Doubt in Davos

The mood in the resort town of Davos, Switzerland is muted this week as business leaders discuss the coming wave of regulation at the World Economic Forum.  The primary concern is that regulatory reform will not be even-handed leading to greater opportunities for regulatory arbitrage.  That concern coupled with increasing political risk in emerging markets such as China is cause for considerable doubt in a quick economic recovery. Here is what The New York Times is reporting this morning.

Global business leaders warned Western governments on Wednesday that a populist crackdown on the financial industry could crimp a fragile recovery from the worst recession since the 1930s. The worried response to U.S. President Barack Obama's plans to curb big banks and a British assault on bankers' pay came as 2,500 business leaders and policy makers met at the World Economic Forum in the Swiss ski resort of Davos.

Surveys produced for the annual conference showed global economic confidence on the rise after deep gloom in 2009 and a cautious return to hiring, especially in emerging markets.  But the specter of uncoordinated, heavy-handed regulation and government intervention in the economy was the biggest cloud on many business leaders' horizon. Uncertainties over whether China will rein in its feverish pace of growth and concerns about how Greece will tackle its debt crisis also weighed. Standard Chartered bank CEO Peter Sands said there was a growing risk that fragmented regulatory initiatives would "create enormous amounts of complexity" and encourage financial companies to arbitrage among regulators.

Is your company ready for the potential regulatory tsunami?  Wheelhouse Advisors can help you prepare.  To learn more, visit www.WheelhouseAdvisors.com.

CFOs and CIOs Find Common Ground

A recent article in CFO magazine discusses the critical partnership between corporate CFOs and CIOs.  As is often the case, these two executives have difficulty speaking the same language.  CFOs are certainly more focused on the financial and risk aspects of any major information technology undertaking.  On the other hand, CIOs tend to focus on the innovation and efficiencies that they can bring to the business through greater automation.  Here is what CFO magazine noted from a recent roundtable discussion with CFOs and CIOs.

If one trait of CIOs could be changed, the executive said bluntly, they would develop more appreciation for prudent risk-taking. "They're always coming up with these very capital-intensive programs that are essentially faith-based initiatives. The projects are not well supported with metrics, the numbers don't work, but they want to run off and take the risk."  Similarly, one CFO at the table, who also asked not to be named, chimed in: "Stop saying that it's going to produce 2,000% ROI. Nobody believes you."  The first executive did allow, though, that there are two sides to the issue. Finance leaders, he acknowledged, often lose sight of the fact that "we have to have some vision, too." Rather than being just numbers-driven, CFOs have to find room for belief in innovation and "understand the power of a better idea."

To be truly successful, the two executives must find common ground.  Wheelhouse Advisors provides practical solutions to bridge the gap between CFOs and CIOs leading to stronger business results.  To learn more, visit www.WheelhouseAdvisors.com.

How to Reinvent Your Company Through Better Enterprise Risk Management

A recent article by Jack Bergstrand and John Wheeler in Directors & Boards Magazine discusses how companies can reinvent themselves through better enterprise risk management ("ERM").  The article provides a unique perspective by integrating the management principles of Peter Drucker with ERM.

Enterprise risk management is an important tool for sustainable competitive advantage. Like the market and the enterprise itself, successful enterprise risk management programs require holistic and systematic processes supported by the following factors:

1. Envision: Strategy linked to customer needs, with defined operational implications, and well-articulated enterprise guidelines for managing risks and opportunities.


2. Design: Formal risk mitigation and opportunity sensitivity analysis/monitoring/reporting.


3. Build: Enterprise-wide controls, processes and infrastructure.


4. Operate: Well-established personal roles and motivations for people to act in the best interests of their companies through proper incentives.

For companies to reinvent themselves, they can’t be viewed as the sum of their parts. The enterprise overall is the goose that lays the golden eggs. Similar to a brand, it needs to be holistic, integrated and relevant—and continuously adapt through successful and accelerated enterprise projects.

Jack and John provide greater insight on these concepts in an on-demand webcast hosted by Directors & Boards Magazine.  The webcast includes a lively question and answer session addressing concerns from the audience of board members and senior executives.  To access this free webcast, visit www.WheelhouseAdvisors.com.

Back to the Future for Banks

The anticipated financial regulatory reform from the Obama administration may be surfacing on the heels of a dramatic defeat of the Democratic candidate in the race for the Massachusetts Senate Seat vacated by the late Ted Kennedy.  The defeat results in a loss of the Democratic super-majority in the U.S. Senate and a potential defeat of the much heralded health care reform bill.  The Wall Street Journal announced the President's next move.

President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country's biggest banks, marking the administration's latest assault on Wall Street in what could mark a return – at least in spirit – to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials.

The proposal represents a sharply different philosophical shift from the view of banking over the last decade, which saw widespread consolidation among large financial institutions to create huge banking titans. If Congress approves the proposal, the White House plan could permanently impose government constraints on the size and nature of banking.

