Can You Be Too Cautious When It Comes to Risk Management?
This year has been tough for many investment professionals so it's no suprise that more than a few folks are hungering for January 1. Either 2010 is going to be "their year" or they figure that things just couldn't get any worse. Unfortunately, depending on Lady Luck, after months of tumult, is a high risk proposition and ill-advised. Add the fact that the governance benchmarking movement is gaining momentum around the world. Those who rely on a rabbit's foot or magic crystals are likely to be forced into action, regardless of their desires.
So what's on the governance "to do" list for coming months?
- In its December 16, 2009 press release, the U.S.Securities Exchange Commission describes a new rule "that would help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees. Among other things, it would require a narrative disclosure about the company's compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. Smaller reporting companies will not be required to provide the new disclosure." For more information, click to read "SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance."
- Wall Street Journal writer Dennis K. Berman predicts that 2010 will usher in the "most significant regulation in 75 years" in order to "reset the financial industry's profitability, core oversight and connection to Main Street investors." (See "In 2010, Year of the Regulator" - December 22, 2009.) His view that "politics, populism and profits" are about to collide in the halls of the U.S. Congress is one that I share. When Joe Worker struggles to pay bills, let alone save for retirement, he becomes a vote-killer and that spurs lawmakers into action to create new mandates. (Whether "one size fits all" regulations work - and I contend that they induce their own set of problems - is a different discussion altogether.)
- On December 15, 2009, the American Federation of State, County and Municipal Employees, AFL-CIO released what it describes as a "first of its kind report" entitled "Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems" by Attorney Christopher W. Waddell. Focused on pay to play, insider trading, fiduciary duty, ethics and board assessment, the 40+ page file is worth a read. The fact that this document exists is yet another indication of the movement towards a nuts and bolts approach to staying out of trouble.
With these and countless other indications that the paradigm is shifting towards the documentation of accountability, one wonders if it is possible to be too cautious when it comes to risk management. This is not the same as asking whether someone can be too risk-averse with respect to investment management and thereby incur opportunity costs.
Frame your answer by asking yourself any of the following questions:
- "Is there anything I could do now that would mitigate my risks in 2010 and help me avoid time-consuming and costly problems if I have to explain why I didn't do X, Y and Z?
- Will I regret not taking the extra steps to notate my strategy, related internal controls and the general decision-making process?
- What are the reputation-related consequences of inaction or undertaking an incomplete process with respect to enterprise risk management?
- Will my personal and/or professional liability exposure go up if a problem arises and I am unable to explain why I did what I did?"
Will this new year be one of undue caution or simply a matter of committing to smart best practices because it is good prevention, not to mention a way to garner invaluable information and increase peace of mind?
