We use the Kalashknikov as a metaphor to demonstrate the power of corporate risk management. We need to question how more effective our risk firepower would be if we could deploy the right firepower upon the company’s leaders.
Executives and CEOs have been fortunate, up to now, that shareholders have been patient. AGMs have been peaceful, but it is only a question of time before avaricious CEOs suffer the full force of fate. Although HLS was an unpleasant case to observe, it does demonstrate that investors have not even come close to the full extent of venting their spleen.
This has clouded the corporate bottom line in many cases. So, we have to look through the fog. One thing we need to change is auditors’ attitude and professional execution of the job. They must pay more attention and exercise own professional judgement to prevent or detect fraud. All professions are waking up to the dangers of fraud. Sleeping through the investment crises, or passing the buck is not a risk option anymore.
Professional exams now check whether students have grasped the value of corporate ethics. The Association of Investment and Management Research (AIMR) formulate the Chartered Financial Analyst (CFA) exams. Whereas professional exams may have included little on ethics before, the CFA curriculum has changed with time. The Level I 2003 exam has a 15 % topic
weight for Ethics and Professional Standards, and a 30 % weight for Asset Valuation. There is real hope that these can safeguard against some of the flagrant corporate excesses committed recently.
Graduates and auditors are also more familiar with IT systems and technology. They understand the principles of IT operations, including off-site storage and backup facilities. This means that they are able to consult with others to rebuild an incriminating audit trail of evidence against directors who have committed serious corporate errors.16 One infamous example was the Enron–Andersen shredding of vital documents. Another case was New York attorney Eliot Spitzer successful action against Merrill Lynch and CSFB for their part in “ramping” worthless dot-com shares during the TMT craze. All these are possible with technology to reconstruct shredded statements or deleted emails.
The successful litigation against Merrill Lynch and CSFB shows that punitive action can be effectively taken despite attempts to obstruct it, or to destroy vital evidence. A business tradition was to take risk as an inevitable part of life, callously saying: “Leave losses to be recovered from insurance or law-suits.”
This does not add to corporate profits, but detracts from it, once the final bills have been calculated. The litigation against the culprits of the Barings and other banking and fund fiascos still continues, and there seems little net compensation for the losers, after accountants and lawyers have deducted their fees. Insurers are not mugs, and they are reluctant to pay for someone else’s errors, especially when they stem from a risk-seeking or risk-ignorant attitude.
Posts Tagged ‘Risk’
RISK FIREPOWER
Monday, October 26th, 2009RISK COUNTERMEASURES
Monday, October 19th, 2009Once detecting operational risk conditions is in existence, we can think about deploying risk countermeasures. Could any CEO shark engineer himself some huge pay-off based on undisclosed benchmarks?
Frankly, yes and no. Yes, they could get away with it easily in the old days. General Motors was a classic example where the head of a modern corporation could do what he liked in the era of Roger Smith. Pressure from the board, CalPers and H. Ross Perrot eventually forced him out. More recently, NYSE chairman Richard Grasso was pressured into resigning after the resultant furore that erupted when his $140m pay package was made public. Was this a case of Kalashnikov risk management used successfully? Some would say with justification that the aggrieved Western shareholders are amateurish when it comes to reining in the wayward behaviour of boards and CEOs. The professionals in the Japanese mafia do it so much better.Western shareholders could well adopt this tactic as a last resort. The UK GSK and the US GM meetings do not even compare in skill. This is one of the positive role models of the Yakuza systematically ignored in the Western world. They could teach shareholders how to level the corporate playing field by disrupting the AGM. If they get continually fobbed off, then they could always shoot the directors one supposes.
Badgering and damaging leaders’ reputation certainly can have effect. Corporate governance is coming along slowly. It would arrive faster if we could borrow some of the Yakuza’s tactics in Western companies. In the meantime, we have the regulatory cogs slowly grinding around the Combined Code, Higgs Report and Sarbanes–Oxley to protect us.
The covering up of negative financial reports and losses are examples of corporate misgovernance to head off risk of reputation damage. The eventual cost on ongoing business may be greater where the fundamental causes of the original loss have not been remedied, but merely swept under the carpet until recurring later.
This behavioural trend increases systemic risk where greater eventual damage is vested upon the wider industry. We have already seen this in Lloyds insurance, where a nepotistic code of doing business with “our sort of chaps” represents a sclerosis risk that nearly blew the UK insurance industry. The more we ignore it, the more it can blow up in our faces.
These hidden losses and weaknesses make it more difficult to value a company and its assets. The persistent ramping of a company’s value, and the love of M&A to increase company size instantly, creates additional problems for investors in Western firms. It is a problem rooted in the modern business culture, much influenced by the USA.
The weaknesses inherent in embedded value methods are repeated and added to in US GAAP reporting. These need to be anticipated, adjusted for and fully understood before reliance should be placed on the results.
How to discourage the executives from acting in an irresponsible fashion?