The Storyline (part IV) of the 8th annual European GRC Summit organized by Copenhagen Compliance
During this management meeting we are going to exchange ideas, reflect and learn from our experiences and mistakes from the recent credit and financial crisis and move on to better things. As wise old Rafiki in The Lion King said; 'The past can hurt. But the way I see it, you can either run from it, or learn from it.'
Scene: The annual senior management seminar/workshop of Global Mining celebrating an excellent year. They rejoice the financial results with a good dinner and leave for Copenhagen to attend the 8th annual European GRC SUMMIT in Copenhagen, on September 22nd -23rd 2014 at the Confederation of Danish Industries.
Participants:
Mr. GEORGE RISKIN, Chairman
Mr. ROBERTO M. ICOMPLI, CEO
Mrs. Caroline Moneypenny, CFO and also in charge of Compliance
Ms. ITA, IT Manager
Mr. I.M. Auditsson, Chief Internal Audit
Mr. Joe Doe, HR Vice president
Everybody is sitting in comfortable chairs at Falsled Kro on the island of Fyn in Denmark.
GEORGE RISKIN, Chairman of the board of directors for Global Mining, around 50, dressed neatly in a dark suit and a colorful tie, sits at the head of a Danish Design glass table, looking at the harbor and watching the happy birds and colorful flora. He looks at the agenda for the day's workshop. A happy look of satisfaction and happiness is obvious across his face.
He continues to look at the workshop agenda, smiles and reflects. He picks up a piece of flower, smells it with delight and then leans back in his chair, cleans his glasses and suddenly illuminates with a revelation;
CHAIRMAN GEORGE:
I am so glad that today we simply can celebrate the good year, however we have to reflect on the past to see what we have been thru and how we have successfully emerged from the financial calamities due to our focus on Good Governance, Risk Management, Compliance and IT-Security. (GRC) issues.
So let us go through the key events from the credit and financial crisis and try and find the common GRC factors from our associations and history. Also let's give our individual comments on the crisis and figure out whether there were some warning signs we could have heeded earlier than we did. Were there times when if we did not face up to our past mistakes, bad habits, negative experiences, to help us move on to better decisions.
ROBERTO M. ICOMPLI, CEO;
The financial crisis revealed that in many companies the board and senior management allowed problematic risk activities to continue, and sometimes they even lied about it.
In my opinion there are two opportunities. First, the directors often did not know what decisions were being made, by those beneath him in the orgaisation. The lack of 'transparency' and 'accountability' in the segregation of duties made it difficult to attempt to discover som eof the unwise, if not illegal decisions were made further down in the organisation.
Secondly we need to better understand the nature of markets, how they nehave during the crisis when cash is critical. Capital and liquidity were precisely the measures thatwe had not anticipated.
No matter what, such crisi will occur in the future, so an adequate capital base will be important.
Sometimes I thought that during the crisis 'a coup d'etat' had taken place. While shareholders may "own" a corporation; the board & management of the corporation no longer worked at their direction during the crisis. We had become a self-perpetuating operation.
Mrs. Caroline Moneypenny, CFO and also in charge of Compliance;
My concerns on GRC are that our existing regulatory bodies might help shareholders? No, not when rulemaking is not subjected to a cost-benefit analysis. Even moderate changes in regulatory compliance proposed by the many global oversight authorities have been totally sandbagged.
Let me give you an example: Dodd Frank, with its thousands of pages, is entirely worthless as it will never be implemented as intended. We probably need a reenactment of Glass Steagall Act because it does not require rulemaking to bring it to life.
Perhaps that would result in a change in their attitude toward risk.
Mr. I.M. Auditsson, Chief Internal Audit;
Sometimes the "ends" justify the means. Sometimes we are rewriting "risk" matrixes to 'support' positions: after-the-fact? Sometimes implicitly but most often factually
We need that trusts in the entire financial system must be busted up. We cannot afford another trust busted again.
The compliance overload is driven by a desire to strike out at "the banks" out of generalized resentment rather than any rational or accurate assessment of risk. The facts of the matter is that through the economic crisis and continuing to the present, there are several companies and financial institutions that never had a quarter in which it lost money, never failed to meet its obligations to counterparties or depositors, was never undercapitalized by any regulatory standard and never posed a systemic threat to the banking system. Still they are booged down with 'check-the-box' type of GRC management.
The purpose of capital is to offset unanticipated risks and associated losses. The capital base of many companies and financial institutions was tested by a significant loss and was more than adequate.
Ms. ITA, IT Manager;
I believe that the next significant melt down will not involve housing asset bubble or CDOs. It will be something bigger...perhaps involving sovereign debt...or something global...but I think that is 15/20 yrs away.
Furthermore, the ethics of top management, not to mention those held at other layers of management, in large organizations, i.e. those in which large inflows and outflows of cash occur, are questionable from most perspectives.
According to many strong predications, there is more than $1,000,000,000,000,000 worth of speculative value in derivatives now in the market worldwide. This is several times the total global GDP.
The biggest problem with the latest rounds of economic reforms is two-fold: First, the derivatives were not required to be publicly listed or traded, second, we still have regulators that are mostly ex-employees of the banks. We need a clean GRC slate.
Mr. Joe Doe, HR Vice president;
Nail on the head, ITA. When we say too big to fail, we send a message, to big not to succeed.
The problem is that; "there is no such thing as a free lunch" is a repetition because it is inescapably true. Sometimes we take huge risks, take home huge sums of money and then when something goes wrong we want to pawn them off and diversify the blame.
However, we all enjoy this seemingly free lunch thanks to shareholders and taxpayers, who consistently lose as a result of the mismanagement of meager billions of dollars.
The managements naivete but not just the greed, incompetence, and monumental insecurity that we have experienced in finance, politics and the general public, the usage of money is alarming and potentially devastating on a scale that no one is willing to take seriously.
Mr. GEORGE RISKIN, Chairman;
Yes, Joe. But we do have that segregation of duties. So let me conclude with a few reflections on the Board of directors and senior management responsibilities for the next year, before we leave for the annual conference at Dansk industry.
Right after the conference, and based on the massive inspiration we normally get, we must;
- Identify and remediate the gaps in the internal risk management systems.
- We must be well-equipped to get us out of any future mess. Only the next wave of new leadership was able to come in and deal with the problems as they occur.
- A board or management cannot be judged by whether or not it was able to catch things before they happened because no board is positioned or tasked to do that.
- We must prove our worth by how collectively we react to a problem and whether they can assist management to get the ship back on course.
- We will redefine the functions of our Risk Committee so that they can identify ("catch") the risk before it happened.
- A mature board will focus on identifying the underlying problem and making sure the solution gets implemented. An immature board will focus on finger-pointing and forcing through symbolic changes to please the external world.
Finally George, burst in laughter and says: Of course, presuming any such massive and vast entity like our company can be successfully managed.
They all laugh!