With this move, the President is certainly looking to overcome his health care disappointment by garnering public support for a return to tighter restrictions on the nation's banks.  Given the current mood among the electorate, his probability for success in this arena is high.

An Industry on Steroids?

The Financial Crisis Inquiry Commission ("FCIC") held its first series of hearings this week on Capitol Hill in Washington.  The stated mission of the 10 member panel composed of bi-partisan members of Congress as well as private citizens is, "To examine the causes, domestic and global, of the current financial and economic crisis in the United States."  Similar to the Pencora Commission that investigated the causes of the Great Depression in the 1930s, the FCIC has the authority to conduct hearings and issue subpoenas for documents and witnesses.  The deadline for their final report is December 15, 2010.  Of the people called to testify this week, one of the more interesting and compelling was banking securities analyst, Michael Mayo.  He compared the financial services industry to major league baseball in its rampant use of performance enhancing steroids. Much like Mark McGwire, who admitted to long-time steroid use this week, bankers enhanced their performance artificially with significant long-term side effects.  Mr. Mayo noted the following:

"....the banking industry has been on the equivalent of steroids.  Performance was enhanced by excessive loan growth, loan risk, securities yields, bank leverage, and consumer leverage and conducted by bankers, accountants, regulators, government and consumers.  Side effects were ignored and there was little short-term financial incentive to slow down the process despite longer-term risks."

The only way to rid steroids from major league baseball was to implement a drug testing program with significant penalties for use.  Likewise, the banking industry must also implement programs to deter excessive risk-taking and allow firms to fail when they have ignored the potential catastrophic downside of their actions.

Board-level Commitment to ERM is Growing

This week, results from the 2010 Global Enterprise Risk Management Survey were released by Aon and they indicate a growing level of maturity in ERM programs.  In addition, as the program maturity levels increase, board members are becoming increasingly involved in the effort.  Here is a summary of the board-level indicators from the survey results.

Board-level commitment to an enterprise risk management initiative is absolutely critical to achieving the highest value from ERM efforts and investment. Not only does board buy-in establish priorities and sanction resource allocation, it is a key factor in establishing and maintaining an appropriate risk culture and embedding ERM throughout the chain of command. Best-practice organizations ensure that boards and management have defined risk management responsibilities and delegations of authority.

Responsibility for risk management, including internal and external reporting of risk, should be embedded into the organization’s governance structures and discussions, with emphasis at the board level on:„„

1. Confirming the organization’s risk management objectives and strategies.


2. „„Approving the organization’s risk appetite and tolerances.


3. „„Confirming the organization’s risk profile and approving management’s approach for responding to the most critical enterprise-level risks.


4. „Overseeing the organization’s risk governance framework and ensuring that risk management roles, responsibilities and expectations are defined at the senior management level.

Boards that are successful at ERM have established approaches for managing the workload associated with risk governance — including setting expectations for the quality and timeliness of risk reporting from management. When a board is mired in details regarding risk and risk management, decision making can be slow and ineffective. Best-practice boards are able to find an appropriate balance between oversight of risk and risk management (through effective dialogue with and delegation to management) and the board’s practical use of risk information to enhance decision making.

The balance of responsibility between board and management is a crucial element in any successful ERM program.  If your company or board is struggling to achieve this balance, Wheelhouse Advisors can help.  To learn more, visit www.WheelhouseAdvisors.com.

Preparing for the Inevitable Rise in Rates

Last week, the Federal Financial Institutions Examination Council ("FFIEC") issued an advisory to all U.S. financial institutions to prepare for the inevitable rise in interest rates.  Specifically, they provided recommendations for the proper management of market risk or interest rate risk ("IRR").  Here is a summary of their expectations.

Current financial market and economic conditions present significant risk management challenges to institutions of all sizes. For a number of institutions, increased loan losses and sharp declines in the values of some securities portfolios are placing downward pressure on capital and earnings. In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution’s capital and earnings.  This advisory re-emphasizes the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of institutions. It also clarifies various elements of existing guidance and describes selected IRR management techniques used by effective risk managers.

The regulators are certainly concerned about financial institutions becoming complacent due to the historically low funding rates.  In addition, they surely do not want to be criticized again for working to prevent problems that will inevitably occur as part of any business cycle.  Financial institutions of all sizes will be wise to address these recommendations sooner rather than later.  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.

Getting Ahead of the Risk Curve

In an acknowledgement that the problems that led to the financial crisis of 2008 have not been fully resolved, the Bank for International Settlements ("BIS") in Basel, Switzerland is seeking to address a return of excessive risk-taking in meetings this weekend with top financial leaders from around the world.  The Financial Times reported yesterday that the current low rate environment coupled with ample liquidity has set the stage for another potential crisis.  Here is what they had to say.

The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.  In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.  The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment.

It is a good sign that the BIS and others are looking to get ahead of the risk curve.  What remains to be seen is the reaction from the leadership of major financial institutions and the resulting behavior within the markets.

