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.

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.