Monthly Archives: October 2008

CFOs Feel Risk Management Practices #1 Root Cause

Poor risk management practices are the top contributing factor to the current financial crisis, according to a study done by an affiliate of CFO Magazine and The Economist, funded by Towers Perrin.  124 CFOs, SVPs, and other finance executives were surveyed September 22, 2008 – the same week that the $700 Billion dollar bailout bill was being sold to congress.  Highlights of the study include the following:
  • 72% were concerned about their firm’s risk management practices, suggesting a need to invest in more effective risk identification, measurement and mitigation actions.
  • 62% blame poor risk management at financial institutions as a major driver of the current crisis.
  • 59% noted the complexity of financial instruments (derivatives) as causing some of the current mess.  To me, this suggests a need for stronger cognitive ability in financial professionals and leaders; and learning to use the more sophisticated stochastic methods of risk management including Real Options, Monte Carlo Simulations, Rasch Measurement, and Computer Adaptive Testing of risk culture, financial skill, and leadership conscientiosness.
  • 55% plan to put their risk management practices under a microscope, from the board down and from the shop floor up

Do your risk management practices address the abilities, skills of finance and leadership professionals in mitigating risk?   Do your Audit and Enterprise Risk Management professionals demonstrate their proficiency at measuring, using modern psychometrics, cultural, employee, and leadership sources of risk and uncertainty?  Are you comfortable with your firm’s ability to detect and mitigate these risks?

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Singapore “Funky Town” To Attract Human Capital

Singapore, the small but prosperous City-State wants to be “Cool and Funky” to attract the right sort of Human Capital, said Senior Minister Goh Chok Tong, reports the Straits-Times (Oct 27, 2008).  “We have to offer them a lifestyle which they want to be a part of, and importantly, jobs that chellenge them intellectually and pay well”.  “An open economy which allows for free movement of trade, capital, people and ideas is essential”.

Wise words from a man who currently presides over the most recent spectacular economic success story in the last 30 years.  A tiny island nation with few natural resources, they went from abject poverty and “developing nation” status in the 1950’s and today, GDP per capital rivals any western power.  Singapore has the most liberal immigration laws in the world, especially for educated foreigners, and maintains a very small government to ensure high levels of economic freedoms.  When I used to travel there on business in the 1990’s, though, the locals called it the “Fine City” because all sorts of personal freedoms incurred government fines.  In December of 2006, when I took my family to visit Singapore, we saw t-shirts like this, and noticed that they had repealed their prior draconian anti-chewing gum laws.  These early signs of reform, and this week’s SM comments suggest that there is a newfound serious recognition that entrepreneurial and creative human capital simply won’t work where there’s little culture and fun.  They need real options of the creative variety to allow their minds to think creatively of new ways to create value.  Do you think Singapore can create another Silicon Valley + San Francisco?

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Telecommuting Generally Positive for Employees and Employers

 

Working from home seems to have many benefits for employees and businesses, according to a study published in the prestigious Journal of Applied Psychology, and available for download for free.  Doctoral Student Gajendran & Professor Harrison of the University of Pennsylvania used Meta Analysis, a method to summarize a variety of other studies, and discovered that telecommuting: 

  • Improves the employee’s perception of autonomy
  • Reduces work-family conflicts for the employee
  • Improves the quality of the relationship with a supervisor
  • Produces higher levels of job satisfaction
  • Improves performance as evaluated objectively or by the supervisor
  • Reduces intentions to leave
  • Reduces stress

Having telecommuted for two years when I worked for Lucent Technologies in the 1990’s, I found most of these results in line with my own hypotheses.  There were several findings, though, that surprised me.  First, I was surprised that while supervisors and objective measures showed performance improvements, there was no change in productivity perceived by the telecommuters themselves (positive or negative).  Second, I was surprised that the quality of the relationship with supervisors was perceived to be better with telecommuters.  In my own case, I found it harder to connect with all sorts of stakeholders, including my boss, when I telecommuted, but apparently most people find the structured sort of relationship with a distal boss to be even better than nearby work arrangements.  Consistent with my own experience, but in contrast to supervisors, the relationships with co-workers worsened for those telecommuting, particularly those who telecommute extensively.  I suspect that co-workers resent the freedoms they don’t have and also have to do extra work to schedule teleconferences and webmeetings/Goto meetings to make sure they include telecommuters.  Do these results surprise you?  What strategies do you suggest for exploiting the upsides of telecommuting, while mitigating the co-worker relationship risks?

