Sledding risk. Down-slide risk management.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I and many other Canadians have fond winter memories of taking the sled or toboggan to the nearest hill and spending hours sledding.  As we became older we revisited our youth by taking the next generation sledding.  At the end of the day’s activities we would return home cold, bruised and laughing and while we waited for hot chocolate we would recall some of the great wipe-outs and “air” that we were able to catch that afternoon.  So what does this have to do with risk management you ask?  Well in the US state of New Jersey “slopes behind ropes” are starting to appear as the town and municipal governments fear potential law suits and thus they are banning sledding.  They are doing this to protect themselves from downside risk. 

This is a good example of where protecting or eliminating downside risk (potential law suit) is being done at the cost of upside risk (exercise, fun, fond memories, social bonding).  Some organizations are obsessive about eliminating downside risk, the cost of which is stifled creativity, reduced market share gain and even low employee moral as their initiatives are squashed.  Does your organization put too much effort on downside risk management at the expense of the upside?  It can be just as detrimental to your business as having too little.

 

To read the nj.com article follow the link:

http://tinyurl.com/47l3g7m

Has the Canadian peso been replaced by the high flying loonie? Part 1

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

Last week Rick Nason and myself were in Ottawa discussing risk management.  It wasn’t long into the conversation that our host pointed out that one of the biggest issue facing Canadian exporters is the rising (soaring?) Canadian dollar - affectionately called the loonie.  Over the next few blogs I intend to look at the loonie’s rise, its future and consider how risk management can help ease the burden to exporters.  First let’s set the stage. 

The Canadian dollar has gained 19% against the US dollar in the last 4 years and within the last months has gained a little over 3%.  Sure, the gain has been an up and down ride, but the end result is an upward trend partly secured by the US’s struggling and heavily indebted economy and Canada’s abundance of natural resources.  As Mr. Flaherty the Minister of Finance recently stated: “We’re done with the Canadian peso.”  The loonie has broken free of the broken currency image. 

In the near term analysts believe that a combination of higher commodity prices (minerals, oil, food), expectations of tighter monetary policy by the Bank of Canada and a brighter economic outlook in the US will push the loonie even higher.  Economist David Rosenberg is forecasting a $1.20 CAD/USD between 2013-2015 and in the near term, Bay Street is talking 1.05-1.10 in 2011. 

This appreciation of the loonie seems inevitable and perhaps explains one of the reasons that the China Investment Corp – China’s $300 billion sovereign investment firm will establish its second office outside of China in Canada.  It just may be time for exporters to re-visit their risk management strategies in the area of coping with negative foreign exchange movements. 

Proof by Semantics

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I recently went to a presentation by a representative of the Bank of England.  The main part of his talk was explaining how “Quantitive Easing” is not the same as printing money.  Last year the Bank of England purchased around £200 billion of UK government debt, just slightly more than the previous year’s fiscal deficit (close to 12% of GDP).

Anyway, the thrust of his argument was that QE is not printing money because the debt was purchased from dealers who were holding the debt and the purchased debt is being held by the Bank of England for possible resale in future (…. at what loss?).  The debt is not purchased directly from the government and is not cancelled.  Purchasing it from the dealers frees up capacity for them to invest elsewhere in the economy. 

Seems like a semantic argument to me.  Money is fungible so the fact it goes round in a circle does not alter the underlying character of what is done, nor does the accounting method.  Also, the B of E representative did not mention the current year’s deficit will be of a similar magnitude and will need to be bought by dealers. 

It seems simple (and I realise that my analysis is also overly simplistic).  If the economy’s supply of goods and services is static (for argument’s sake) and the money supply increases, then the nominal price per unit increases.  Sound like inflation? 

So what does all this mean?  Sterling has fallen considerably against the dollar recently.  Inflation fears have cropped up and many are expecting higher interest rates mid year.  This has caused a part recovery of Sterling.  However, the economy contracted in the last quarter so sterling fell again.  (By the time anyone reads this, Sterling will probably have continued its yoyo impersonation.) 

