October 20, 2008
We all take risks because life is made up of uncertainties. Most decisions we make involve some degree of risk. Very little can be accomplished unless we take some risks.
This is true in the business world as well. Corporations take risks.
What is the difference between a gamble and a calculated and acceptable risk?
In the present financial debacle, it seems that the Government, Congress, and Wall Street took unacceptable risks in the subprime market that ultimately led to the situation we are in today. Those same unacceptable risks were also taken by other financial institutions and Governments in Europe as well. Iceland according the Herald Tribune is officially bankrupt!
Risk assessment is an important component in any corporate ethics program. Many Fortune 500 companies have such a program and a designate risk and compliance officer.
The Federal Sentencing Guidelines specify that corporations should design an ethics program that included identifying risk.
There are a number of consulting firms, such as Global Compliance, the Ethical Leadership Group and Daylight Forensic & Advisory LLC that advise their clients on developing effective risk assessments.
All too often the Government reacts to scandals instead of anticipating them. The defense industry bribery scandals, in the 1970s led to the Foreign Corrupt Practices Act.
The savings and loans scandals of the 1980s led to the Financial Institutions Reform, Recovery, and Enforcement Act, the corporate scandals of Enron, Tyco and WorldCom in the early 2000s led to the Sarbanes Oxley Act. We can surely expect new regulations and control in the mortgage and finance industry.
How can we make sure that risks we take in the decisions we make are acceptable?
I suggest that we ask ourselves the following questions:
A. What have been the consequences to similar decisions in the past?
Few people know that there have been in our history previous national mortgages debacles that led the country to similar financial crisis.
B. What is the motive of our action?
The financial benefits of the sub-prime mortgages were considerable for the real-estate brokers, the lenders and investors. If personal benefit is the only motivation, then we should reconsider our decision.
C. What are the possible negative consequences of the decision we are about to make?
I think it is fair to say that if the participants in the sub-prime scheme knew of the consequences we are facing today, they would not have engaged in it.
We should not be afraid of taking risk but just be more careful.
As Louisa May Alcott once said:
"I am not afraid of storms, for I am learning to sail my ship."