Wednesday, April 14, 2010

The Elephant in the Room of Risk Management

by John Berling Hardy © The Hidden Game Revealed

One of the cornerstones of our accounting, banking, and investing models is the assumption that pervasive collusion is an anomaly – a kind of perfect storm that needs many pieces to be in place for it to be successful. What if this assumption was false? What if pervasive collusion, instead of being an aberration, were something as mundane as rust on metal? It would imply that in the absence of specific safeguards, pervasive collusion would be the stasis towards which organizations and industries would gravitate.

Social systems in general gravitate towards oligopoly. Take any small town with a history that extends over a century and you’ll find a small clique who runs it. Observe any high school, be it in a slum, or in Hollywood, and there’ll be a ‘cool crowd’ that lords over the rest. So why then should we expect corporations to be any different?

Accepting this possibility would have serious implications for our entire approach to risk management. This would radically impact our risk assessment calculation. What was before thought of as known risk did not include this contingency, therefore the way in which investments and lending institutions went about lending their funds seriously underestimated the true risk relate to their investments. It would also imply that we had to rethink our current approach to corporate governance, and internal controls (SOX).

As this type of phenomenon tends to be more acute in larger organizations, it stands to reason that this is the sector in which the banks sustained the greatest losses. Their knee-jerk reaction was to then tighten up credit in the medium and small sized business sector. This compounded the economic impact of their mistakes, while doing nothing to address the real source of the problem- the Player Culture that predominated at the top of so many large organizations.

There is a naturally occurring phenomenon; I refer to as the Hidden Game Algorithm, wherein a small group of Players are able to create a Player Culture within a company, thereby transforming it into their personal proxy. Those megalomaniac CEO’s, such as Jack Walsh at GE, or Kenneth Lay at Enron, were merely the tip of the iceberg, this represents an ethos that has pervaded our entire business culture.

I believe it is high time we removed our rose coloured lenses and began to deal with this “elephant in the room”. It is time we removed these corporate celebrities and their circles of influence from their perches at the top of banking and industry, and replaced them with those who have the intelligence, and intent, to lead us forward.

Reproduced with permission of John Berling Hardy at The Hidden Game Revealed

1 comment:

Anonymous said...

William, I totally agree. There are a lot of coporate elephants out there and what we need to get rid of is the source of their food - speculative stockmarkets. Alternatively we need to limit business size so that we will return to free markets, or we need to limit the free transfer of huge sums of capital across borders. Either measure will cut back the size of global businesses. CEOs aren't especially good or clever. They just are randomly lucky.

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