As a one off, there may be an argument that QE provides a boost.   Politicians are fond of the term “kick starting the economy”.  However, the economy does not look like a motorbike to me, so should not be expected to behave as such.  I think the jury is still out on QE and we can expect uncertainty and volatility to continue.  Corporations should understand their FX and interest rate exposures and beef up their risk management.

Risk And Blogging

 

 

Here I am late with getting my blogs done when one of my partners subtly tries to remind me that I am behind schedule by sending me a list of 8 keys for blogging success.  (Here is the link   http://www.socialmediaexaminer.com/8-keys-to-blogging-success/)

As I looked through the list, I thought that they also made a great list for Risk success (and a way for me to quickly get another blog done).  Do you agree?

 

1.   “Are You Passionate?”  To be a successful risk manager you need to be passionate. 

2.  “Are You Patient?”  The results of a risk management program do not always manifest themselves immediately.

3.  “Are You Clear?”  Forget strategy lingo – risk lingo has more capability to confuse and turn people off than almost any other department in the organization (ok – maybe not the IT department which might win this category)

4.  “Are You Brave?”  Are you willing to put your well reasoned opinions and ideas out there and have the willingness to defend them?

5. “Are You Seasoned?”  At RSD we know that risk management is not learned in a book or in a classroom in isolation.  You also need experience, intuition and seasoning.

6. “Are You Helpful?”  As a risk manager do you help to engineer risk responses so things get done, or do you stick to the traditional “Department of No!” response – which is most certainly not helpful.

7. “Are You Organized?”  Obvious.

8. “Are You Focused?”  As a risk manager are you clear in your goals and objectives.  As I have written about before, fuzzy goals and objectives lead to everything becoming risk and thus nothing getting managed.

A Tale of Two Supermarkets and Risk Management Lessons

by Stephen McPhie, CA

Partner, RSD Solutions Inc. 

www.rsdsolutions.com

info@rsdsolutions.com

 

Over the last couple of months I have heard two separate stories of customers of two different large supermarkets being injured while shopping.  Both customers happened to be elderly ladies. 

Lady A slipped and fell and twisted her ankle.  The injury was not serious but the Supermarket arranged a cab home for her.  The store manager phoned the next day to ask how she was getting on and promised to send a £25 shopping voucher, which he did.

 Lady B was struck from behind by a large trolley used to replenish the shelves and which was being pushed by an employee.  She was treated by the store’s first aid person and advised to go to hospital.  She did this and required 5 stitches.  Her shoes were blood soaked and ruined.  She could not wear shoes for a month and needed several follow doctor visits costing cab fares each time.

 Several letters from Lady B’s family following no further communication from the supermarket elicited only vague sympathy and the claim that the employee pushing the trolley was pushed by another customer and thus denial of liability.  They did eventually send a £25 shopping voucher as a “gesture of good will” with the hope that the lady will not stop shopping at their store.  The family are now engaging a compensation lawyer.

 

The prompt and caring action by the fist supermarket cost little and resulted in a happy customer who will tell all her friends how nice the manager was to phone and how well she was treated.

The story is not over yet for the second supermarket, but it faces not only the possibility of significant compensation and legal costs, but also potentially bad publicity.  There is also the risk that the bad publicity is magnified if the media take up the story.

So what are the lessons for risk management?  They would seem obvious for most, but in this case one large organisation appears to have been totally blind to them.  Identifying the possibility (or, for supermarkets, the likelihood) of such accidents and a protocol for dealing with them promptly costs little but can turn the situation to their advantage.  There may be no strict legal liability but even a few hundred dollars could prevent losing a customer, possibly several, and bring positive publicity.

 

 

 

 

 

Had Enough

Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

 

Last week I went to one of my favorite restaurants – the Humidor in Nassau, Bahamas.  It is a Brazilian style restaurant where they keep coming around with various cuts of meat on skewers until you turn your “chip” over to indicate that you are full.  For those of you that know me, you realize that I can put away a fair chunk of food.  Thus you might think I relish eating at these all-you-can-eat places. 

