Olympic Swimming Gold medalist? Bring your flotation device to Kings County, WA

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

From time to time, I like to look at the “far-side” of downside risk management.  Sadly, most of my examples tend to come from litigation prone America, in this case Kings County in the State of Washington. 

 

As the temperatures on the thermometers increase, the call of “Everybody into the pool” is sending shivers down the spines of local government councilors.  In 5 years there have been 17 drownings in a county of 1.9 million people (about 1 per 650,000 residents per year); to reduce this number further the Council has passed a by-law making flotation devices mandatory for all swimmers.  This is another fine example of a governing body focusing on reducing the cost of downside risk (drowning) while ignoring the far greater reduction in the benefits of upside risk (fun, health, exercise, socialization, future Olympic gold medalist).

 

Unfortunately such folly is not restricted to elected government officials.  When your company or organization looks at risk is only the downside focused on with the exclusion of the upside?  The answer may be telling and hold the key to moving your organization forward by freeing up resources.     

 

For more on this story click on the link to the Seattle PI story: http://tinyurl.com/3qjd3yx

Surfing or Passion?

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

Last week I read Yvon Chouinard’s book “Let My People Go Surfing”.  Yvon is the founder of Patagonia clothing company and I think I may be the last business person on the planet to have read his book.   In case you have not read it, it is the story of his founding of the company and the many path-breaking business principles that he and his associates founded, such as on-site day-care and flex time, etc. etc.  The book also outlines how he, his company and his associates became passionate and active supporters of environmental causes.

The book is a fascinating case study in how to run a company.  So many of the business practices that Yvon and his partner’s started are now common-place benchmarks – but they were anything but when he first introduced them.

When the company first started making mountain climbing gear, they warned their customers not to expect fast service during mountain climbing season as they (the founders) would be out mountain climbing rather than filling customer orders.  This passion for activity and passion in their chosen field, rather than following best business practices turned out quite well for them.  The title of the book of course refers to the fact that employees are encouraged to go surfing when the conditions are good, rather than wait until the 5 o’clock whistle has blown.

Yvon is obviously a very smart but also a very charismatic person.  (I assume he is charismatic from the way that the book was written.)  His company is a blue-print for many others that have tried to follow in his footpaths.  His book is also a popular read amongst B-school types. 

This brings up an interesting question.  Is Patagonia and Yvon successful because of his passion for mountain climbing and surfing, or is he successful because of his passion, or is he successful because of his education (he basically has no formal post-secondary education)?  Can risk managers be successful in the same way?

Note:  This is a re-posting of a blog that previously appeared on November 15, 2010

Risk management lessons from engineers

By Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Engineers have a duty of safety and welfare of the public.  This duty overrides duties to clients, employers and confidentiality obligations.  Consequent to such duty, an engineer must strive to ensure that any dangers of which he or she is aware must be rectified.  If this cannot be done, the facts must be reported to the relevant authorities; i.e. whistle blowing.

 

Should whistle blowing be encouraged more widely, especially in relation to risk management?  Whistle blowers still seem to be generally regarded as traitors and not team players.  However, shareholders and boards may do well to view them as a valuable control and protection.

 

There are probably numerous corporate disasters that could have been averted if people in the know had been listened to more and action taken.  For example, in an earlier blog, I noted that in 2005, Paul Moore, the Head of Regulatory Risk at HBOS, warned that the bank was becoming too risky and recommended it should go into an emergency mode to rectify the situation. Shortly after that he was forced out of the bank.  HBOS, one of the UK’s largest banks at the time and the largest mortgage lender subsequently became a massive banking wreck.

 

Clearly processes must be instituted such that whistle blowers can blow in a direction where they will be taken seriously and protected against any form of reprisal.  The CEO is often the person who sets the tone and consequent risk profile of a bank and may be tone deaf to whistling.  Therefore some sort of independent, strong and senior person should be tuned into whistling.  Perhaps there should also be some sort of award system, or factoring into year-end bonuses, to recognise such protection of a firm’s assets.

Who’s Came First?

By Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

Pete Townshend (of the band The Who fame) has done well out of the TV show CSI’s title songs.  He could carry on in that vein with theme tunes for sovereign debt crises.  Who’s Next, Who Came First, Who’s Last, …. and some others.

