|
|
| (4 intermediate revisions by the same user not shown) |
| Line 1: |
Line 1: |
| | {{a|risk|}} |
| ==={{risk|Ecosystem}} versus {{risk|Market}}=== | | ==={{risk|Ecosystem}} versus {{risk|Market}}=== |
| *{{risk|Benign}} and {{risk|brutish}} | | *{{risk|Benign}} and {{risk|brutish}} interpretations of the {{risk|Prisoner’s dilemma}} |
| *{{risk|Market}} | | *{{risk|Market}} |
| | **{{risk|Government}} |
| **The {{risk|firm}} | | **The {{risk|firm}} |
| **{{risk|Government}} | | **The {{risk|individual}} |
| ==={{risk|Prisoner’s dilemma}}===
| | |
| ==={{risk|Cooperation}}=== | | ==={{risk|Cooperation}}=== |
| *{{risk|Transaction}} | | *{{risk|Transaction}} |
| *{{risk|Risk controller}} | | *{{risk|Risk controller}} |
| | *{{risk|Audit}} |
| | |
| | |
|
| |
|
| ======
| |
|
| |
|
| *[[Complexity]] | | *[[Complexity]] |
| Line 46: |
Line 50: |
|
| |
|
|
| |
|
|
| |
| (e) The Individual <br>
| |
| :::(i) Motivations:<br>
| |
| ::::(1) FEAR. This is the chief motivating factor for any individual. <br>
| |
| :::::(a) Types of fear:<br>
| |
| ::::::(i) Fear of screwing up. <br>
| |
| ::::::(ii) Fear of the known unknown <br>
| |
| ::::::(iii) Fear of remote but foreseeable contingencies – the chicken licken scenario<br>
| |
| :::::(b) Some legitimate risks do not create fear:<br>
| |
| ::::::(i) unknown unknowns – black swans – do not create fear. It is hard to blame someone for not anticipating something that, qed, could not be anticipated.<br>
| |
| ::::::(ii) Emergent risks – risks that only arise at a level of abstraction beyond that for which the employee is directly responsible or accountable. <br>
| |
| :::::(c) Behaviour which reduces fear<br>
| |
| ::::::(i) Repeated tasks<br>
| |
| ::::::(ii) Familiar tasks<br>
| |
| ::::::(iii) Pre-established modes of operation<br>
| |
| ::::::(iv) Behaviour which is characteristic of most people in the organisation (homogeneity) <br>
| |
| ::::::(v) Decisions for which somebody further up for line or across the organisation has accepted responsibility<br>
| |
| ::::::(vi) Encouraging others to underwrite risk or collectivise /diffuse risk<br>
| |
| :::::(d) Behaviour which accentuates fear<br>
| |
| ::::::(i) New situations <br>
| |
| ::::::(ii) Unhedged risks<br>
| |
| ::::(2) REWARD. Compensation for what you do. <br>
| |
| :::::(a) Generally an employee does not have an equity stake in the business (OK, OK bonuses – we’ll get on to that) <br>
| |
| :::::(b) Employee reward is pre-defined: there may be incentive structures but employees for the most part get fixed compensation. They are creditors of the firm for that compensation. Unless the firm is bankrupt, they are paid regardless of performance. The sanction for poor performance is termination. It is very hard to reduce fixed compensation. <br>
| |
| :::::(c) The larger the firm the more specialised the staff, the fewer are specifically revenue generating roles. Most of a multinational Bank is infrastructure: operations, risk management, IT and increasingly middle management : infrastructure to manage the infrastructure. <br>
| |
| :::::(d) Therefore only a small portion of the staff have any grounds for incentive based compensation. Some could be incentivised by cost management, but for many – risk, legal, compliance – performance related pay is largely antithetical. <br>
| |
| ::::::(i) This will not stop enthusiastic general counsel arguing, in times of feast, that his legal team are skilled enablers of revenue generation, and should be compensated for the profits they help to bring in. <br>
| |
| ::::::(ii) The stock reply: turning a control function into a profit and loss centre has bee tried before. It didn’t work out so well. <br>
| |
| :::::(e) The bonus culture. No doubt to redress the fear / reward balance, investment banks shifted towards a bonus culture throughout the eighties. <br>
| |
| ::::::(i) Many of these firms started out life as partnerships, where those bringing in the profits were personally liable for losses, and the compensation they shared was specifically the equity. These firms took advantage of regulatory change to incorporate. The partners changed their formal status (if not their titles) from partner to employee, but the compensation structure remained. While these firms encouraged equity participation (to the point of paying compensation in shares) employees main source of income was celery and not share performance. Indeed the manual dilution of equity capital in the bonus round had the typical effect of depressing share performance. In this way and in many others comma employees in these Incorporated partnerships were and continue to be systematically preferred over equity holders. The same pay structure has been adopted by competing banks which have always had a corporate structure full stop the lesson of the last 30 years has been only a mug is long banking stock .<br>
| |
|
| |
|
|
