Spring Cleaning

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

I am just now getting around to my spring cleaning.  Yes – I know - summer is half over, and it will soon enough be time to start prepping for fall.  I will be the first to admit that when it comes to organization or administrative tasks that I am not the most efficient person on the face of the planet.

 

Anyhow – back to spring cleaning.  In the process of spring cleaning you obviously get rid of a lot of junk that you don’t use anymore as well as things that were ever at best only marginal useful.  However, what I find interesting is that when I do a semi-annual cleaning I come across items that I forgot that I had that I could really use.  They were there all along but just hidden by all of the junk.

 

Sometimes I think that risk departments and processes could also do with the occasional spring cleaning; getting rid of a bunch of “junk”, such as processes or reports that are simply cluttering up the place.  In doing so you might just come across some ideas or processes that you had forgotten about that could indeed be very useful or valuable.

Is this the Risk Manager's super hero?

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

A special thank you to Wanda Wilson for finding this superhero.

Rank

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

When I was in trading and structuring, we were semi-obsessed where our trading desk “ranked” in the annual rankings of the various magazines that focused on the capital markets.  Of course investment bankers are over-the-top obsessed where they are ranked in the league tables.

 

Where does your risk department rank amongst its peers?  I realize this is a hypothetical question as there are not rankings (particularly non-financial rankings) of risk departments, but it is still worth it to ask the question.  If your risk department does not rank at the top of your industry, then why not?  How much is it costing your company to not have a top ranking risk department?  What would it take to get your company’s risk department to the top of the rankings?  What would be the benefits?  Why aren’t you working to be the best now?

Safety for today but not for tomorrow. A conundrum.

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

It was with interest that I read “Can a playground be too safe” which has it all when it comes to counter-intuitive risk management and can so easily be translated from the playground to the boardroom (the big person’s playground?).  First, as playground surfaces become “softer”, children (and parents) are over-perceiving the safety of the surfaces and thus taking greater risk at play and experiencing just as many injuries as paved or grassed surfaces (this risk phenomena is call homeostasis).  Second, as government’s worry about litigation and medical bills, playground equipment is getting lower to the ground and platforms tend to be railed in.  This reduction of risk according to critics “may stunt emotional development, leaving children with anxieties and fears that are ultimately worse than a broken bone.”

 

Arguably what we learn in the playground ultimately becomes part of our adult self.  Looking at the way some firms handle risks we see the safe playground move to the boardroom.  Companies develop risk management systems that staff trusts emphatically with dire results as they push the envelope thinking they are protected from downside risk.  In addition to this companies may develop risk programs that reduce downside risk for the quarter but at the cost of reducing the long term profitability and competitiveness of the firm.

 

For more on this subject follow the link to the New York Times article “Can a Playground be too Safe”:

http://tinyurl.com/3baekhe

Great Versus Relevant

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

As a university professor I always start to get excited again this time of year as fresh new batches of students are about to arrive on campus.  Another cohort of great minds to fill with relevant knowledge – or so we tell ourselves as we start preparing our class syllabus.

 

One of the strange characteristics that we note – or at least in business schools, although I suspect it carries over to other faculties as well – is that the great students on average underperform the average student later in life in their careers.  Of course there are always exceptions to this – some great students have outstanding careers.  Typically however the most gifted academically under-perform their more mediocre peers.

 

There are a couple of possible explanations for this.  The first and most obvious is that B-Schools teach and measure on all the wrong topics and metrics.   I believe this is true and have a forthcoming academic paper titled “Business School Myths” that outlines my arguments why this is so. 

