Implementing ERM Without Breaking the Bank

The implementation of Enterprise Risk Management ("ERM") at mid-market companies is discussed in this month's edition of Treasury & Risk Magazine.  While many of their larger counterparts have embraced ERM, these mid-market firms have been slow to adopt the same practices.  Here is some of the insight provided in the article.

Enterprise risk management has become standard practice for Fortune 500 companies these days, but not so much for mid-market firms. While the financial crisis made it clear how important understanding risk can be, it also made it that much harder for cash-strapped and cost-conscious smaller firms to invest in the software and personnel necessary to make ERM happen.

“Many mid-market firms don’t yet have a robust ERM,” says Brian Kalish, head of the finance practice at the Association for Financial Professionals. “Certainly for the past year, those that don’t have not been dealing with that issue.” “Our company is currently looking at ERM, but for now, it’s just me,” says Dan Kugler, assistant treasurer for risk management at Snap-On, a $2.8-billion Kenosha, Wis.-based maker of hand and power tools. “We don’t have a risk officer yet,” says Kugler, whose main responsibility is overseeing Snap-On’s property and casualty risk.

As we continue to emerge from the economic downturn, many of these mid-market companies will be well served by implementing a practical, business focused ERM program.  If your company is considering ERM and would like to know how to implement without breaking the bank, email Wheelhouse Advisors LLC at NavigateSuccessfully@WheelhouseAdvisors.com.

How Trustworthy Is Your Company?

Last week, an executive roundtable session was held here in Atlanta at the Carter Presidential Center to discuss views on the increasing need to rethink corporate governance.  During the session, Walter Smiechewicz from Audit Integrity provided some compelling insights into measuring corporate governance practices and the overall value of having a strong corporate governance program.

Audit Integrity bases their analysis of corporate governance practices in a proprietary ratings methodology they refer to as Accounting and Governance Risk or AGR.  The firm has analyzed public financial statements and related disclosures to calculate an AGR rating for every U.S. publicly traded company.  Using these ratings, Audit Integrity has also determined a strong correlation between higher AGR ratings and higher shareholder returns.  As a testament to the accuracy of the AGR rating, Forbes magazine has used the AGR as the primary basis for their 100 Most Trustworthy Companies List for the past three years.

If you are interested in improving your AGR rating or simply want to learn more about better corporate governance, visit www.WheelhouseAdvisors.com.

Financial Regulatory Debate Continues

The debate over financial regulatory reform continues in the U.S. Senate according to a report from Bloomberg today. There seems to be agreement on the ultimate goals of regulatory reform.  However, senators do not seem to agree on where the responsibilities for regulation should reside.  Here is an update on new legislation that is currently in the works.

Senate Republicans led by Richard Shelby are drafting an alternative to financial-regulation legislation that Senator Christopher Dodd is developing after bipartisan talks collapsed this month, two Shelby aides said. Shelby’s plan will likely aim to create a consumer protection unit within a new bank regulator instead of the standalone agency sought by Dodd and President Barack Obama, said the aides, who requested anonymity because the talks are private. It would shield taxpayers from costs of unwinding systemically important failed financial firms, the aides said. Also under consideration is a consolidated bank regulator, one aide said. The idea is supported by Dodd, who proposed eliminating the Office of Thrift Supervision and Office of the Comptroller of the Currency, and moving their powers, along with the bank-supervision powers of the Federal Reserve and the Federal Deposit Insurance Corp., to the new agency.

This alternative bill will also address how best to tackle regulation of systemic risk.  Currently, discussion continues around establishing a regulatory council led by the U.S. Treasury that will provide systemic risk oversight.  However, there continues to be doubt about the effectiveness of regulating by committee.

Losing Their Way

The recent troubles of global car manufacturer Toyota offer a real-world example of the need to reinvent enterprises with a focus toward enterprise risk management.  As Jack Bergstrand and I discussed in our recent webcast, companies today are relying on outdated management principles that emphasize specialization and limited communication across business units.  This contributes to greater risk and ultimately a diminished brand.  Here is what Forbes magazine reported this week about the management failures at Toyota.

President Akio Toyoda acknowledged in an opinion piece he wrote for The Washington Post last week the company had "failed to connect the dots" between the sticky pedals in Europe, surfacing as early as December 2008, and those in the U.S. that culminated in the massive recalls. The error in Europe was corrected, starting with the Aygo hatchback in August 2009, and those models were not included in the latest global recalls.

Making the exact same product again and again - what's known as "quality control" in manufacturing - isn't the same thing at all as ensuring safety, according to Steven McNeely, who oversees safety management systems at Jet Solutions, a Richardson, Texas-based carrier.  "Management's attention and oversight was focused on the business bottom line, and those metrics were quality measures. Management was not focused on safety risk assessment or risk management," he wrote in his essay, "Lessons Learned From Toyota."  Others say rigorous testing, managerial foresight and valuing customers are critical to the true Toyota Way, and the company has derailed from that path.

The greater size and complexity of today's corporations demand a new way of managing.  If you agree, visit www.WheelhouseAdvisors.com to learn more.

Another Agency Jumps on the ERM Bandwagon

This week, another governmental agency announced plans to bolster their Enterprise Risk Management practices. What is interesting is that the agency making the announcement, the U.S. Commodity Futures Trading Commission, has been the subject of merger speculation with the Securities and Exchange Commission, the other agency recently announcing a similar move.  Here is an excerpt from the press release.

