Is Accenture out of the Woods? A Brand at Risk

Accenture has dumped Tiger Woods, and is peeling his image off airport billboards and train platforms as fast as possible. It would appear that Mr. Woods is not the poster child of ‘high performance’ and ‘excellence’ that Accenture promoted.
A cynical ad agency exec we know says “They got there money’s worth for years”. For him, what Tiger Woods did or did not do isn’t the point as much as the measurable value of the sponsorship. Is he right? What is Accenture’s vulnerability to the allegations and the recent behavior of Tiger Woods?

You must read Frank Rich's post (written after ours) -- a terrific piece naming Tiger the 'man of the year'. He references Accenture:

Perhaps the most conspicuous player in the Tiger hagiography business has been a company called Accenture, one of his lustrous stable of corporate sponsors. Alas, the many billboards with slogans like “Go On. Be a Tiger” are not so easily dismantled, and collectors’ items like “Accenture Match Play Tiger Woods Caddy Bib” are a growth commodity on eBay.

One would like to assume that Accenture’s failure to see or heed any warning signs about a man appearing in 83 percent of its advertising is an anomalous lapse. One would like to believe that business and government clients didn’t hire Accenture just because it had Tiger’s imprimatur. But in a culture where so many smart people have been taken so often, we can’t assume anything

They built their brand on his shoulders. What does that say about their judgment? Did they vet him appropriately? Worse -- did they know he was what he appears to be – perhaps condone it and align with him anyway? Will their clients continue to associate his face as the face of Accenture now that his mask is off?

Either way, Accenture made four tactical errors in their use of Tiger Woods in their decade-long relationship with him:

1) Accenture made the brand building of Tiger Woods an equal part of their own brand building. When one of these two ships starts sinking, it could take the other down with it. Can Accenture sell ‘high performance’ solutions as its own brand and not as a jointly branded effort?
2) Accenture tied their brand to a living, young celebrity/personality. There’s a reason that some firms use long-deceased icons like Abraham Lincoln or George Washington as brand identifiers. Other firms use animals like geckos or lions as brand identifiers for similar reasons.

3) Accenture failed to see how over-extended Tiger’s brand is, endorsing products for Nike, Gatorade, Gillette, Buick, Titleist, American Express, Rolex, General Mills, etc. If Accenture and Mr. Woods really are high performance players, would an Accenture staffer who wore Nike shoes and a Rolex watch be an even higher performance systems integrator?

4) Accenture has overstayed its joint branding with Tiger by a few years. Had anyone asked “How long should this partnership last?” “When does the risk (and cost) start to outweigh the benefit of continuing this relationship?”

Tying a company’s brand to a celebrity is always risky. Celebrities are human and they suffer the same foibles that you and I do. They get addicted to sex, gambling, food, drugs, etc. They can have bad parents, bad parenting skills, bad kids, etc. They get photographed in unflattering poses, places, etc. Psychology Today succinctly opines on Tiger’s actions as being relatively natural.

Celebrity endorsements are ripe for trouble and few celebrity endorsements can last a long time.
If you sell soda pop it can be damaging. If you sell acumen and judgment it is far worse. Accenture must learn to market and promote itself without the crutch of a celebrity. Accenture needs to make its solutions and abilities (not the golfing industry) sexy and exciting. In his blog, Brian Sommer (ex-Accenture) probes this topic in-depth. High performance is something that potentially exists in all of us. Maybe Accenture can focus more on how they draw that out and bring it to bear on client projects.

Booz & Co // Schlepp Airlines

A new report by the consultancy Booz & Co has, unsurprisingly, called for a return to basics in risk management and a restoration of what it calls “a strong risk culture”. Booz says businesses need to build in three lines of defence: in the front office, where “sustainable risk-return thinking” must prevail; in the wider business, where risk managers need enhanced authority; and in internal audit teams, whose risk management skills need to be improved.

On a UK blog Schlepp Air is the metaphor to drive the point home.

Sometimes we like risks to be taken seriously. This is a touchy subject in the banking sector right now. These are not great days for the reputation of financial risk managers. Their “value at risk” models first lulled bankers into a false (and perilous) sense of security, but are now causing the financial system to seize up.

Brown's ineptitude

Fiery blog post from UK:

Had Brown not been seduced by the siren songs of his exclusively banking sector advisers during the crisis, we would not now face the problem we face today. Brown's utter fiscal ineptitude must now be clear for all to see; why the nation ever permitted this greasy-haired Scots technical college lecturer to meddle with the nation's finances will be a puzzle future generations will not comprehend.

More

Hong King Workshop " Developing Financial Talent for the Next Decade "

At the Advisory Committee on Human Resources Development in the Financial Services Sector (FinMan Committee) in Hong Kong, government rep Julia Leung, summed up the takeaways from a talent development point of view in this post crisis world. She highlighted that there should be more emphasis on risk culture and risk management in training. "We need to train people who can think laterally, strategically with holistic views on markets, and their interconnectedness in a global context, well versed in both the Chinese and international ways to maintain our international markets with Chinese characteristics¨

Vulnerability in some organizations: Inadequate risk governance.

In a good article in Financial Executive last month, Joe Atkinson outlined which companies staved off catastrophic losses : those that addressed risk issues promptly, delineated clear roles and accountabilities and implemented a risk culture that encouraged discussions of risk between the business and risk control functions.

He says that, regulatory reform aside, achieving true risk resilience needs effective risk governance--the structural, cultural, process and accountability improvements that support good decision-making and serve as the foundation of risk management. Only with a strong foundation in place can companies navigate regulatory and economic challenges.

Asian perspective on lessons learned – or not – from the financial crisis

Senior risk managers at AsianInvestor's Southeast Asia Investor Forum last week spoke about the lessons learned – or not – from the financial crisis

Chris Michel, Hong Kong-based chief risk officer at equity brokerage CLSA Asia-Pacific Markets. In reality, he says, an over-reliance on such mathematical risk models may have contributed to the financial crisis. The perception in the market that the increasing complexity of financial products was matched by increasingly sophisticated techniques for measuring and controlling risks is inaccurate.

Panellists discussed how risk governance and enterprise risk management has been propelled to the forefront in light of the financial crisis. Dennis Lee, chief risk officer at the National University of Singapore said that risk management needs to be embedded as part of "business as usual", and not relegated to a compartmentalised function performed by a few.
Hw says that it is even more crucial now to have independent risk functions -- such as the CRO or entire risk department -- to help management embed a risk culture.

Balancing Enterprise Risk Management and Enterprise Performance Management

In reviewing how and why Risk Management Processes failed, the GSMI includes several steps companies can take to develop a more effective approach to risk management. Included are suggestions for creating a more effective risk management culture.

They say that risk management needs to have a prominent place in the overall corporate agenda and be reinforced regularly to have sufficient power to drive the organization. An integrated risk culture will enable companies to assess risks and identify those for which controlling and mitigating actions are most warranted. Companies should also recalibrate incentive structures to ensure rewards encourage behaviors that create long-term shareholder value rather than focusing on the short term. Embedding these processes in an organization will enable companies to more consistently and effectively implement their chosen level of risk tolerance across the enterprise.

Benchmarks to gauge your own risk management practices

The key to good risk management is management.

Risk culture is one arguably the key to achieving enterprise risk management throughout the organisation. However, the declared and desired common values of a risk culture may differ widely from the taken-for-granted assumptions of the
workplace culture and the way that things happen in practice.


The COSO draft risk management framework aims to provide a benchmark.

Our friends at auditteam.org publish in detail against which they can gauge their
own risk management practises.

Topline pointers:


1. Risk is a double-edge sword – Management in essence must be optimising risk and notv necessarily minimising it.

2. Embedding the risk management framework across the whole organisation in a consistent and meaningful way.

3. Aggregating risk exposures – so that the aggregate risk exposure at the entity level does not exceed the risk tolerance of the organisation.