 

A second and related explanation is that business schools teach great knowledge, not relevant knowledge.  Compounding this, students from the first days of kindergarten are rewarded for focusing on great knowledge not relevant knowledge.  (“Great” meaning both the great ideas –dead poets etc. – as well as the great volume of material that needs to be covered to satisfy the standard curriculum which is designed by a committee – insert your own design by committee joke here.)  What is “great” in terms of ideas is rarely questioned, other than by the kindergarten and primary student, and they are told that they are too young to understand.  (Anyone who needs to relearn how perceptive kids are needs to read the comic strip Frazz.)  For instance we continue to teach Shakespeare without question.  I have nothing against Shakespeare (in fact I rather like old Will’s writing and themes), but should we unquestionably continue to teach it simply because that it was taught last year?  Have there not been any relevant (more relevant) plays or stories written since?

 

It seems to me that risk management is also trending towards “great” versus “relevant”.  Regulators, shareholders, rating agencies, Boards, and others all want to see evidence of “great” risk management in place.  Here too “great” has two meanings; (1) what is considered the orthodox risk metrics and (2) a lot of it.  But does anyone ask if the risk management is relevant?

 

Getting back to the point about great students underperforming on average the more mediocre students, it is interesting to ask the question; “Does great risk management, on average, underperform mediocre risk management?”  If “great” means traditional and volume, and not relevant, then I believe that “great” risk management will indeed underperform mediocre but relevant risk management.

Damned if you do and damned if you don’t

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

U.S. politicians are playing roulette with that country’s AAA debt rating with their inability to agree raising the debt ceiling along with meaningful deficit reduction measures.

 

Last year the UK enacted meaningful deficit measures with a harsh austerity program and received plaudits from certain international institutions including the IMF for its actions.  The AAA debt rating was thought to be secure and medium term growth prospects bright.  However, Tuesday’s Daily Telegraph reports that this rating is now in jeopardy due to [1] lower than expected growth.  It is rumoured that the Prime Minister wants the Chancellor to stimulate the economy somehow although he also says that further stimulus is unaffordable.  What would change of course do to the market perceptions of the country and its credit rating?  Probably nothing positive!

 

Of course, the cause of all this is mass irresponsibility on the part of politicians in many countries over several years.  They can’t resist spending other peoples’ money.  Furthermore, they only have a short-term vision (if any at all) - their outlook generally stretches until no further than the next but one election, which usually means an absolute maximum of 8 years.  That usually leaves someone else to pick up the mess with those that caused it are often hailed as wonderful and visionary.

 

Personally, having lived in Canada during the deficit and debt ridden years in the 1980’s and 1990’s and coming to London in 2000, I was horrified by Gordon Brown’s 2001 budget that turned the spending tap wide open and set the UK’s fiscal health on course to where we know it ended up.  The opposition was too timid to mount any significant attack and essentially ended up buying into the big spending – until the political mood changed and they changed with it.  I remember telling anyone who would listen that this was fiscal madness and would end in tears sooner or later.  However my audience was small as nobody listened.  Good times were rolling along on a sea of debt, both public and private.

 

There is no easy solution and no painless solution to all of this.  Deficit reduction (let alone any thought of debt reduction) reduces growth at a time of moribund growth.  Stimulus might provide short relief at a cost of higher future interest costs and higher inflation and result in more difficult decisions later.  In fact, as fiscal situations worsen, decisions are taken away more and more from politicians and dictated more and more by the market.

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[1]  www.telegraph.co.uk/finance/economics/8660752/Weak-UK-growth-puts-AAA-rating-at-risk-experts-warn.html

Appearance vs. Reality

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Going through airport security has certainly changed air travel.  It appears to be almost harder to successfully pass through airport security with evil intent than it is to rob from Fort Knox.  The appearance (or at least as far as the various governmental agencies would like us to believe) is that airports are the safest places in the world, and the place where one is least likely to encounter a terrorist.  But is that the reality?

 

Likewise in your organization you undoubtedly have risk management practices in place that seem to safeguard the organization against specific instances of harm or ill-effects.  But is that the reality?

 

Furthermore who determines the level (and depth) of the reality?  The person who built the system?  Do you think they might have a bias?  Do you think if they had a blind spot in building the system that they might also have a blind spot in assessing it?

 

So again – is your risk management built for appearance, or is it built for reality?