Signs of Increasing Risk Demonstrate Need for Additional Reforms

At the annual meeting of the American Economic Association here in Atlanta this past weekend, economists debated progress on reforms to prevent a repeat financial crisis.  The consensus seemed to be that much work remains to be done.  Here is what the Wall Street Journal reported about the meeting results.

Over the past few days, economists here highlighted the many ways in which the lessons of the crisis have yet to sink in. Few think the U.S. and other governments have made needed repairs to the financial regulatory system. And some suggest governments' response has increased the chances of a repeat, making the banking system more crisis-prone, putting new strains on institutions such as the Federal Reserve and stretching government finances closer to the breaking point (see charts below). "Our response has made us more vulnerable to a bigger crisis," said Tom Sargent, a New York University economist. "It's distressing."

The U.S. and world economies are walking a tight rope of recovery vs. reform.  While short-term recovery is desirable, it cannot be made at the expense of long-term economic growth and reform.

Reputation Risk Must Be Actively Managed

As the survivors begin to emerge from the carnage of the financial crisis of 2008, corporate reputations are once again viewed as a highly valued asset.  The primary challenge for these surviving companies is to rebuild trust while managing their reputations in a way that aligns with their corporate strategy.  Once they become misaligned, it is very difficult (if not impossible) to bring them back in sync.   Here is what Anthony Johndrow had to say in a recent article from Forbes magazine.

Today it’s about balancing the seven dimensions that make up corporate reputation (product/service, innovation, governance, workplace, citizenship, performance and leadership), namely going beyond product and service promises that are still rooted in 20th-century brand-building assumptions. The evolution of the role of chief reputation officer is still in its infancy, but one thing is clear: It’s not about just getting involved in social media, it’s about giving the company a voice in the formation of its reputation.

Every company has a reputation, regardless of whether or not it has a strategy behind it. Thus, today’s reputation stewards must give voice to their companies. If they do not, their reputations will be driven only by accident (as a result of company actions that don't benefit from expert CRO guidance--see recent financial crisis for numerous examples) and by conversations among people who might not be their best friends. That is a recipe for disaster, no matter who is keeping score.

Many companies may not go as far as creating a full-time chief reputation officer position.  However, it is critical that someone is on point for managing a firm's reputation and that it is actively monitored.  In the highly connected and media driven society that we now live, a company's reputation and brand value can be destroyed in an instant.

Many Companies Still Not Ready For SOX Audits

In last week's issue of Compliance Week magazine, a startling survey result was disclosed.  It seems that almost two-thirds of the smaller public companies that will be facing an audit of their internal control over financial reporting this year are not fully prepared (see chart below).  While some may be looking for the U.S. Congress to exempt them from compliance (a measure that is currently being discussed on Capitol Hill), others may simply be ill-equipped or misdirected.  Here is what was reported in the Compliance Week article.

Of the 210 accountants participating in the recent poll, one-third said their company is less than 25 percent complete in implementing Section 404. Inefficiencies were attributed to problems such as poor training and education in the area of processes and controls, lack of focus on project management and utilizing resources, and a “compliance at all cost” mentality that is focused on effectiveness but not efficiency.

At a recent conference of the American Institute of Certified Public Accountants, Elisse Walter, a commissioner for the Securities and Exchange Commission, said the SEC does not support an exemption for smaller companies. “The SEC supports applying 404(b) to smaller companies, particularly as it applies to the financial crisis we’ve seen,” she said. “But now it’s in the hands of Congress.”

Time will tell the outcome of the congressional debate.  However, the companies that are behind schedule should not necessarily hope for a last-minute reprieve.  The best approach is to address the compliance requirements in a business-focused, practical manner that is effective, efficient and ultimately beneficial to the company's long-term well-being.  If your company is looking for cost-effective solutions, visit www.WheelhouseAdvisors.com to learn how we can help.

Federal Reserve Chairman Kicks Off Year of Change

Kicking off the new year here in Atlanta yesterday, Federal Reserve Chairman Ben Bernanke delivered a speech to the American Economic Association on lessons learned from the financial crisis of 2008.  The focal point of the speech was the role that both monetary and regulatory policy played in the creation of the housing bubble that led to the meltdown.  He admitted that regulatory supervision should serve as the first line of defense in preventing asset bubbles with monetary policy serving as an emergency brake.  Here is his view on the performance of regulatory supervision leading up to the financial crisis.

Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again. Because the crisis was so complex, its lessons are many, and they are not always straightforward. Surely, both the private sector and financial regulators must improve their ability to monitor and control risk-taking. The crisis revealed not only weaknesses in regulators' oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world. For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis.

Based on the view of Chairman Bernanke and many others throughout the world, 2010 will certainly be a year of change as it relates to regulations and risks.  Is your company prepared to address these changes proactively with minimal disruption to business as usual?  Or, will your company be forced to react and change on the fly?  If you are not certain of the answers to these questions, Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.