4. Risk reporting and communication – that is sufficient, regular and adequate

5. Risk management process – to establish which are not working
satisfactorily.

6. Creating the right risk culture – a set of shared attitudes, values and practices that characterise how an entity considers risk in its day-to-day activities.

7. Learning from risk events – enabling management to stress test their own processes

8. Risk fatigue – Maintaining a heightened sense of risk awareness is, however, easier said than done

9. Reviewing the risk management unit – the right people performing their work in a professional manner.

Pathology of a Crisis

I hope you all saw this article by Eric Dash in the NY Times today.
Pathology of a Crisis - causes of death: toxic loans.

Actually Mr Dash cites 2 causes :

- poor credit underwriting standards (toxic loans), and
-regulators asleep at the wheel (they saw it but did nothing about it)

However, these are not, Mr Dash, the causes of death of the banks. These are merely the symptoms of the illness.

The cause of death in banking has been the lack of an appropriate risk culture (appetite, tolerance and governance) in the banks and at the regulators.

Until this is recognized as the fundamental flaw in the financial services industry today, then they will go back to doing the same old stuff as before.

Unfortunately, Mr Geithner had his chance to change this, but has listened too much to Wall Street.

A real shame.
http://www.nytimes.com/2009/11/19/business/19risk.html?_r=1&ref=todayspaper

Lehman's Moral Compass

Is what killed Lehman Dick Fuld's emasculation of the risk management function? Risk management served as Lehman's moral compass, and when it went the firm went, as described in this amazing recap of the collapse by David Fiderer

His article centers on The Greatest Trade Ever, by Wall Street Journal reporter Gregory Zuckerman, who describes John Paulson’s plan to give irrational exuberance an extra boost by directing his banks to originate new CDOs that Paulson & Co. could essentially bet against.

He made no secret of his belief that the CDOs’ subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities, which had been ignored by the rating agencies, Paulson could collect up to $5 billion.



The Greatest Trade Ever doesn't dwell on was an open secret: Everyone knew that subprime lenders aided and abetted mortgage fraud. To my knowledge, the only investment banker who wrote candidly about the subject was Joseph Tibman, who was at Lehman when it collapsed, and wrote The Murder of Lehman Brothers: An Insider’s Look at the Global Meltdown. Tibman believes that as much as anything, what killed Lehman was Fuld's emasculation of the risk management function, which served as a moral compass.

London Calling: "The threat of risk is an opportunity to be embraced"

Cass Business School will offer an event covering "Developing a risk culture to meet uncertain futures" in January.

Richard Baker (ex-KPMG’s Enterprise Risk Management practice) and Gary Pass (consultant in learning and sustainable change) helm. Baker runs Caerus Consulting. In Greek mythology, Caerus was the personification of opportunity, luck and favorable moments. He was depicted with only one lock of hair. His Roman equivalent was Occasio or Tempus.

Event detail:
"The ability of executives both to manage risk effectively and govern good risk management practices is problematic. Common practice often leads to erroneous measures, ineffective responses, costly mistakes or - worse - leadership lip service.

A complex interdependence between natural and human systems challenge conventional notions of management control. Developing a risk culture demands leadership that engages the wider organisation in a new way of thinking. Its aim is to identify develop new responses, processes and practices, which treat the threat of risk as an opportunity to be embraced. "

RMA Webinar on Risk-Aware Culture

The RMA steps in after a few months to add this topic to its roster.

A webinar on "Creating a Pervasive Risk-Aware Culture throughout the Organization" runs in December.

Overview: The financial crisis provides an opportunity to re-evaluate an organization. Raising the bar on an institution's risk awareness is a critical step in re-establishing success. Creating an environment that rewards, supports, and sustains a risk-aware culture requires reviewing the risk management framework including governance, leadership, oversight, and risk appetite.

Anthony P. Ciavarelli will host. He is President and Chief Scientist at Human Factors and recent author of "The Relationship Between Safety Climate and Recent Accidents".

Let's assume he believes the recent Wall Street meltdown was no accident too.

His interests are Human performance in complex systems, operational performance measurement, team and organizational effectiveness assessment, human perceptual processes, human factors in design, and training technology and skill acquisition.

Participants in the course will learn the fundamental principles of human risk-taking behavior, with consideration to individual, work group, and organizational factors that influence risk decisions. The class will end with an exercise in which participants apply a Risk Culture Assessment Instrument to their individual organizations.

This course is designed to:
Define individual, work group (team), and organizational risks.
Discuss selected industry cases and causes of organizational failure.
Develop an understanding of organizational climate and "risk culture" factors.
Learn about risk culture, organizational performance, and failure.
Distinguish between qualitative and quantitative risk culture assessment methods.

Sign on

Ethical -- "If"

A recent article attempts to outline a plan for creating an ethical business culture in six steps:

Establish an enforceable code of conduct.
Initial and ongoing training.
Regular communications.
Anonymous reporting hotline.
Enforcement/Action.
Rewarding employees that live the culture.

Author Greg Heaps writes that a company that follows this “will be rewarded with the risk of less risk, less fraud, less litigation, and happier employees.”
On the whole, this sounds as reasonable as any plan can be before you actually try to implement it. But.....this last concept of rewarding employees that live the culture. Do we really need to reward those who behave appropriately with a treat? When did we become puppies who sit, or kids who do their homework?

The reward of ethical behavior is to keep your job and continue advancing your career. You don’t deserve a cookie.

Read Six Steps to Creating an Ethical Culture

Numbers lie.

Good piece in Mother Jones on "How You Finance Goldman Sachs’ Profits" The gist:
This summer's record bank profits are essentially created by massive federal funding. To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Read On

The Great American Bubble Machine

A look back at this summer's Rolling Stone article about a different type of rock star: the Goldman Sachs investment banker.

The article, called "The Great American Bubble Machine," was written by Matt Taibbi. In it, he viciously attacks Goldman Sachs through a series of arguments, blaming the bank for engineering virtually every bubble, and pseudo-bubble, that has plagued the economy over the past hundred or so years.

This review is followed by terrific letter to the editor banter

Gordon Brown's Bubble

Amazing to read some of the frozen-in-time commentary from Q408 when the sky was falling. This from UK in 9/08


Financial crisis: It was Gordon Brown's bubble that we saw burst

By Norman Lamont

Shortly after I became chancellor of the exchequer in 1990, I had a meeting with my Japanese opposite number, a charming, able man who insisted on speaking English without an interpreter. His English was better than my non-existent Japanese, but I could hardly make out a word he said. Eventually, leaning forward, I was able to discern one phrase endlessly repeated: "the bursting of the bubble".
Over the years, I met many Japanese ministers. The speech was always the same because the pain lasted a long time.
What we have been seeing is the bursting of the Brown bubble.
This is not the import of some problem from the US to Britain. America has had its own bubble, but so have we in the form of the highest personal debt per capita in the G7 combined with an unsustainable rise in house-prices, which we conveniently chose to confuse with prosperity.

Full Post

"There Is No Security on this Earth. Only Opportunity.” Douglas MacArthur

What would a truly effective risk culture look like?
Musings from February 2006 that resonate today.....


2006: A Deloitte white paper encourages those involved in risk management to ‘imagine the unimaginable’ when assessing potential risk to an organization. The key requirement for the success of this effort is the fostering of ‘a holistic and integrated risk management culture’.

Certainly the world can be perceived as a frightening place. It is hard to argue that bad things don’t happen. This is a conversation that engenders a very dangerous human emotion in the process of rational decision making: fear.


Much of the literature and many of the consulting firms admonish organizations to develop a ‘risk management culture’. Apparently this culture would be developed through the education of all members in the organization to be aware of identified hazards and to be on the lookout for potential problems that are likely to have negative consequences.

