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?

Technorati Tags: Business, Risk, Management, Enterprise Risk Management, Selection, Assessment, Preemployment

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.

Technorati Tags: Risk, Enterprise Risk Management, Management, Leadership, Real Options, Decision Making, Choice, Uncertainty, Security, Mitigation

Monkey Risk Managers as Real Options

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.

Technorati Tags: Risk, Enterprise Risk Management, Business, Management, Real Options, Mysore, Mysuru, India

Pirates as Risks & Employee Real Options

The New York Times reports on a fascinating sort of Operational Risk – Pirates.  The self-described Somali “Coast Guard” have seized a massive freighter owned by a firm transporting military equipment for the Belize-flagged Ukrainian vessel.  Former Somali fishermen took it upon themselves to extort a “tax” on ships in their territorial waters.  In this case, they claim they simply thought the ship looked big, and wanted to extort a levy.  They claim that they didn’t realize that major weapons were on the ship.

The US and Russian governments are subsidizing the recovery of the military equipment, for an indeterminate customer in Kenya or Sudan.  The USS Howard is reported to be circling the “Pirates”, and Russian Naval vessels are en route to support the recovery of the detailed ship.

I wonder if the Risk managers in Kenya or Sudan or the Ship’s owners in Belize or Ukraine had considered the subsidy from taxpayers in other countries to mitigate the risk of Pirates in their risk forecasting.  Calculating the probability of hijackings on the high seas, although infrequent (like hurricanes, bank robbers and bankruptcies) can be estimated with some degree of uncertainty.  The Times reports that in the past, companies and countries have simply payed off the Pirates, and this as fueled a cottage industry in ocean robbery, thereby increasing the probability of future lucrative attacks.

It appears that in the absence of taxpayer subsidies, Real Options analysts looking to hedge risk would look at several alternatives to mitigate pirate risks.  First they could opt for contracts with Blackwater or some other international private police force.  Or perhaps they would take a less expensive option and staff or train personnel with self defense techniques, or weaponry.  It’s a high-stakes example of managerial Real Options applied to human resource investments.  It reminds me of my first students in the late 1970’s.  I taught Tae Kwon Do, which has specific techniques for thwartin gun-toting thugs.  Because these skills take years to master, it might very well be cheaper to buy high-grade guns and cross-train employees who have other freighter roles to adapt and take defensive roles against the Somali hoards as needed.  Or, perhaps there’s sufficient risk and skill required to add a surcharge for a security detail to protect ships whose courses require journeying close to pirate-filled waters such as Indonesia and Somalia.  Managerial Real Options, such as those I teach and use with my friend and colleague, Johnathan Mun, with his software Real Options Valuation can calculate these uncertainties and value which choices might be useful “insurance policies” against these sorts of risks.

As of September 30, 8pm PST, the US Navy and Russia hadn’t successfully resolved the issue and the Somali “Coast Guard” were demanding $20 Million US dollars ($14M Euros).  Some have speculated that they would settle for $2M.  Clearly there’s some value to preventative defense measures, and only Real Options analysis can quantify and determine which options are “in the money”

Technorati Tags: Real Options, Training, Human Capital, Pirates, Business, Management, Decision Making, Somalia, Africa, Weapons, Self Defense

Prioritizing Workforce Risk Appropriately?

I read with interest the blogpost by InfoHRM writer, Mick Collins, on “Identifying Workforce Risks…Right Now“.  He notes that a recent survey of employer perceptions of leadership talent availability indicate that the majority felt there is already a shortage of qualified leaders.

I worry about how employers know this.  I’ve worked in many industries, for over 20 years, and it is surprising how little sophistication some employers use to define the leaders job requirements (e.g. job analysis), develop appropriate instrumentation (even Classical Test Theory, let alone Computer-Adaptive Measurement based on the Rasch Model); and use these data in succession planning forecasting models.