The U.S. Commodity Futures Trading Commission hopes a proposed increase to its budget will allow it to create a new office geared toward detecting and reacting to emerging new risks to the marketplace. This new Enterprise Risk Management Office would be funded by a portion of President Barack Obama's proposed fiscal-year 2011 budget increase and would " coordinate agency responses to address risks to markets and institutions the CFTC regulates," according to CFTC spokesman David Gary.

The idea of creating an office to monitor markets for emerging new risks isn't a new concept. The U.S. Securities and Exchange Commission in 2004 launched the Office of Risk Assessment, which was also designed to spot new trends or problems in the markets and serve as an enterprise-wide office to work with all of the SEC's divisions to police for risk. SEC Chairman Mary Schapiro last year combined that office with several others to form a new Division of Risk, Strategy and Financial Innovation and tapped University of Texas Law School Professor Henry T.C. Hu to run it.

Given the similarities in approach, a CFTC/SEC merger may be a good idea to eliminate redundant activities and reduce the skyrocketing deficit.

Regulatory Reform Moving Forward in 2010

It looks like the political environment in Washington is set to support a financial regulatory reform package this year. A recent poll published in The Hill demonstrates the sentiment for pushing forward on reform.  Here is what they had to say.

Washington insiders overwhelmingly believe Congress in 2010 will pass new regulations on the financial industry. According to a new poll by FD, a communications and strategy firm, 76 percent of Washington insiders say financial regulations will head to President Barack Obama’s desk this year. The FD survey included 300 insiders working in lobbying, government, media, nonprofits and think tanks, among other associations. The poll was conducted between Jan. 31 and Feb. 1 with an error margin of 5.7 percent.  The poll showed that insiders strongly believe Obama will attempt to move to the political center this year and that Congress will not pass healthcare reform, a limit on greenhouse gas emissions or new restrictions on campaign finance.

Is your organization prepared for the coming changes?  Visit www.WheelhouseAdvisors.com to learn how we can help.

Pathway to Restoring Trust

The Committee for Economic Development recently issued a briefing on how companies can restore trust in corporate governance.  Well known business leaders participate on this committee and provide periodic guidance for companies based on current events.  A significant piece of this briefing focuses on how companies should be managing risks.  Here is an excerpt discussing the role of both the board of directors and management.

There should be a board entity—whether the Audit Committee or a new Risk Committee—which has the task of assessing the direct economic risks noted above (capital, leverage, liquidity, credit, market, operational) confronting the company. Working with management, it should review and agree upon the fundamental systems, processes and measures for assessing, mitigating and monitoring risk, as described immediately above. It should receive timely updates on the status of high risks facing the company. It should also receive reports from relevant risk officials in a company on whether those receiving compensation above a certain level have identified relevant risks and taken appropriate risk-mitigation steps. (This activity is relevant both to accountability and to compensation.)

Does your company operate in this manner?  If not and you are interested in learning how to build a program to support this activity, visit www.WheelhouseAdvisors.com.

2010 Top Ten Risks

CFO magazine recently published its top ten list of risks for financial executives and businesses in 2010.   At the top of the list is strategic change management.   Firms who understand how to take full advantage of the opportunities presented by the recent financial crisis will prosper.  Those who cannot readily translate their vision into reality will suffer greatly.  Also on the list is a renewed emphasis on shared services.  With major change on the horizon, companies must create a resilient financial infrastructure that can accommodate new businesses quickly.  Here are the top ten risks for 2010.

1. Strategic change management. The upheaval of the past year and the desire to seize opportunities during the recovery will make for a lot of changes, including mergers, acquisitions, and divestitures. These shifts leave a lot of room for controls to fall through the cracks and can create new liabilities.

2. Capacity. Faced with uncertain demand, companies risk both over- and understaffing. Timing capital expenditures, such as new facilities or equipment, will also pose a challenge.

3. Incentive plans. Compensation is under extreme scrutiny in the wake of the recession and could pose a risk for public companies.

4. Human resources. Layoffs have left many companies with skill gaps and possible holes in their compliance structures.

5. Fraud. Widely thought to pick up (or be revealed) in down times, fraud can be easier to commit at companies that are short-staffed and under pressure, which would describe most businesses today.

6. Innovation/R&D. Companies that have cut back in this area during the downturn risk falling behind their competitors.

7. Third-party relationships. The collapse of Lehman Brothers opened CFOs' eyes to just how careful and far-reaching they need to be in evaluating third parties.

8. Shared services. Under pressure to cut costs, finance executives are exploring new locations for their back-office functions. These changes can affect companies' control structures and processes.

9. Inflation/Deflation. Currency risk remains an open question for 2010.

10. Tax management. Recession-scarred states are looking to raise funds through new taxes and stricter enforcement of existing tax laws.

Wheelhouse Advisors can assist your company with leading solutions to these risks.  For more information, visit www.WheelhouseAdvisors.com.

A Return to Boring?

In The New York Times this week, Paul Krugman offers his views on the state of the U.S. financial services industry with an interesting comparison to our neighbors to the north.  Here's an excerpt from his op-ed.

Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.

Mr. Krugman makes a good case for banks to get back to their roots.  However, in the U.S., it may be like trying to close the barn door after the horse is long gone.