People understand risk, they manage it every day. This understanding, however, tends to be defined by their responsibilities in the organization. Therein lays the central task for risk management. Business managers have a depth of knowledge and understanding of the products or services they want to offer, but are likely to have little understanding of the operational environment necessary to deliver them. Operational managers (Legal, Tax, IT, HR, Facilities, etc.) have knowledge of their area of expertise but may lack an understanding of how it specifically applies to the desired product or service. The element that unites their efforts is the business strategy.

Simply focusing on growth as defined by quarterly financial statements is not sufficient. Management teams must understand the priorities of the organization, the rationale for funding certain projects and not others and the results that are expected in a variety of metrics form customer satisfaction, market penetration, efficiency and transparency, etc. It is only when these conditions exist that an awareness of risk (risk defined as not only hazards but also opportunities and uncertainties) can be added to the existing culture.

Cultures exist. The task is to add a more conscious awareness of risk
In this environment, risk and the management of it can be understood as essential to the growth of the business. The risk management function becomes an element that unites the various disciplines in a common effort. In this context, mangers can be motivated to not only describe and report threats and hazards to the strategy, but also opportunities and uncertainties that, if embraced can have a positive effect.




These excerpts are from Bill Sharon, CEO and Founder of Strategic Operational Risk Management Solutions who focuses on streamlining operational environments in the service of the business strategy. More at

After the storm: A new era for risk management

Interesting piece reviewing where we've been and what is to come in the way in which financial institutions identify, assess and manage risks.

As Mikhail Fedorov sees it, the crisis has exposed the shortcomings of a whole host of risk techniques, and major soul-searching is now underway to ensure that the risk and controls functions in financial institutions will be more robust, authoritative and accountable in future.

According to the latest Financial Stability Report from the International Monetary Fund, global bank losses are likely to exceed US$4.1 trillion. In March 2009, the Economist Intelligence Unit conducted a global survey to assess how risk management is changing in the world’s financial institutions. Key findings from this research include the following:

We are seeing an erosion of confidence and a retreat from risk. The survey reveals an industry that appears shell-shocked by the events of the past 18 months.

Transparency is a common theme to proposed reforms.

Reforms to risk management within institutions will be far-reaching and comprehensive.

Culture, expertise and data are the weak points in companies’ risk management.

Respondents lack confidence in the ability of supervisors to formulate the right response to the crisis.

Read the full report here

Where's Dwight David Eisenhower when we need him?

Straight from Les Leopold's The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It

It's great to know that during the worst economic crisis since the Great Depression, the wealth of the 400 richest Americans, according to Forbes, actually increased by $30 billion. Well golly, that's only a 2 percent increase, much less than the double digit returns the wealthy had grown accustomed to. But a 2 percent increase is a whole lot more than losing 40 percent of your 401k. And $30 billion is enough to provide 500,000 school teacher jobs at $60k per year.
Collectively, those 400 have $1.57 trillion in wealth. It's hard to get your mind around a number like that. The way I do it is to imagine that we were still living during the great radical Eisenhower era of the 1950s when marginal income tax rates hit 91 percent. Taxes were high back in the 1950s because people understood that constraining wild extremes of wealth would make our country stronger and prevent another depression. (Well, what did those old fogies know?)
Had we kept those high progressive taxes in place, instead of removing them, especially during the Reagan era, the Forbes 400 might each be worth "only" $100 million instead of $3.9 billion each. So let's imagine that the rest of their wealth, about $1.53 trillion, were available for the public good.

What does $1.53 trillion buy?

-- It's more than enough to insure the uninsured for the next twenty years or more.
-- It's more than enough to create a Manhattan Project to solve global warming by developing renewable energy and a green, sustainable manufacturing sector.

-- It's more than enough to endow every public college and university in the country so that all of our children could gain access to higher education for free, forever!
Instead, we embarked on a grand experiment to see what would happen if we deregulated finance and changed the tax code so that millionaires could turn into billionaires. And even after that experiment failed in the most spectacular way, our system seems trapped into staying on the same deregulated path.
Instead of free higher education, health care and a sustainable economy, we got a fantasy finance boom and bust on Wall Street which crashed the real economy. We have our 400 billionaires, and we have 29 million unemployed and underemployed Americans. We have an infrastructure in shambles. We have an environment in crisis. We have a health care system that would make Rube Goldberg proud. And we have the worst income distribution since 1929.

I hazard to guess that each and every Forbes 400 member could get by with a net worth of $100 million. I don't think that would kill their entrepreneurial drive or harm our economy--in fact it would be a major boon to the economy to step back from the edge of such massive concentration of wealth. The real problem is getting there form here. A wealth tax that kicks in when you become worth more than $100 million would be a good start. The Eisenhower tax rate on adjustable gross income over $3 million a year would help as well.

And please let's not call it socialism, now that we've placed the entire financial sector on welfare to the tune of over $13 trillion in subsidies and guarantees. (By the way, the yearly budget outlays for means tested programs for low income citizens is about $350 billion per year. So Wall Street's welfare is about 37 times as large as welfare for poor.)

So if narrowing the income/wealth gap isn't socialism, what is it? It's the America that thrived in the 1950s and 1960s. It's the America that created a middle-class and vowed never to let the financial gamblers return us to another depression. It's an America that put its people to work and built an infrastructure that was the envy of the world.

Read more

"Identifying the next emerging risk"

There is now a broad consensus that the credit crisis was sparked by a lack of appreciation of the risks being taken within the financial sector — and the wide-ranging impact they could have. Scarred by this experience, many businesses are upping their game in all aspects of risk management.

One question which continues to vex them however is how to spot the next big emerging risk.

The answer starts in an excerpt from leading expert John Farrell of KPMG

Many businesses around the world are currently considering how they can improve their capabilities for identifying that next big emerging risk — long before it has time to manifest itself into something truly damaging and destructive.

However, I believe that much of the thinking in this area may be misdirected. Too many organizations are looking for that magic solution; the silver bullet which will home in on the gravest danger and eliminate it with a minimum of fuss.

They are wasting their time. There is no switch which can be flicked, no toolkit which can be installed, no crystal ball which can be relied upon. Rather, companies should seek to better understand their own risk capabilities as the answer lies within their existing risk management frameworks and risk culture. These should be redirected and refocused — as many businesses appear to be currently looking in the wrong places.

Emerging risks do not appear as a dust cloud on the horizon; something which the most eagle-eyed observer with the best telescope might hope to spot. Instead, these risks frequently emerge from within — as a direct consequence of management actions. The trick therefore is having the thinking and techniques in place to consider all the possible risk ramifications which can arise from key business decisions......

......One of the best ways to deal with this is in enhancing and refocusing existing capabilities within an organization; it is nothing new. Perhaps the biggest risk we actually face is that too many businesses might not realize this.

And tip of hat to Sohan Dhande for his excellent blog post(s).

The Self-Actualizing Aspect of Ambivalence in Late Modernity

If Individuals Are To Organize Their Own Relation To The Encompassing Social World, A Maximum Of Reflexivity Is Required

In Modernity and Self-Identity, Anthony Giddens uses the term risk culture. He does not mean that social life in modern society is any more risky than it use to be. Rather, he states:

“modernity can be understood as roughly equivalent to the industrialized world.” In this sense, both the industrialized world, or, the social relations implied in the production processes of technology, and, capitalism, which for Giddens means “a system of commodity production involving both competitive product markets and the commodification of labor power,” come together to form a risk culture.

In other words, for Giddens, risk and reflexivity, on an individual level and on an institutional level, are the essential ingredients of modernity. Whereas in traditional cultures social environments were more stable, change was routinized, and, the need to calculate outcomes for possible futures were minimized, in modern culture, if individuals are to organize their own relations to the encompassing social world, a maximum of reflexivity is required. In the setting of modernity, the connection of the personal with social change takes place in the reflexive process of self-identity.