I’ll never forget a situation about a year ago, when three of the major HR consulting firms approached my employer with a proposal to sell software and consulting services to help forecast workforce supply and demand, at least for executives.  None had even a basic understanding of uncertainty and risk – the fact that I can predict tomorrow with less error than I can predict the next decade’s forecast.  Instead, I partnered with Paul Squires of Applied Skills and Knowledge to create a Monte Carlo simulation, based on both historical business data, and Bureau of Labor Statistics estimates on the probability of retirement by age.   Today, I recommend using a combination of discrete event and Monte Carlo methods, but the model I created with Paul was still far better than anything the consultants tried to peddle.

Technorati Tags: Human Capital, Workforce Planning, Enterprise Risk Management, Leadership Due Diligence, Assessment, Selection

Government Risk & Executive Skill

The announcement of Sergey Brin’s new blog, highlighting the value and challenges of his wife’s new genetic testing firm highlights one sort of risk in Enterprise Risk Management.

The California Department of Public Health caused feelings of terror in genetic testing services when they announced that they would shut them down if they didn’t first pay the government tribute. Brin’s wife is a cofounder of 23andMe, a genetic testing service.

This made me wonder – if 23andMe’s leaders were sufficiently savvy with influence skill, and relationship management with regulators, would they have a higher probability of surviving an encounter with the CDPH?  Robert Cialdini‘s research suggests they would; and it suggests that a portion of managing business risk includes ensuring relationships and the skills that create them are sufficiently high as to weather these types of unforeseen government threats.

Technorati Tags: Influence, Government, Enterprise Risk Management, Skill, Assessment

Bank of America Robust to Financial Whirlwinds?

Milton Jones, Chief Quality and Productivity Officer, Bank of America

The catastrophic financial collapses of recent weeks are nothing short of breathtaking.  It’s particularly noteworthy that in spite of Freddie Mac, Fannie Mae, Lehman Brothers, and AIG; Bank of American has weathered the storms.  Earlier, they purchased struggling Mortage Banker, Countrywide and this week they bought Merrill Lynch. 

 

What is it about the Bank of America that enabled them to weather storms that are sinking other financial institutions?  Do they have a more holistic view of Enterprise Risk Management?  Are they more conservative about risk taking?  Do they have a better set of methods to manage their risk profile?  Perhaps it is a combination of these things.  Did their application of Lean Six Sigma given them a better, companywide appreciation for using science to reduce risk and increase returns?  Did their Chief Quality and Productivity Officer, Milton Jones, or Amy Woods Brinkley, Chief Risk Officer, among others, inculcate a culture, management system, and set of methods that helps them survive?

Whatever the answers, I suspect the quality of their leadership exceeds that of some of their now bankrupt competitors.  I suspect their portfolio of actions with varying risk / return profiles were better.  It wouldn’t suprise me if their culture was relatively more respectful of uncertainty, and proactive risk mitigation than their imprudent counterparts.  What are your thoughts?

Anna Woods Brinkley, Chief Risk Officer, Bank of America

Massive Financial Risks – Root Causes?

The last few weeks remind me of the recent past with Enron, MCI/Worldcom, and Lucent Technologies catastrophies.  With Freddie Mac, Fannie Mae, Lehman Brothers and AIG hit by a financial tsunami, it amplifies the need for effective Enterprise Risk Management more than ever before.

Is there any doubt that leaders are partially culpable for these failures?  Could science-based methods have helped avoided these leadership risks by selecting, growing and managing executive talent as a process, with measurements and controls from Industrial Psychology and Industrial Engineering?

Free Introduction to Modern Human Measurement Course

I’m pleased to report that The Scientific Leader is now offering a free introductory class on modern human measurement. The Rasch Model, the basis for objective human measurement is used extensively for a wide variety of applications in Six Sigma improvement, Healthcare, Organizational Development, Executive Assessment, and Human Resources.

The free class can be found here