paper will bring everything together and give focus as to where to apply their energies.

There’s growing talk about environmental, social and governance (ESG) risks - which are potentially huge but sometimes hard to reconcile with traditional investor aims. How can firms do so?

Yes - the traditional view was that investors bought shares in companies and shareholder value maximisation was a firm’s only goal. But over recent years it’s become very clear that companies have a wider group of stakeholders. However difficult it is to balance the needs of those various groups - who include suppliers, employees, customers, providers of long term capital (equity and fixed income), regulators and the greater world outside - they have to do it, or they won’t, over time, be a sustainable business.

The challenge for investors is what to do about it, because they need to weave this way of thinking into portfolio construction whilst the evidence on how this leads to extra returns is, at the moment, very limited.

I think the main thing to highlight to investors is that factoring in ESG risks should allow you to cut overall risk level in portfolios - which in turn, reduces potential loss making areas. As a risk manager, that’s key. Recognising ESG risks may not add to returns, but they’ll improve your risk profile, so they need to be incorporated into your investment management approach.

You took two years out of your career to be a full-time parent; whilst your kids are now much older, can you look back and pass on any tips for working parents?

Enjoying the time when they’re young and, if you’re able to, take shared parental leave - because those times never come back. But also, stay in contact with the office whilst you’re out of commission or do some part-time work - as much as you can.

You’ve undertaken a host of charitable work including at a Cambridge University College and local charities; beyond the clear benefit to those organisations, how has it been good for your career?

It’s win-win: you feel good for having done it, you do some good if you choose a charity where your skills and interests match, and you gain experience in either the executive functions or in a chair or non-exec role. You learn about new areas, such as governance and making what are usually very limited resources go as far as possible; value for money, and impact. All of those make you more attractive in the commercial working world, too.

How was your Nurole experience?

Excellent. The roles are all laid out and it’s a great, intuitive system to navigate. Nurole, I think, is particularly useful for those (including some women) who may feel they’re worried about putting themselves forward. Applying online rather than making that call saying ‘I’m here! I’m great!’ is considerably more appealing.

And now for some quick-fire questions...

What’s your favourite book?

My favourites change over time - currently loving "Girl, Woman, Other", Bernardine Evaristo’s new Booker prize-winner.

Favourite quote?

’Nothing new under the sun…’ from the ancient wisdom of Ecclesiastes.

Favourite holiday?

Walking with my husband in Yellowstone National Park.

What do you do to have fun?

Go to the theatre or play with our grandchildren.

Favourite app?

Offtime [notification-blocker for phones], to stay sane.

When does your alarm go off and how many hours of sleep do you have on average?

6am, with 6-7 hours' sleep.

When did you last cry?

At our daughter's wedding this summer.

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