Colm Kelleher on Risk Weighting

Interesting interview with Colm Kelleher, Morgan Stanley’s CFO

Colm thinks higher capital requirements are coming, by way of increased risk-weightings, and he also thinks a hard leverage cap, maybe in the 20x range, will become a reality.

Read on:

The end of “too big to fail”

Excellent article delving of the implicit moral hazard posed by our current financial system, and the history of financial crises, and what it might all mean.

Please read and look forward to your comments.

"An Ounce of Prevention" by David A. Moss

The magnitude of the current financial crisis reflects the failure of an economic and regulatory philosophy that proved increasingly influential in policy circles during the past three decades. This philosophy, guided more by theory than historical experience, held that private financial institutions not insured by the government could be largely trusted to manage their own risks—to regulate themselves. The crisis has suggested otherwise, particularly since several of the least regulated parts of the system (including non-bank mortgage originators and the major broker-dealer Bear Stearns) were among the first to run into trouble. Former Federal Reserve Chairman Alan Greenspan acknowledged in October 2008, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”



From Crisis to Calm
Of course, financial panics and crises are nothing new. For most of the nation’s history, they represented a regular and often debilitating feature of American life. Until the Great Depression, major crises struck about every 15 to 20 years—in 1792, 1797, 1819, 1837, 1857, 1873, 1893, 1907, and 1929-33.

But then the crises stopped. In fact, the United States did not suffer another major banking crisis for just about 50 years—by far the longest such stretch in the nation’s history. Although there were many reasons for this, it is difficult to ignore the federal government’s active role in managing financial risk. This role began to take shape in 1933 with passage of the Glass-Steagall Act, which introduced federal deposit insurance, significantly expanded federal bank supervision, and required the separation of commercial from investment banking.

The simple truth is that New Deal financial regulation worked. In fact, it worked remarkably well. Banking crises essentially disappeared after 1933 (see chart), without any apparent reduction in economic growth. Not only was the period of 1933-1980 one of unusually strong growth, but the growth was broad based, associated with stable or falling income inequality, rather than with the rising inequality that took hold after 1980.

Perhaps even more striking, America’s post-Glass-Steagall financial system soon became the envy of the world. Although critics had warned that the forced separation of commercial from investment banking could undermine the nation’s financial system, American financial institutions from Morgan Stanley to Goldman Sachs dominated global high finance for the remainder of the century.

Read "Ounce of Prevention" from Harvard magazine.

Doomed by Human Institutions

Interesting OpEd in the WSJ on the topic of systemic risk. Peter Wallison argues that "piling yet more responsibilities on the Fed would bury it, and raise the question of whether we are serious about discovering incipient systemic risk..... "

Wallsion says "it is simply too much to expect any human institution to step outside of itself and see the error of its ways when it can plausibly ignore those errors in the short run."

The buck has to stop somewhere. Institutions must police themselves. Wallision says " to set a thief to catch himself is quite a different matter". If that is so, we are doomed.

full article

Risk Management Certifications are a Selling Point

In the financial sector, risk management positions are in demand, and a certification gives you credibility. More and more business schools are moving away from corporate finance and investment banking subject areas and into the risk management arena -whether its insurance risk management or bank risk management.
The problem is we now have a growing number of "certifications" and no current way of comparing the best and the most relevant. However, creating an industry benchmark for risk knowledge -or a series of benchmarks - is a good step in the right direction.

http://www.nytimes.com/2009/08/20/education/20FINANCE.html

Towers Perrin Study Focuses on Risk Culture

Two key pillars are emerging as supporting components of ERM: risk culture governance and risk-based decision making. Risk culture, a component organizational culture, embodies an interactive system of values and normative behaviors. Leadership can shape risk culture to influence appropriate behaviors that help the organization achieve its goals and embody its values. But to understand the current baseline or measure progress of cultural change, an assessment tool or process is required.

The study states that to be effective, Risk Culture assessment needs to focus on two key categories:

Values and Ethics - the core principles that drive behavior. Are the values of the organization clearly defined and communicated adequately? Does the culture support risk awareness?

Internal policies and practices - the application of values and ethics. Is the culture open to challenging tradition and implementing new ways of doing things? Do employees feel it is safe to speak up? Is talent management in place to retain experienced employees? Do leaders show commitment to values and ethics through their actions? Are roles and governance structures in place to manage risk?

The Danger of "Assuming" Risk

Former Barclays salespeople speak out in a recent Daily Mail article. One salesman says the emphasis was all on the numbers - how many meetings you could make and how many accounts you could close:

"I now feel we were misled about the risks. I shouldn't have trusted what we were told, but you just assumed that someone would have done their research and known the risks.

If we failed, Barclays would take the money we generated. For me, this created a culture of selling for the sake of selling rather than doing what's good for the client. I just couldn't do this any more."

Consider the impact that a "sales culture" can have on a risk culture...

Read more: http://www.dailymail.co.uk/money/article-1195075/Barclays-salesmen-lift-lid-fleece-customer-culture.html#ixzz0OTLKPrO0

The Father of Risk

Peter L. Bernstein, one of the finance world’s foremost experts on the nature of risk, passed away at the age of 90.

Perhaps Bernstein’s most enduring contribution to the finance world his clear and concise explanations of the nature of risk, making the concept of risk directly relevant to modern portfolio selection in a way non-academics, and Wall Street movers-and-shakers, could easily understand.

Read more about his life and works.

Mr. Bernstein and the late Robert L. Heilbroner wrote together. They were lifelong friends having met in first grade at the Ethical Culture School and moved on together to Horace Mann and then Harvard, graduating in 1940 with degrees in economics. Like many others of their era, they were Keynesians, and they argued that public spending was necessary for a healthy market economy. They also argued that government’s role in the economy should not have been curtailed as President Ronald Reagan sought to do in the 1980s, when he argued that the deficit was too large to maintain public spending. It was not too large, they said, as a percentage of the nation’s economic output.

Operational Risk Management and the transition to Basel II AMA; what are the industry views?

This survey gives you the opportunity to share your views on Operational Risk Management and Basel II AMA: http://www.surveymonkey.com/ORM

Failures in Risk Governance Made the Crisis Worse

David Walker's recently published UK government-commissioned report on the banking sector made a number of important points and proposed a series of changes to the banking rules. Mr Walker found that failures in the risk goverance of banks had "made the financial crisis much worse".
He found that "many boards inadequately understood the type and scale of risks they were running". Moreover, the bonus awards at banks led to "excessive risk -taking".
Mr. Walker proposes that nonexecutive board members devote up to 50% more time on their job and have greater responsibilities in contolling the risks of the bank they oversee.
This is clearly a step in the right direction for changing the risk culture of the banking sector. Maybe, a little training for non-executives on banking and risk management would also serve them well too!
http://online.wsj.com/article/SB124773114690549933.html

Accenture: the need to overhaul risk-management

A new study from Accenture shows that a vast majority (85%) of surveyed corporate executives agree that they need to overhaul their approach to risk-management if the lessons of the economic crisis are to be used to improve business results.

“Executives could improve their organizations’ performance and position themselves for economic recovery by linking and balancing risk management and performance management to aid their decision-making and increase shareholder returns,” said Dan London, managing director of Accenture’s Finance & Performance Management practice. “Being effective at this also requires companies to integrate their risk management capabilities enterprise-wide.”

Survey respondents also identified a number of common problems with their risk-management functions, including:
Ineffective integration of risk, return and capital issues in decision-making (identified by 85 percent of respondents);
Lack of alignment between the company’s strategies and its risk appetite (85 percent);
Insufficient enterprise-wide risk culture (82 percent);
Inadequate availability of timely risk, finance and business data (80 percent);
Lack of integration and aggregation across all risk types (78 percent); and
Ambiguous risk responsibilities between corporate and business units (78 percent).

