Strategy, Risk Management, and Corporate Governance

Manila Bulletin, March 17, 2009 | Go to article overview

Strategy, Risk Management, and Corporate Governance


In this short article, I focus on the foundational role corporate governance plays in the financial system. I say this in the context of a belief I hold axiomatic – that systemic challenges to the financial system are better prevented by the private sector players in the ecosystem than responded to by the regulator.Our economic decisions reflect and are a result of the dynamics of our individual and collective psychological states. Whilst these dynamics broadly result in rational decisions, they are also often collectively inclined towards irrational behaviour. The remit of corporate governance is to check these irrational tendencies by informing collective psychology, i.e., collective patterns of decision making, with science and ethics. In this article, I only focus on the science.You can only manage what you can measure, a management expert once offered. The reminder is insightful and timely. The board should be measuring (a) risk or, more accurately, the risk and return profile of a financial institution’s strategic initiatives, (b) the results of implementing the board’s risk policies to re-assess strategies continuously, and (c) how consistently these risk policies are being implemented by the bank’s various key functional groups.I am not, of course, suggesting that (a) to (c) are not being done today. They are - in various degrees of effectiveness. But in light of what we are learning from today’s crises, I would argue that these should be put at the forefront of any effective board governance.More specifically: It is no longer sufficient for board members of financial institutions to have a cursory understanding of quantitative finance and risk management tools. It is no longer sufficient for board members of financial institutions to rely solely on “experts” to render advice. …

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