Risk Politics

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

As a professor and lecturer on risk and enterprise risk management I see and take the time to study a lot of different risk frameworks.  However there is one risk element that I rarely ever see mentioned.  That risk is political risk – and I do not mean elected officials risk, but instead the mundane but ever present day to day water cooler office politics risk.

 

An organization is a collection of people that interacts with other organizations which are also a collection of people.  (I am assuming that your company or organization is not 100% machines and that all of your customers are also not 100% machines.)  Whenever you have people interacting with people – either internally or externally – you will have politics.  Whenever you have politics you have political risk.  Where does that show up on your ERM system? 

 

A perhaps even bigger form of political risk is the games played by senior management as they jockey for position.  Does your ERM system capture that inherent risk?

 

What risk mitigants does your firm have in place to identify, measure and manage political risk?  Is it getting better or worse at your organization?  Do you know?

 

Oh – and by the way – there is also the risk of elected officials doing something silly that effects your plans and forecasts as well.

 

 

Politicians Are Risk Managers

by Stephen McPhie CA

Partner RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

 

Tuesday and Wednesday of last week saw budgets delivered by the finance ministers of both Canada and the United Kingdom.  To be more accurate, the budget was delivered in Britain by the Chancellor of the Exchequer.  As an aside, the British Prime Minister also has another title which is First Lord of the Treasury.

Both finance ministers had different agendas.  In Canada, the trick was not to get blamed if the budget was defeated resulting in an election call (which is indeed what happened but on a different matter).  In Britain, it was an imperative not to force the Liberal Democrats to abandon the coalition government, thus causing an election.  In both cases political timing is all-important.

Actually, in the latter case, the hard work was already done late last year and this budget only really consisted of some tweaking.  However, in both cases, a major consideration was essentially hedging against external factors that could not be directly controlled but which could result in major adverse consequences, at least for the finance ministers concerned and their political parties.  Politicians are masters of this type of risk management - pursuing sub-optimal agendas and policies to manage a political outcome.  In other words, taxpayers and the country as a whole pay an option premium on behalf of politicians.

There are often a lot of things not to admire about politicians and their methods, but sometimes you can admire some of their risk management abilities.  Can many company executives say the same about how people would see their companies’ risk management capabilities?

Political Risk

by Rick Nason PhD, CFA

Partner RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

I had a guest speaker in my capital budgeting class last week. They were explaining to my students the various capital budgeting techniques that they used at their firm. The speaker then stopped and said – in a moment of frankness – that in reality a lot of capital budgeting decisions were premade for political reasons long before a calculation was even begun.

All organizations involve people, and whenever people are involved so will politics be involved. As much as we in academia and the consulting fields like to think of ourselves as being purveyors of great rational concepts, the reality needs to be explicitly recognized that politics more often than not trump rational decision making.

When you read the title of this blog, I suspect that you thought I was going to blog about governmental politics. While changes in government policy are definitely risks to be managed, they are risks that are relatively easy to manage due to their transparency and openness. We expect elected officials to act in their own political interests.

I conjecture that the far bigger political risk is the internal political risk that affects the rationality of risk decision making within an organization. These are risks that are not discussed for (wait for it) principles of political correctness or politeness. We are starting to get some rumours out that internal political decisions in the crippled nuclear reactor in Japan may have made the crisis worse – against rational decision making. Are political risks influencing risk decision making in your organization potentially leading to a melt-down?

Pentagon Political Risk Model: $125 million. Reliability: Ummm,...

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

Over the past 4 decades the US Pentagon (Department of Defense) has spent untold millions attempting to build a predictive political risk model, the latest iteration of which cost around $125 million USD.  Despite the vast amounts of data gathered from world political experts and the complexity of the algorithms, they failed to predict the recent events in Egypt.  Luckily the direct impact on the US in this particular instance is minimal; for now. 

Rick Nason, a partner at RSD, has pointed out that risk can be simple, complicated and complex.  When people and human emotions are involved it seems that complex risk management wins the day.  Is your organization operating under a “tick the box” risk management system?  Alternatively, has your organization put faith in algorithms? 

For a link to “Pentagon’s Prediction Software Didn’t Spot Egypt Unrest” from Wired Magazine click:

http://tinyurl.com/6jc3zzc