Those findings are from Accenture's 2009 Global Risk Management Study, which is based on a survey of 260 chief financial officers, chief risk officers, and other executives with risk-management responsibilities at large companies in 21 countries.

The survey also found that companies expect new risk-related challenges as a result of the current economic environment, including more stringent regulations and increasing costs associated with growing complexity in the risk environment. For instance, 41% of respondents reported that their risk-management costs have increased at least 25% in the past three years, including 14% who reported a 50% rise in such costs.
Asked to identify the biggest challenges they face over the next two years as they develop more rigorous risk-management capabilities, respondents pointed to the difficulty of aligning with the overall business strategy (identified by 93% of respondents); the need for more effective collaboration with business units (89%); the need for greater integration in the firm's processes and culture (89%); and inadequate resources and talent (88%).

Accenture's analysis pointed to a lack of integration of current risk-management and performance-management processes: While nearly half the respondents said their company's risk-management function is involved to a great extent in strategic planning (48%) or in investment and divestment decisions (45%), only 27% said the risk-management function was involved to a great extent in objective-setting and performance management.
"The current economic downturn is the ultimate stress test of a company's risk management function, and the lessons learned can be leveraged to restore confidence and create a stronger, better, integrated and aligned platform for improving performance under a variety of business conditions," said Dan London, managing director of Accenture's Finance & Performance Management practice.

About the study: Accenture conducted a survey of 260 chief financial officers, chief risk officers, and other executives involved with risk management at large companies in 21 countries in Africa, the Asia-Pacific region, Europe, and North and South America. The purpose of the survey, which was conducted via the Internet between November 2008 and February 2009, was to understand the challenges companies face with regard to their enterprise risk-management capability as well as the approaches, tools, and structures that help some companies manage risk more successfully than others.

Chutzpah on Steroids

Bob Herbert weighs in in an Op-Ed piece in the NYT about the financial industry today.

He says that "the people running this system remind me of gangsters who manage to walk out of the courthouse with a suspended sentence and can’t wait to get back to their nefarious activities".


His write-up takes the industry to task and for fighting against creation of the Consumer Financial Protection Agency. He says banks are wringing huge profits from overdraft fees that often are sky high and in handled in ways that are exploitative, if not predatory, and that the last thing in the world that "malefactors of great wealth" want is a fair marketplace.

Interested in your views. Have we reached a whole new level of chutzpah here?

Read the Article

Jamie Dimon approves the Change Culture

On 27th June the WSJ published a letter from Jamie Dimon, CEO and Chairman of J.P.Morgan Chase &Co. In it , Mr Dimon supports the changes that the Obama administrationis making to the banking system and the underlying culture in Wall Street.

He likes the creation of a single bank regulator; the focus on strong capital and liquidity requirements; the regulation of all financial services firms; and strong oversight for key markets, such as derivatives. However, Mr Dimon does suggest that new regulation does not hinder the banks' ability to innovate; that it still creates "space" for the responsible development of new products and services. This keeps US banks competitive and prevents the flow of capital to other nations.

Mr Dimon also asks how banks can win back the trust of the American people. He suggests that bank leadership should foster a culture within their respective organizations "that focuses on integrity, strong execution, quality products, long-term value creation, and doing the right thing".

He also adds " there must be a relentless focus on risk management that starts at the top of the organization and permeates down to the entire firm".

Now we are talking!!

Please click link below for full article:

http://online.wsj.com/article/SB124605726587563517.html

Leadership beats Greed

Certain Wall street banks are arguing that they must boost the salaries of their employees to ensure their key staff do not jump ship. While this is a transparent way to circumvent the outcry against bonuses, it is only a short-term fix to a much longer-term cultural problem in banking today.
Dr Kerry Sulkowicz, a clinical professor of psychiatry at NYU, in a recent WSJ article (see bleow for link) observes that it is going to be very difficult to roll back these inflated salaries in a few years when times are much better and demands for big bonuses return. The total compensation costs to these banks in the future good times will be significantly higher than the 2006 peaks.
More importantly, Dr Sulkowicz believes that money is not the only way for banks to create loyalty. Strong leadership inspires a sense of pride in employees and they remain loyal to the CEO. Compare Chase and Citi right now - and the culture that each leadership has engendered.

Money does not always have to buy everyone's loyalty, but leadership is a better way of ensuring it.

Click below for WSJ article:
http://blogs.wsj.com/deals/2009/06/30/beware-the-wall-street-salary-monster/

Bank Culture :Luck versus Skill

A recent article in the Financial Times (see link below) referred to a speech by a senior Bank of England official who has announced that bank profits in the years running up to the credit crisis were due entirely to luck rather than skill.

Banks had created moneymaking machines that had "seduced" everyone into overlooking the risks built into the business models. According to the BoE offical, ROE - a measure of well banks manage their assets (and thus a benchmark of skill) - was being boosted by higher leverage - a measure of gambler's luck.

Most banks with a low ROE were most likely to resort to higher leverage and therefore rely on "luck" to make money.

A banking culture that was driven by luck rather than judgement or skill can only survive until the next crisis.



Please click below for the FT article:

http://www.ft.com/cms/s/0/1782b0b4-6642-11de-a034-00144feabdc0,s01=1.html

"You Don't Need to Be a Weatherman to....

....know which way the wind blows"

Interesting opinion piece from the energy business.

The writer points to a shift in opinion is taking place for the energy sector. Politicians
have for a century allowed energy companies to profit from passing on risk to the consumer, "just as they allowed the bankers to do"

He talks about the true cost of coal-powered energy -- and the choices that would be made if risk were put into context. A parable for our times..........

Risk Factors at Nonprofits

In the U.S. nonprofit sector, the hardest part of effectively managing risk is changing the culture of your organization. Some interesting points in this article for all sectors -- have a read..........

The question is: What kind of culture?

Bill Sharon, CEO and Founder, SORMS writes:

"Much of the literature and many of the consulting firms admonish organizations to develop a ‘risk management culture’. Apparently this culture would be developed through the education of all members in the organization to be aware of identified hazards and to be on the lookout for potential problems that are likely to have negative consequences. The problem with this approach is that there seems to be an assumption that the organization does not have a culture to begin with that already intuitively understands risk; one that only needs to be leveraged through a structured effort. The decisions about the response to financial, physical, operational (or any of the other categories of risk) need to be made within the context of what the organization is trying to accomplish."

I think Bill is confusing "risk averse" with "risk conscious". The idea is not that risk is bad. In fact, business without risk, well...there is no business without risk. But, it is a fairly good assumption to make that, in most cases, there are multiple, individual interpretations of risk appetite in most organizations. And, as Bill points out, risk appetitie must be aligned with organizational and business goals. Yes, education is very important. But, it's not education about avoiding risk or "risk is bad" - it's about communicating a defined and appropriate risk appetite enterprise wide so that everyone is on the page about what kinds of risk will make the firm more profitable and what kinds will enganger its existence.

For full article click here.

Google Trends

Thanks to Hans Bool for the SEO analysis:
On Google Trends it appears that the search for "Risk" declines lightly but the search volume increases at the same time. A first deduction is that the factor risk in our lives is quite stable, and even declining over the last years. It maybe something people get used to. One must take into account that risk is a very broad area.

More surprising was the number one country where the term Risk was used: Singapore.
For those who have been in Singapore know that this is a country or city-state that is organized until the very last end. There is no litter on the streets because the fines are very high.
This means at least that risk and strictly organizing are closely related; companies try to over-organize to reduce the risk of business-failure.

For Mr. Bool's full article

Barriers to Improving Risk Management in Banks

I just participated in a webinar that was co-sponsored by the SAS Institute and the Economic Intelligence Unit (EIU). Their recent survey of financial services around the world on the issue of risk management in the future, highlighted the fact that there is still a long way to go before the ship is righted and back on course.
Entitled "After the Storm: A New Era For Risk Management in Financial Services", the findings included:
1) Only 32% of respondent banks had undertaken a thorough overhaul of their Risk Management function.

