The view from “Olympus” and “Why did RBS fail?” v “Roads to Ruin”
Monday, 9 January, 2012 1 Comment
The long anticipated report…for what it is worth [in terms of the difference it may make!] is out and, whilst I haven’t read it through fully I was struck by the similarities between this passage and the content of the recent “Roads to Ruin” report into dangerous risk management failure/limitations (delete as required):
|FSA on RBS||Roads to Ruin|
|It is difficult, from the evidence now available, to be certain how aspects of RBS’s
management, governance and culture affected the quality of its decision-making,
but the Review Team’s analysis prompts the following questions:• Whether the Board’s mode of operation, including challenge to the executive, was as effective as its composition and formal processes would suggest.
• Whether the CEO’s management style discouraged robust and effective challenge.
• Whether RBS was overly focused on revenue, profit and earnings per share rather than on capital, liquidity and asset quality, and whether the Board designed a CEO remuneration package which made it rational to focus on the former.
• Whether RBS’s Board received adequate information to consider the risks associated with strategy proposals, and whether it was sufficiently disciplined in questioning and challenging what was presented to it.
• Whether risk management information enabled the Board adequately to monitor and mitigate the aggregation of risks across the group, and whether it was sufficiently forward-looking to give early warning of emerging risks.
|…weaknesses were found to arise from seven key risk areas that are potentially inherent in all organisations and that can pose an existential threat to any firm, however substantial, that fails to recognise and manage them. These risk areas are beyond the scope of insurance and mainly beyond the reach of traditional risk analysis and management techniques as they have evolved so far. In our view, they should be drawn into the risk management process. They are as follows:
A. Board skill and NED control risks – limitations on board competence and the ability of the Non-Executive Directors (NEDs) effectively to monitor and, if necessary, control the executives.
B. Board risk blindness – the failure of boards to engage with important risks, including risks to reputation and ‘licence to operate’, to the same degree that they engage with reward and opportunity.
C. Poor leadership on ethos and culture
D. Defective communication – risks arising from the defective flow of important information within the organisation, including to board-equivalent levels.
E. Risks arising from excessive complexity.
F. Risks arising from inappropriate incentives – whether explicit or implicit.
G. Risk ‘Glass Ceilings’ – arising from the inability of risk management and internal audit teams to report on risks originating from higher levels of their organisation’s hierarchy.
Now, someone please try to persuade me that the root of the problem isn’t fed by the bounteous supply of Corporate BS and watered by the flow of financial liquidity that remains in the control of a morally corrupt Corporate culture. This particular virus, that originated in the financial system, has evolved and used the system as the conduit to spread so rapidly that it has reached the scale of a global pandemic.
For as long as those charged with finding a cure are themselves contaminated by the same virus they are content to analyse and talk about symptoms rather than share in the pain of treating the cause at source.
The “Roads to Ruin” report looks at some very high profile cases that, I believe, illustrate the point. But, if you want more, someone (for the moment I just can’t remember who!), recently, drew my attention to a report on financial “irregularities” at Olympus…that’s the manufacturer rather than the “Mount”!
The nature, scale and number of parties required to perpetrate the fraud would be unbelievable, if it weren’t for the fact that we have seen it all before! I am still surprised that it hasn’t featured more prominently in mainstream Business News before now (yet again, perhaps I shouldn’t be too surprised!). Perhaps this tells us all that we need to know about the extent of the infection!?