 

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Board Members Blind to Major Risks

65% of financial-company board members feel they lack the tools and transparency to properly assess risk exposure, according to a PricewaterhouseCoopers survey reported on by CFO.com.  I was particularly intrigued that 77% felt that existing valuation tools are not robust enough, especially because I have a paper submitted to the Society for Industrial-Organizational Psychology’s 2009 conference on this topic. 

Given board member’s desire for better risk and value detection methods, I’m pleased that the Cue-See Model I created has potential to help.  Based on evidence from many business sciences including Finance, Industrial/Systems Engineering, Industrial/Organizational Psychology and Computer Science, Cue See posits four factors that characterize value creation in all processes:

  • Quality: Delighting customers (fitness for use)
  • Cost: Price, or resources consumed to create value
  • Quantity: Volume (units or customers served)
  • Cycle Time: Speed

These four simple factors, when combined with business-level goals, provide a sort of quantitative backbone to understand uncertain and risky value creation in any type of process designed to achieve goals, including financial and shareholder goals desired by corporate board members.  In my paper, I go beyond the introduction I did in a paper for Quality Digest Magazine, and include Monte Carlo Simulation, Discrete Event Simulation, and Real Option Analysis methods mixed with Rasch Psychometrics to quantify human intangibles objectively.  I also go into greater detail on the theory behind the Cue See model in my forthcoming book, “Leading Scientifically: Managing Risks and Increasing Returns”, to be published in 2009 by Prentice Hall / Pearson Education.

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Full Employment Act for Financial Risk Managers

CFO.com reports that the one small silver lining in the recent financial crisis is that financial professionals, especially the top job, are more important than ever.  Some have called it a “full employment act” for financial risk managers, who seek to mitigate the downside, and exploit the upside, to “get paid” for taking appropriate risks.

The Institute for Financial Analysts provide a certification program for those seeking Financial Risk Management Skills (FRM), and for $2,500 include instruction in the following areas:

Basel II that involve current banking laws and regulations to create international standards.
Quantitative Analysis, including measurement and modeling of risk
Enterprise Risk Management to manage risk (Avoid, Reduce, Share/Insure, Accept).

Recommended books include The Professional Risk Manager’s Handbook and the Financial Risk Manager Handbook

These address the technical knowledge requirements to be an effective Risk Manager, however, according to the Open Source O*Net online job analysis information include other critical job tasks and skills including personality traits such as integrity, and stress tolerance (Low Neuroticism).  I wonder if pre-employment risk management assessments are used to manage Risk Manager risks?

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Market for Pirate Risk Management

I wrote previously about considering the current Somali pirate situation a special kind of operational risk management, with real options to mitigate the risk of a hijacking.  While probability of being attacked is less than one percent, the consequences of being attacked are high ($1M-$2M in ransoms, plus a 3 month delay), they’re worth taking an insurance policy to hedge the risk.  Previously, I speculated on whether the free market would find a solution in a market demanding pirate risk management, and I’m pleased to discover that private guards are filling such a role.

Reuters reports that commercial shipping firms are using private security firms to provide intelligence on the location of pirates, and even provide armed security details as needed.  Firms providing these risk management solutions include the Olive Group.  Aware of the security firms’ own risks, they rely mostly as an intelligence role to help firms avoid pirates altogether, using arms as a method of last resort.  This seems like a prudent strategy for managing these sorts of risks, and is commendable and to be expected for a security risk management firm who themselves seek to maximize their own profits while minimizing costs and carnage.

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Monkey Risk Managers as Real Options

Langur Monkeys Fighting

Langur Monkeys Fighting

Did you ever think your risk management investments might include a Monkey Squad?  In Mysore (Mysuru), India, the local government funds a Monkey Squad, a Cow Squad, a Dog Squad, and even a “Special Gang” during mango season, according to this report on their website (page 39).

At first, I found this humorous, but the more I investigated it, it is actually a cross-cultural example of a special form of operational risk that is unique to locations with violent mammals.   In October, 2007, for example, the BBC reported that the deputy mayor of the Indian capital Delhi died after being attacked by a horde of wild monkeys.  In response, Delhi’s government hired a langur monkey trainer to frighten off other monkeys from boarding trains and hurting people.

It’s an unusual example of an organization purchasing a real option – a group of people (and Langurs) skilled in managing monkey menaces – to mitigate risk.  These particular governments felt it was worth hiring, in Mysore’s case, 5 people who dedicate their careers to anticipating and addressing monkey violence when needed.  Real Options is a new approach to managerial finance in which risk and uncertainty are considered alongside cost and value creation.  It allows a leader to make partial investments immediately, and allow uncertainty such as monkey attacks) to resolve itself before either exercizing an option, or letting it expire without action.

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