2) 27% said they only felt they had minor changes to make to their risk function.

3) 41% stated that their #1 focus was on improving risk data quality vs. 33% that have "improving governance" as their top priority.

4) Only 24% believe they need to improve their communcation of risk across the organization.

5) When asked what they saw as they key barriers to improving risk management in their organization, 40% cited poor data; 32% had lack of expertise and 30% had inadequate systems.

6) Lack of risk culture among the broader businesses in the organization was cited as the key barrier to improving risk management among 31% of banking respondents.

So, as one commentator remarked with respect to risk culture:

"Risk, in the final analysis, is not a function within a firm, it is the firm."

Geithner Knows The Score

The Treasury Secretary said on Wednesday " This financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage."

He goes on to say " By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system."

Mr. Geithner is absolutely right in this regard and these changes in compensation practices will assist banks in focusing on changing their risk culture.
But, has the Obama administration missed a great opportunity to go much further on executive pay? Is this not an ideal time to take the bull by the horns and undertake a real "grass roots" overhaul? What do you think?


Please see Geithner's full comments and a short video of his TV remarks:

Best Practices in Risk Management

Booz & Co has recently produced a paper entitled "Bringing Back Best Practices in Risk Management: Banks' Three Lines of Defense".
In the is paper, the 3 authors state that those banks that fared better in the recent crisis benefited from a strong risk culture combined with a focus on 3 effective lines of defense: Top Management and the Front Office; the Risk Function; and Audit.
The paper emphasises 3 steps in building a strong and appropriate risk culture in banks :
-Leadership
-Communication
-Raising the profile of the risk teams/functions (including attracting talent and expertise)
As we have being saying for months now, establishing an appropriate risk culture requires strong leadership, constant communication and an embedded awareness and understanding of risk across the whole organization. This article is worth a read:

The Economy Is Still at the Brink

This Sunday's NY Times opinion by Sandy Lewis and William Cohan is worth a read because it is making the bold statement that President Obama's view on how to revive the economy is inadequate. They argue that restoring confidence in our economy is not the soundest way to revive it.

While clearly stating that confidence in capital markets is important, the authors believe that there are huge structural flaws in the architecture of our financial system, and that many of the fixes that the Obama administration has proposed will do little to address them. In fact, all the changes we have seen and heard about from Washington are merely papering over the deep cracks.

The authors also argue that , if commentators were lamenting the financial system as dysfunctional only 6 months ago, why are they now lauding a model that simply restores the status quo?

The solution, it seems, is for the administration to have experienced Wall Street folks advise them on the changes rather than economists, academics and theoreticians.This would allow people who know how the markets work in the real world to be in key decision-making positions that could significantly change the system for the better.

Moreover, one example the authors use to promote a balanced risk culture in banking is to make the senior executives akin to general partners, whereby their prudent risk taking is well compensated and any cavalier decisions that incur heavy losses, result in dismissal. In addition these partners would have the bulk of their net worth tied up for up to 10 years, so short term/expedient profit decisions with high and /or long term risk are not encouraged.

A change in the system , in the risk culture of the financial services industry will only happen when there is a realignment of these banks interests with those of their shareholders, their clients and the public at large.

The New York Times article

Study: Many Have Strong Risk Culture, Few With ERM

Interesting study in Insurance Networking Newsreveals that insurers still consider enterprise resource management (ERM) an initiative “in process.”

The study evaluated stages of progress in the following categories: establishing an ERM culture, aligning ERM programs with organizational goals, formal ERM framework adoption, and executive level participation.

"This is not a normal retirement"

Today, Bank of America is forcing out Chief Risk Officer Amy Woods Brinkley, after a surge in credit losses led to a government bailout and an order by regulators to raise $33.9 billion of capital. Brinkley, 52, joined the company in 1978 and has been in her current job since 2001.

"This is not a normal retirement," said Anthony Plath, a finance professor at the University of North Carolina at Charlotte. "There's something going on here that's related to loan losses and the performance of the bank."

"Embedding Enterprise Risk Management"

Chief financial officers (CFOs) of life insurance companies continue to recognize enterprise risk management (ERM) as a critical management issue, as demonstrated both through the prominence they give ERM within the organization and the resources they devote to building ERM capabilities, according to a recent survey on ""Embedding Enterprise Risk Management".

"We are just beginning to see many companies getting serious about ERM and moving from just talking about it to implementing robust methods that address myriad risks," said Prakash Shimpi, a managing principal of Towers Perrin with global responsibility for the company's ERM practice. "It is abundantly clear that ERM will need to be higher on the CFO's to-do-list if in fact companies wish to maintain healthy levels of financial performance."

9 principles of a Risk Intelligent Enterprise

Deloitte publishes a detailed set of nine principles of a Risk Intelligent Enterprise. A good read through of insights and practical steps for incorporating the concepts within your organization.

Risk has a positive side, one that applies to value creation and risk taking for reward. Introducing new products, entering foreign markets, acquiring competitors, forging partnerships - all are challenging endeavors, and if you don't properly manage the associated risks, you may not reap the potential rewards.

"Excuse me—you're standing on my bonus"

An interesting piece from a few years back on credit culture and the excuses made to push the boundaries within ill-defined frameworks.

Food for thought.....

When Will They Learn?

London: A new Treasury Select Committee report on bank pay said the banking crisis had “exposed serious flaws and shortcomings” in remuneration policies. The report highlighted practices such as cash bonuses made immediately regardless of the long-term impact of a deal or transaction. But will they learn?

"We have a suspicion that many bankers remain unconvinced by the need for change and believe that, once 'the storm dies down’, it will be a case of 'business as usual’,” the report said.

Making Money the Responsible and Ethical Way

This article in Saturday's NY Times shows that the next generation of business leaders are starting to get the "ethical bug". If we have to wait until they run Corporate America before we see the extinction of a "greed is good" culture, then so be it. However, many current leaders of the financial world could take a page from the new MBAs hymn book and start to realize that greed leads to higher risk-taking and this culture is not sustainable.
Read on and prosper!
http://www.nytimes.com/2009/05/30/business/30oath.html?_r=1&scp=3&sq=a%20promise%20to%20be%20ethical&st=Search

Tightening European Bank Oversight

Maybe there will not be a European "Super Regulator" after all, but at least the European Union is trying hard to establish some form of pan-european oversight of the banking system in these countries. This is all the more important as many banks are multinationals and thus straddle national borders. Often, a lack of coordination between countries regulatory bodies can allow international financial institutions to fall between the supervisory cracks.
If the result of theire efforts is the ability to overrule wayward national regulators in order to ensure that we do not see a repeat of the credit crisis, then we should be all in favor of the proposals from Brussels.

Sensible regulatory oversight = prudent risk taking.

http://www.nytimes.com/2009/05/27/business/global/27euro.html?_r=1&ref=todayspaper

Wall Street Greed Prevails

Today's article in the WSJ (see below) on the fact that Citi and BofA are planning to join Morgan Stanley in raising base salaries to compensate bankers for limits on bonuses, tells us that many banks have a long way to go in bringing the recommended change to their risk culture.

The government's intention in curbing compensation - especially the huge bonuses - was to instill a culture of moderation at these banks when it comes to risk taking. Less risk, less reward. Or, the smaller the bonus payout, the less bankers will need to take unnecessary risks.

Clearly, by giving the risk takers (investment bankers) higher salaries to recompense them for their lost bonuses, certain banks are indicating that they do not see a need to reduce their risk appetite. (It is notable that neither Goldman Sachs nor J.P Morgan Chase are intending to raise base pay).

Also, the argument that there is a need to pay big bucks to retain key employees is a moot one. Let them go somewhere else.If they are that greedy and risk "perverse", then let them risk another bank's capital.

