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From the brink of disaster ….

September 21, 2008

This week, IACCM members from Europe will assemble in London for our conference – where the topic is risk management.

In light of recent world events, this subject is of course especially appropriate. But unlike many conferences (where the focus tends to be on compliance), IACCM is discussing the best way to achieve balance between risk and opportunity.

The truth is that business must find a way to reconcile these twin imperatives for success. Thus far, key sectors of the economy have failed to structure their operations in a way that balances responsible decision making with pursuit of  ‘opportunistic business’. The biggest issue right now seems to be adequate monitoring and control over sales activity that is driven by commission.

Sales commission has long been the bane of corporate performance and mature businesses have used contracts and commercial staff to oversee the worst excesses. This has not always worked – especially in emerging markets where commercial skills are almost unknown. But in many mature markets it can offer real success. A high performing – and appropriately missioned – commercial group will achieve the balance between identifying risk and enabling opportunity. Their job is to find ways to pursue attractive business  without jeopardizing the company or its reputation.

What a shame that the financial services indutry did not develop such a governance model.

One Comment
  1. Part of the problem with the latest financial meltdown (which looks a lot like other financial meltdowns) is the implicit contract between the major firms, the Fed, and the government. A lot of the same people are at the top of organizations in all 3 sectors, and the people who run these firms know that they have a safety net should they cause any type of catastrophic failure. They don’t want to forgo their massive bonuses to run their businesses properly, because they have free taxpayer-provided insurance. They created a complex tangle of derivatives, based on shaky mortgages, that Warren Buffet called “financial weapons of mass destruction” years ago. The government and the Fed didn’t help either, but going into details there would make this comment way too long.

    If people were serious about fixing these situations, they would establish contracts that set up a set of actions and consequences for firms declaring bankruptcy and requiting taxpayer money, just as individuals who declare bankruptcy face consequences. (The banking industry successfully lobbied Congress to tighten up bankruptcy laws for individuals, making it harder for people to walk away from debt. Somehow they neglected to include themselves.) Some people have indeed suggested these types of remedies, but there seems to be little danger of them being implemented.

    If a corporate contracting group had to make this implicit contract implicit, they would probably frown upon an arrangement with such obvious, substantial, and destructive moral hazard.

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