The goal of the meal however was not the restaurant.  The Graycliff is also one of the top makers of cigars in the world, and I wanted to try one of their Double Espresso cigars that are top rated by virtually everyone.  How could I enjoy a cigar if I had stuffed myself?  Since I had a goal in mind – enjoy the rare treat of a great cigar – it was easy to have the self-discipline to stop stuffing my face with succulent cuts of meat.  There was a bigger goal in mind.

Often it seems the case that companies are so focused on not making a mistake with risk management that they stuff themselves with risk management and forget the larger goal of the company.  They do not have the self-discipline to know when to stop adding more risk management on top of more risk management, and when the process becomes self-defeating.  The regulators of course are experts at over-stuffing themselves with risk-management to the detriment of the overall goal.

Does your company or organization know when enough risk management is enough?  Is your company gorging on risk management to the detriment of achieving the real goals of the organization?  Or is your company like the women in the couple who sat at the next table – she barely tried anything, although it was obvious that she desperately wanted to.  I don’t think she achieved her objectives either.

Risk On A T-Shirt

Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.rsdsolutions.com

 

info@rsdsolutions.com

 

In a previous blog I have talked about how everything can become an issue for the risk department.  That of course becomes an impossible task, and thus the task is on to simplify risk.  Physicists have tried to do this – in fact there is a very interesting and readable book on it:  Universe on a T-Shirt: The Quest for the Theory of Everything, by Dan Falk.  http://www.amazon.com/Universe-T-Shirt-Quest-Theory-Everything/dp/B0046LUU4K/ref=sr_1_1?ie=UTF8&qid=1295797022&sr=8-1 

Have you ever thought that we in the risk profession are guilty of the same thing?  For example, COSO is an attempt to get a general framework that will work for all companies in all situations and for all things.  No wonder implementation of the COSO cube has turned out to be a bust.   We just had a request from an Asian company to design an ERM computer system that will essentially be timeless as the firm grows – again pure folly.

Risk management does not fit on a T-shirt.  That is not to say that it is overly complicated or verbose.  It is to say that risk management is context specific.  Sometimes it is simply not appropriate to wear T-Shirts.

Innovation: Cloneable. Creativity: Not

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

Recently my colleague Rick Nason wrote a blog entitled “Reese’s Peanut Butter Cups”.  In it he talked about how in television commercials the accidental mash-up of chocolate and peanut butter leading to a wonderful new thought or idea – an ah-ha moment.  Last month I had such an ah-ha moment while attending a CEO breakfast hosted by the Carlisle Institute, an economic think tank in New Brunswick.  Allow me to set the stage.  A day before the event I read on twitter that the most common word used on LinkedIn to self-describe individuals is “Innovative”.  The following day I sat in a room filled with CEO types and their groupies (accountants, lawyers and politicians) and the discussion revolved around Canada’s poor productivity.  The solution was clear according to the speakers and agreed unanimously by those in the room; we need to become an innovative nation.  And to enhance or encourage innovative according to the speakers, you needed more money to be allocated to research by the private and public sectors. 

So what was my ah-ha moment that I realize by this mash-up of instances?  First, innovation is not unique and second, it is cloneable.  In other words there is a template for it: which unfortunately for Canada, the rest of the world also knows this and uses it.  I agree that innovation can take you a long way (Japan’s televisions, Finland’s cell phones) but that doesn’t make you win in the long run or stand out from the crowd.  To win you must be creative and for that there is no template.

 

So what does this mean for senior management looking at corporate risk management?  There are plenty of innovative risk strategies out there in the form of more sophisticated algorithms, software and flowcharts but these templates do not differentiate you from the herd rather they make you part of it.  Alternatively, creative risk strategies are adaptive, and tailored.  A creative risk strategy is rare which by definition makes it unique and thus helps your firm raise about the herd.