Until this type of greed leaves Wall Street, the culture of common sense in risk management will not prevail.

http://online.wsj.com/article/SB124338366426556607.html#articleTabs%3Darticle

Ira Millstein -- A New Agenda on Governance

Ira Millstein is arguably the top lawyer in America on corporate governance. The Yale School of Management, which named its Center on Corporate Governance after him, has called him a principal architect of modern international corporate governance.

In the face of the current financial crisis, Millstein has been at the forefront, calling for boards to take greater responsibility and improve oversight of risk management. He is confident that the lasting effect will be positive, not negative, seeing the world as one in which real values are more important than the values we created in the 1980s and 1990s. The first thing we must do? Restore trust in the system.

He recently delivered the keynote address at the KPMG Audit Committee Issues Conference,
His message was clear: Directors need to restore trust and reset their goals. What follows is an excerpt from Millstein’s speech. Here's a link to Millstein's article or go here for the full text

LIVE AUDIO WEBINAR -- TUNE IN!

After the Storm: A New Era for Risk Management in Financial Services

Join the Economist Intelligence Unit as they present findings on global enterprise risk management (ERM) in the financial services sector.

FACT: More than 70 percent of the world’s leading financial services executives believe that losses stemming from the credit crisis were largely due to failures in addressing risk management issues.Listen in to this audio Webinar to learn how 316 financial organizations are evolving their risk management structure in light of the ongoing credit crunch.

We'll cover:
The current financial services business environment.
Why conventional risk management measures failed.
Emerging ERM ideas and approaches.
How firms are implementing risk management change.
What the future holds -- the evolution of ERM for financial services.

LEARN MORE AND REGISTER

MMC: "what does this mean for me?"

Some good perspective in this 'how-to' from MMC in New Zealand.

MMC states that "the most important - and difficult – task for the management team is to instill a risk management culture into the business. Every individual, from director to receptionist, must understand and be aware of the approach being taken by the company. Most importantly,
they need to know what their role in the process is – “what does this mean for me?”."

Deutsche Bank Debacle

Deepak Moorjani (currently involved in litigation with Deutsche Bank) shares his perspective on his former firm's risk policies and the culture and reward structure that encouraged these,.

Speaking about the banking sector, recent write-downs and losses , Moorjani says that "Where some see coincidence, I see consequence. I consider Deutsche Bank's poor results to be a “management debacle,” a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks and balances".

His rant at this blog is a good read.

Businessweek Smisnessweek

the article is right on the money but the real story is in the comments section. One reader says:

"Management can not tell you when to act or to choose when -- "doing the right thing" wins over "doing whatever it takes." If they have to tell you which one is right it will be to late to act this response has to be a reflex action if not, then you are the wrong person in this slot the separation process has to be look at and adjusted.Knowledge of the "risk culture." was something that you brought to the table when you where hired."

Well, this just about says it all and explains very clearly how we got into this ecomomic mess to begin with. Risk culture is not portable. It is not something you are born with. It has nothing to do with your "gut". It has to do with adhering to a very well articulated enterprise risk profile which includes the risk appetite. It is about aligning the entire enterprise behind that profile and doing everything possible to compete, given its parameters.

The idea that "really sharp guys" can or should make these decisions on the fly fits Wall Street culture perfectly and that's the problem. Everyone is a quant. Everyone can "smell" returns. Everyone is running their own little side show until, quess what? The enterprise can't support their deals - and then the whole thing caves it.

It's one thing not to have understood this concept before the crash - but the fact that there are people out there who continue to think it afterward is a good indication of the need to communicate and train like crazy.

Risk Culture in Business Week

Strong piece in Business Week 5/12 on "What's Your Company's Risk Culture?"

A good read on why it is important for directors to understand the risk culture... because it influences the decisions of management and employees, with data from the KPMG survey of 500 bank executives.

Board members have taken a greater interest in their company's risk management programs, trying to understand the top risks facing the organization and their risk mitigation plans. But one area of the risk management program that has not been a focus until now is a company's "risk culture," a critical element of risk management efforts and an area that board members should better understand.

Read What is Risk Culture, and Why it is Important? ,

Webcast: New paradigms in risk management

PRMIA is driving the discussion of risk culture in an upcoming webcast.
On 19 May at 1:00 p.m. a live Thought Center Webcast will delve n the issues risk professionals face as they look to understand their new operating environment and adapt risk and regulatory cultures to meet new paradigms.

Traditionally there has been a separation of credit, market and operational risk functions within many financial services institutions. The effects of the current economic crisis indicate that this is no longer acceptable. Institutions are answering the call from internal and external stakeholders for improvements in transparency and communication across all risk classes, but there are challenges.

The panelists will discuss:

• The balance between quantitative and qualitative assessments
• The changing regulatory environment Process and control improvements

Panelists:
Paul Glasserman, Jack R. Anderson Professor of Business Finance at Columbia University Graduate School
Paul Schotten, UBS Bank, New York, Senior Vice President Credit Risk
, Managing Director & Head of Risk and Quantitative Analysis, Blackrock, Inc.
Michael Moriarty, Deputy Superintendent for Property and Capital Markets at the New York State Insurance Department

Moderator
Steve Lindo, Executive Director of PRMIA


To register for this event go to New paradigms in risk management

Difficulties of perception

Thought you’d all appreciate this PWC survey on risk management and how
effectively it is embedded into overall strategy.

Many of the companies interviewed had invested in strengthening their risk management
Process but had difficulties of perception and communication because risk management is often seen as only as a compliance-driven process.

Full study:
www.pwc.co.uk/pdf/in_control_realising_return_from_risk_management.pdf?utr=1

A Question of Balance

The shareholder ousting of Ken Lewis as Chairman of BofA yesterday (while retaining the CEO position) is a positive step on 2 counts. Firstly, it spotlights the power of the shareholder - and this should now start to get some Boards a little concerned that they may not have carte blanche anymore.
Secondly, it is vital for good corporate governance, that the roles of CEO and Chairman are separate. It is not good business for anyone (shareholders, employees etc) that one individual - no matter how competent - holds all the power. A corporate culture of sharing the power between 2 leaders ensures a better balance and a more sound governance structure.
In the banking world, the introduction of regulation to prevent the offices of CEO and Chariman being held by the same person, would go a long way to manage the risk of an overambitious leader.

Please see below link for full article
http://www.nytimes.com/2009/04/30/business/30bank.html?_r=1&ref=todayspaper

When does cultural education begin?

As my previous comments would indicate, business schools are a great place to start educating our potential leaders in the foundation of sound management - the culture of accountability versus the culture of greed.

However, maybe we should start to teach them earlier. A couple of new books just released , one called "The Parents We Mean To Be" suggest that children are getting too much flattery and not enough moral instruction. The book argues that this "praise craze" has fixated parents on building "self esteem" at the expense of such important ideals as teamwork and selflessness.

Maybe , if we begin to teach our kids a little more about goodness rather than happiness, they may turn into better business leaders.

Click below for full article
http://online.wsj.com/article/SB124053094209050311.html

Are Business Schools to Blame?

Have our business schools let us down?
We have the best institutions in the world that teach our MBAs brilliantly about financial markets, corporate finance, economics, investment management etc, etc, etc.
But they have failed to teach our business leaders some fundamental business management skills that revolve around ethics and business morals, and involve the culture of business management.

The moral compass has to change. Our MBA students currently get a great 2 year education on greed. This has meant, as business leaders, they have failed the American workers and retirees. Now they need an education on humility.

As this article in the WSJ today explains, we need to educate our potential leaders on the principles of corporate governance and accountability. And we need to start now, if we want to lay the correct bedrock for corporate culture in the future.

Click below for article:
http://online.wsj.com/article/SB124052874488350333.html

It's the People not the Models!!

