Governance balancing risk and reward

This is based on my comments and the discussions at the ACCA breakfast meeting today.

Fundamentally, directors commit their companies to the pursuit of profitable business ventures. Making money, and making profits, is after all what most businesses exist to do. They acknowledge what Gordon Gekko said “greed is good”. Therefore tempering their pursuits or asking them to think of risk management in what could go wrong is pointless. Their response will be in terms of what happened in the past. Because, in the business world, the rear view mirror is always clearer than the windshield.

Corporates are bigger, more complex and deal in significantly higher volumes of transactions, today. Therefore Risks cannot be managed in the same informal way. Because problems cannot be solved by the same level of thinking that created them. Risk management today will require policies, processes, tools, models, etc to ensure it’s mitigated. Everyone needs to practice it for it to become a culture for the organization. This will balance reward with the level of potential risks.

Auditors are trained to think of what could go wrong. When they raise concerns listen to them and build it into the defense mechanisms for risk in your organization.

Murder on the financial express…. includes corporates, regulators and rating agencies and everybody else, but excluded the Auditors not in the list!, which I agree for obvious reasons.

It reminds  of Agatha Christie’s Murder on the Orient Express. There was just one victim in the middle of the night, but plenty of passengers made strong suspects. Jack and Suzy Welch developed a list of suspects for the financial crisis  in their write up in the Business Week, Sept 2008.

“The list of possible culprits is long indeed: Congress, for overzealously pushing homeownership; the Fed, for keeping interest rates so low; predatory lenders, for taking advantage of unqualified and sometimes vulnerable home buyers; and home buyers, for getting in over their heads. The list goes on: the White House, for letting banking regs become too loose; finance executives, for selling products they didn’t understand while enjoying outsized profits; mark-to-market accounting, for accelerating the downturn; rating agencies, for mischaracterizing paper; and short-selling hedge funds, for betting on doomsday—thereby ushering it in” they said.

A survey carried out by CFO Research Services on behalf of ACCA in 2006,23 of companies in Europe, Asia-Pacific and the US, found a correlation between companies having practices likely to result in ethical behaviour – such as training on ethics and including ethical performance in staff appraisals, and where boards had given attention to ethical matters – and financial performance rated (by themselves) as exceeding expectations. Individual descriptions from respondents of the key benefits of an ethical culture also strongly suggested a clear link between ethics and business performance .

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About surenraj

“Views expressed are my own”
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