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?

Reputational Risks

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

In late December 2010, Bank of Montreal (BMO) agreed to acquire Marshall & Ilsley, a Wisconsin bank, in an all stock deal at a premium of around 34% to M&I’s share price which had been on a downward trend since early 2010.  M&I had been bailed out, mainly due to bad real estate loans and BMO also agreed to purchase $1.7BN preferred shares from the U.S, government issued under the Troubled Asset Relief Program or TARP. 

The transaction appears to have strategic logic in extending BMO’s Chicagoland subsidiary through Harris Bank into a contiguous area and was welcomed by some analysts at least.  It also illustrates how Canadian companies can take advantage of the strong Canadian dollar in looking at strategic acquisitions in the U.S. and how Canadian financial institutions have the double advantage of depressed prices for many U.S. businesses in the sector. 

However, there has also been some criticism and bad press concerning both the acquisition of M&I and M&I itself.  Repaying the TARP funds to the U.S. government allows a number of executives of M&I to be enriched by the deal under change of control clauses.  In fact the CEO of M&I gets $18 million and a bigger job – he will become CEO of Harris.  Otherwise, conditions under the TARP program would not have allowed such a payout. 

Now there’s some further news.  In Wisconsin, as in other states, inevitable government cut backs are starting to be felt.  Also inevitably a lot of people that are being hurt feel very aggrieved that the mess was not their fault and that a lot of those responsible got rich.  Now there is a campaign to punish companies that helped the governor and one of those businesses happens to be M&I Bank.  Seems that a number of people have been withdrawing their funds from the bank.  Fortunately for BMO this does not seem to have become a fully fledged run on the bank but I’m sure there were a few anxious moments high up in First Canadian Place in Toronto (BMO’s main office). 

Will this hurt BMO’s business in the Midwest?  Probably not much in the long run - and it is a long-term investment.  Nevertheless, it would have been interesting to see the internal risk assessment done by BMO when evaluating this deal.  Would these factors have made it onto the list of known unknowns or unknown unknowns (to borrow a phrase from a former high U.S. government official)?  How much foresight and imagination do you put into your risk assessments for your business?

For more on this story, click the link to a Huffington Post article:

http://tinyurl.com/4rbtlfy

Volatility can hurt – personally or corporately

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Personally I am short Sterling and long U.S. and Canadian dollars.  Therefore I am intimately, sometimes painfully and always nervously acquainted with the recent volatility of currency exchange rates.  I wake up in mornings wondering if next week’s credit card bill or next month’s property tax can get paid. 

Against the U.S. dollar Sterling is way off where it was a couple of years ago but still significantly higher than 8 years ago.  The strength of the Loonie (Canadian dollar) is a blessing that I currently enjoy.  However, whenever news like the latest inflation figures come out (not good) or Gaddafi kills civilians, I either take a deep breath or heave a sigh of relief. 

So far I have kept out of the local mission but my concerns are a microcosm of those that all treasurers should be familiar with, whether it is currency volatility or related to commodity prices, interest rates or any other such variable. 

I feel comfortable when I manage or hedge my position in some way.  This might be converting in advance of my needs when rates are favourable or incurring an expense in dollars or gaining some income in sterling.  This is short term.  In the longer term, I might take the option I have to move back to North America! 

I do know that I am aware of my position and risks and am doing just about everything I can and that I am constantly reassessing and looking for better ways to do things.  I am also often seeking other views and ideas. 

The question every financial executive and treasurer should be asking themselves is do they have the same satisfaction that they know their risk exposures and are managing them the best they can?

School Trip Risk Assessment

by Stephen McPhie, CA

Partner, RSD Solutions Inc. 

www.rsdsolutions.com 

info@rsdsolutions.com 

 

My daughter brought home a form for me to sign to give her permission to go on a school trip.  The form included that statement that a risk assessment was available upon request.  My initial feeling of comfort that risk had been assessed gave way to wondering what this actually meant.  Was the trip going to be less risky because a standard risk assessment form had been filled out?  Do people filling out the forms truly document, assess and rank all the risks and devise and action plan to eliminate or lessen the risks?  Do they actually visualise and understand the risks?  Or do they just hurriedly slap down a few of the same token things each time to satisfy the beast? 

I can just about remember ancient times when I was a kid and went on school trips. No risk assessment forms were filled out.  Teachers would instinctively know the risks and exercise due caution.  We would be made to walk in a line two abreast with a teacher at the head of the line and another at the back.  Periodic head counts would be made.  We stopped and regrouped before crossing roads.  And so on and so on.  The teachers had instinctive and practical risk awareness – although it was not formalised or policies written or bureaucracies created. 

In fact, across the public sector, the term “risk assessment” is seen and heard everywhere these days.  It seems to be the favourite buzz phrase.  But is it accompanied by a culture of true risk awareness?  It seems that complaints about the heavy burden of bureaucracy and form filling are as common as the term “risk assessment”.  Are such complainers really embracing an effective risk culture? 

Unless there is a fundamental risk culture instilled within an organisation with commitment from the top down and bottom up, forms and bureaucratic prescriptions are useless.  In fact, they may become counterproductive by taking attention away from the real risk issues and instil a false sense of comfort, thus increasing risk. 

The lesson for businesses is that risk management must be a qualitative exercise that is going to be different for each organisation.  Off the shelf solutions can be valuable and have their uses but they must be made to fit the organisation as a tool and not the other way round.  Paying your cash and imposing a system is not a substitute for a proper commitment and culture.