| |
|
| ===Form over substance===
| |
| :(a) Burgeoning complexity means a preference for substance over form<br>
| |
| :::(i) As previously rehearsed, the more complex the organisation the less likely people are to understand the substance, let alone be responsible for it. <br>
| |
| :::(ii) The form is, by definition, easily articulated. It is measurable, observable, auditable. <br>
| |
| ::::(1) “Did you review that template by year end?” has a yes/no answer which is easily given in the affirmative. All you need is a diary and a decent sense of time management. <br>
| |
| ::::(2) “Did you review the template properly?” is a harder question to answer. <br>
| |
| :::::(a) Did you check it against policy, legal developments and corresponding templates” is a harder question, but it has a yes/no answer. It functions like a checklist. <br>
| |
| :::::(b) Did you get the right answers? Is hard to validate. <br>
| |
| ===Checklists=== | | ===Checklists=== |
| A word on checklists – eyebrow raising book of Atul Gawande. Illustrates the benefit, as well as the limitations, of form as an aide to substance. <br> | | A word on checklists – eyebrow raising book of Atul Gawande. Illustrates the benefit, as well as the limitations, of form as an aide to substance. <br> |
| Line 125: |
Line 91: |
| :::(i) Substantive unfairness <br> | | :::(i) Substantive unfairness <br> |
| :::(ii) Procedural unfairness <br> | | :::(ii) Procedural unfairness <br> |
| ===The perils of the corporate person===
| |
| :(a) Unlike a real person, the interior monologue is not private. <br>
| |
| :(b) Unlike a real person, a multinational firm has an utterly verbose interior monologue, everyone is shouting at the same time adding each other to conversations they don’t care to be a part of. Joel Bakan says a corporation is like a psychopath. It might be run by them – that’s plausible – but in its own personality it is more like a paranoid schizophrenic with multiple personality disorder. <br>
| |
| :(c) This has proved in this information age to be a far greater bane than anyone realised. Everything is discoverable and like all masses of communication that can be pulled of context it inevitably looks worse in hindsight than it did when it was written down. <br>
| |
| :(d) The audit trail fulfils following functions – <br>
| |
| :::(i) evidence of compliance with process without reference to substance <br>
| |
| :::(ii) To evidence and memorialise decisionmaking. <br>
| |
| :::(iii) to evidence qualifications, derogations, assumptions and conditions upon those decisions. Ie to diffuse responsibility for the decision. <br>
| |
| :::(iv) The key for SMEs is to articulate conditions of a qualitative (ie requiring comprehension of the subject matter) and not quantitative nature. Ie “assuming sufficiently robust operational setup to satisfy the legal and regulatory requirements”. This allows the operations SME, to whom the consultant will inevitably turn, to create her own qualitative conditions. If she is experienced, her conditions will be in the gift of a third SME, who will create her own qualitative conditions in the gift of a fourth. Eventually the trail will lead in a bureaucratic [[Möbius loop]] back to legal, and the circle of diffusion will be complete. <br>
| |
| :(e) For employees who are part of the infrastructure rather than revenue generation – and that is most of them – there is a sharp asymmetry. <br>
| |
| :::(i) You are not rewarded for ambition or risk taking – that is not your job. <br>
| |
| :::(ii) You are not rewarded for actually avoiding risks – a bad outcome that did not eventuate is not just dog that did not bark in the night-time, it is part of the infinite set of possible but non-existent events. (option pricing) <br>
| |
| ::::(1) before it materialises, a risk has a positive value, albeit one that is usually impossible to quantify. <br>
| |
| ::::(2) After the risk has passed untriggered, it has no value. It is like an option that expired out of the money. <br>
| |
| ::::(3) If the risk comes about but the firm has defended against it, again it has no value. The firm’s resulting profit and loss is flat <br>
| |
| ::::(4) If the risk comes about and the firm has not defended against it, then notionally, someone is responsible. But see diffusion tactics – here the primacy of the individual’s survival instinct over the organisation kicks in. <br>
| |
| ===Motivations=== | | ===Motivations=== |
| :(a) Individuals who wants to get things done that involve taking new risks or Crossing into unknown territory must develop tools and techniques for disarming natural employee risk avoidance strategies. for example, <br> | | :(a) Individuals who wants to get things done that involve taking new risks or Crossing into unknown territory must develop tools and techniques for disarming natural employee risk avoidance strategies. for example, <br> |