In finance, too, learning entails risk and we should consider the financial engineers whose mistakes led to today's financially led recession. And, as Robert Merton, the Harvard economist is now lecturing, we need to figure out why these models failed.

Hold on a minute!

The models did not fail us, per se. The way the models were used was what failed us. We either overrelied on their output; ignored it; misinterpreted it; or downright manipulated it to suit our needs. Its not the models that need anlysing but the people who used them.
It is easy to forget that, as this article below states, financial derivatives have a real value when applied with judgment.

The structural tension that Mr. Merton describes between "financial innovation and crisis" is very important and very real, but not a reason to focus solely on the engineering of the models that build the innovative products.

Let's focus on the people that abused them -unwittingly or otherwise and learn from their mistakes.
For more background on this topic, please click on the link to a recent WSJ article below:
http://online.wsj.com/article/SB124018430498933171.html

A Crisis of Ethic Proportions

Take a look at John C. Bogle's opinion article in the WSJ on April 21st.(see link below).

Mr Bogle, who is the former CEO of the Vanguard Group of Mutual Funds, writes about how self-interest has got out of hand in management, and we have created a bottom-line society in which success is measured in monetary terms.

This has led to a society - our society today - where business ethics and professional standards have been lost to greed and lack of responsibility.
Our society is now one of "if everyone else is doing it, I can too".

He talks about the need to now establish a "fiduciary society" where money managers are duty-bound by law to place "front and center" the interests of the owners they serve. Focus needs to be on long term investment, due diligence, and ensuring that corporations are run in the in the interest of their owners.

Managers, Mr Bogle states, "need to act in a way that reflects their ethical responsibilitities to society".

Now we are getting somewhere!!

Click link for article:
http://online.wsj.com/article/SB124027114694536997.html

It's a culture thing...

It's easy to assume that people see the big picture.

The rules this coach adopted were bascially CYA oriented. "Don't take risks that will cost you your job or lose players for the school." When confronted with the potential for more and more serious damage, he deflected.

Compliance officers have a bad name because they are ususally corporate police officers, in effect, or they are brought in to clean up a mess.

A more efficient approach is to make sure everyone sees the Big Picture up front. The coach makes a valid point in some ways. Burying key corporate culture points in a 500 page manual that no one reads is asking for trouble.

Why do we continue to think that because this stuff is mandatory that people will actually suffer through it?

Compliance: March Madness

Basketball Compliance Officers

Just as UNC completed its dominating run, there was a solid William Rhoden piece in the Times on Amy Herman, UNC's director of compliance. The role of the compliance officer became a heightened source of interest last month when UConn's coach Jim Calhoun faced accusations of recruiting violations. Please read this terrific nonfinancial example of risk culture.

Rhoden describes Herman's overriding responsibility as protecting the university’s interests. Ironically, he identifies those interests as preventing a rules violation that can embarrass a university, cause head coaches to lose their jobs, and players their eligibility. He left unconsidered the higher interests in higher education -- academic excellence, building a better society, and forestalling possible manipulation of an impressionable student.

Every N.C.A.A. coach is required to take an annual recruiting certification exam, but Calhoun wonders how he can be expected to be familiar with the entire N.C.A.A. manual. “Do you think every N.C.A.A. investigator knows what’s in every one of those 508 pages?” he asked.

Herman said: “We don’t expect them to know all the rules. What we expect of them is that they know enough of the rules to know when to ask. If they have a question about something or if something raises even a tiny red flag, that they know to pick up the phone.”

Risk Culture.

"Compliance officers have become an athletics department’s most important employee. Also the most resented".

Difficulties of Perception

Thought you’d all appreciate this PWC survey on risk management and how effectively it is embedded into overall strategy. Many of the companies interviewed had invested in strengthening their risk management process but had difficulties of perception and communication because risk management is often seen as only as a compliance-driven process.

Please click here for the full study.

Regulate Me, Please

The CEO of Allstate, Tom Wilson, has an interesting article in the Op-Ed section of the NY Times today. What makes it refreshing is that,as one of the Captains of the Financial Industry, he is the first to actually recognize the need to take accountability for the current state of play, and to publicly proclaim that it is in their hands to do something fundamental about it.

He begins with "There are plenty of people singling out causes for the collapse of the financial markets, and conveniently, the source of the problem is usually someone else".
And he ends with " ..leaders must avoid the trap of dimished expectations and contiunue to demand the best of ourselves..."

Are we finally seeing a cultural shift in our financial leaders, whereby they are at last taking responsibility for their actions and recognizing that they are accountable for what has happened and for fixing the problem with deep seated changes?

If so, then we have now begun to build the foundation for a new and better financial world based on a culture of "risk accountability and economic and social responsibility".

Full article:
http://www.nytimes.com/2009/04/16/opinion/16wilson.html?_r=1&ref=todayspaper

The CEO carries his vision in his head. Some employees get it - some don't. It's a common problem in any company but when the people in your company are placing $100 million bets the problem gets ugly fast.

The problem with many mandatory communications programs is that they are done to "check the box" for the Fed. This has two issues. One, "checking the box" programs are rarely Best in Class communications because the Fed's requirements are insufficient to warrant anything else. And, second, since employees have to take the program managment rarely feels compelled to make the material interesting - so no one pays attention to it.

Saying you're communicating something and actually communicating it are two different things. When CEOs place a priority on a program, people pay attention. Employees can see where the focus is and they respond accordingly. If Citibank employees had felt pressure coming from the CEO's office to place a priority on risk management - they would have responded.

Madoff is us and Mr. Ponzi is us!

Professor Nouriel Roubini, is known for having called the crisis really early in its making. Here’s a great simulated conversation…. That asks Americans to look in the mirror and reflects that while Madoff may spend the rest of his life in prison. U.S. households, financial firms, and government may spend the next generation in debtor's prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over-consumption and risk-taking.

Click here for the full article

Citigroup 2007 : A Cultural Disconnect

“Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working.” Charles O. Prince III, 2006

Eric Dash and Julie Creswell's NYT article in November 2008 is an excellent piece on identifying the reasons for the downfall of Citigroup in 2007 - lack of independent risk management; focus on higher risk opportunities without the risk controls to limit excesses; non-existent executive oversight, etc.

However, as Chuck Prince's quote a year before Citigroup's implosion clearly shows, there was a significant cultural disconnect within the organization. The culture that the CEO believed he had instilled across 300,000 or more staff in over 100 countries (his "tone from the top"), had clearly not been communicated much outside his 399 Park Avenue office. Even some of Mr. Prince's own senior management had not got the memo!

Citigroup is a great example of why the creation of a corporate culture is just the first, and often easiest step for a CEO. However, the communication of that culture (rapid, responsive,widespread, and incessant) is the most critical element. It takes, time, effort, and money, but the rewards are plentiful.

Click here for the full article

US GAO Finds Regulators Not Forceful Enough

The US Government Accountability Office recently published a report on its review of Regulators' oversight of risk management at large banks (see below for link to summary). This March 2009 document states that, while regulators often found weaknesses in risk management prior to the beginning of the crisis, they did little to address them. Moreover, the GOA also found that some aspects of the regulatory system in fact hinder oversight. Examples given include a legal entity view rather than an enterprise-wide oversight; and a lack of systematic risk assessment.

So, the long and short of it -no surprise to many - is that the regulators need to undertake a major overhaul of the way they conduct their business. This should include a "tops-down" review of the way they assess the banks. And the focus here needs to be on creating a "regulatory relationship" across a bank and not numerous regulators assessing different entities of the same bank. To date we have duplication of work or, more seriously, gaps in oversight of assessment, that have ensured no one regulator has a full picture of what is going on.

How can this be achieved? Yep, you've guessed it - a change in the culture
at these regulatory bodies. The focus must not be on addressing the symptoms of an individual bank woes , but rather a more holistic view of the causes of these problems. Only then can a full resolution of this crisis be achieved.

Click here to view the full article