 

Seems that Greece is everyone’s favourite (sic) Who Came First candidate.  When will a Greek default become official?  Or how long can a fudge be maintained so that politicians can fool themselves into believing there will be no default?  The market sees default with Greek debt yields climbing towards 20%.  Nobody with some form of conventional content inside his or her head really believes that Greece will ever be able to repay its current debt load and most believe that some sort of restructuring is inevitable.  The only question is when.

 

It seems that here will certainly be another bail out and possibly one after that.  However, sooner or later reality must and will be faced.

 

And if Greece defaults, who'a next?  Portugal?  Ireland?  Spain?  Italy?  And if Greek debt gets restructured and partly forgiven, will there be a line of countries wanting the same treatment?

 

And what does this mean for the Euro and how isolated would the effect be?

Small

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com 

 

 

“The Big Can, the Small Do” is the title of an Economist blog found at http://tinyurl.com/3ltrw68.  While the article itself is very interesting (it is about how smaller companies are more nimble and bureaucracy free and thus more able to innovate despite their lack of resources), it was the title itself that caught my eye as a risk manager.

 

Too often risk departments (particularly those that start down the Enterprise Risk Management path) become bloated bureaucracies that are doomed to inefficiency.  Then a big consulting firm is engaged and they in turn engage their own army of consultants that becomes a parallel bureaucracy that simply doubles the inefficiency (tripling the cost) while producing even less effectiveness.

 

Sometimes small and innovative truly is the beautiful way to go.  A small innovative approach to risk management can not only be very innovative, it can also be very efficient and effective.  If your risk management process starts with an organization chart, followed then by a flow chart, then innovation and efficiency and effectiveness are likely to be a long, long way off.

Extreme Financial Risks & The Eurozone

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.”  (Gandhi)

 

The point is that the emphasis of Eurozone policymakers focus on a stop gap liquidity facility rather than solvency can have long-term consequences.  This is illustrated in the following communiqué (The Future of the Eurozone (VOXEU, Konrad & Zschapitz, June 10^th)) on the outlook for the Eurozone.  

 

A year has passed since the initial bailout of Greece. The Eurozone is still on life support, the authors argue, including the view that Europe’s policymakers have got their strategy desperately wrong.  The failure to modify the Stability and Growth Pact to account for macroeconomic imbalances is a move in the wrong direction.  They treat the bailout as a temporary liquidity problem and not a solvency issue, which will ultimately increase the costs of the policy error. 

 

The authors note two options, which while considered, are not deemed viable.  The first would be the reversal of the socialization of private sector debt and funding from other ECB members to finance budget deficits – a return to national fiscal responsibility.  The economic cost of restructuring would have a large economic cost to all countries.  A second alternative is the use of “financial repression.”  This is when governments adopt measures to channel funds to themselves that may go elsewhere in unregulated markets.  This method is particularly effective at liquidating excessive government debt.  However, from an economic efficiency standpoint, it makes little sense for banks to use their funds to invest in government bonds unless it is part of their shareholder mandate.

Reinhart and Sbrancia (2011) characterize financial repression as consisting of the following key elements:

1. Explicit or indirect capping or control over interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
2. Government ownership or control of domestic banks and financial institutions while placing barriers to entry before other institutions seeking to enter the market.
3. Creation or maintenance of a captive domestic market for government debt achieved by requiring domestic banks to hold government debt via reserve requirements, or by prohibiting or disincentivising alternative options that institutions might otherwise prefer.
4. Government restrictions on the transfer of assets abroad through the imposition of capital controls.

The authors consider following the current option of intergovernmental transfers as a means to avoid debt default or restructuring.  However, the sums required to make this viable would not be considered acceptable to taxpayers. The most likely outcome is a breakdown of the Eurozone prior to reaching an endpoint as policymakers focus on stop gap liquidity facility rather than deal with the solvency issue.   One possible reason for this breakdown is a rise in political tensions among member countries. A second, more likely outcome is a breakdown in the Eurozone as political tensions increase and investors lose confidence in the sustainability of the Eurozone as a whole.

 

For more information on this subject, click on the link:

http://www.voxeu.org/index.php?q=node/6628