Good Risk Governance Pays

Good Risk Governance Pays

Investment Best Practices | Risk Management | Valuation

Enterprise Risk Management and Shareholder Value

Posted in Risk Management

Pencil Tug of War_80521276_XS

As I recently told a group of graduate university students, don’t expect to be the life of the party if you are a risk manager. Colleagues will likely balk when you ask them to take time from already busy schedules to pull together deal details, trading notes and other documents that you need to review, verify and possibly use for restructuring. I further explained that a “tone at the top” orientation in favor of risk mitigation can mean the difference between success and failure. This is especially true if an organization is unduly focused on cutting short-term expenses and perceives risk management activity as a cost sink. Fortunately, at least some businesses see things differently. Their view is that effective risk management can protect or even enhance shareholder value and should therefore be pursued in a big way. Results of a recent study reinforce this notion.

Sponsored by Aon Global Risk Consulting, a survey of over 1,400 corporate executives reveals that damage to reputation or brand is ranked number one of ten “formidable risks.” Other risk factors include, but are not limited to, the following:

  • Anemic economic growth;
  • Regulatory and legislative changes;
  • Greater competition;
  • Difficulty in attracting and retaining talented workers; and
  • Cyber threats.

Notably, the point is made that many of the cited fifty-three risk factors are interrelated with others. The implication is that a risk management team should include persons with various backgrounds. My professional experience bears this out. I’ve frequently worked on teams that include job functions such as auditing, compliance, legal, trading and technology.

The interconnection of risk factors is an important reason why companies need to have a strong risk culture. Tackling complex risk issues requires resources. When leaders understand this, it is a lot easier to budget for enterprise-wide training, procure technology and encourage employees to work together.

“Pajama Head” Investment Management

Posted in Investment Management

Senior man in pajamas with teddy bear isolated in white

In the last few months, I’ve noticed a focus on dressing nicely for work. The female CEO character in “The Intern” admonished her tech employees to leave the tank tops and jeans at home. Ad campaigns of handsome men in tailored suits appeared in volume after “Fifty Shades of Grey” hit the big screen. Even in the small town where I live, a local restaurateur posted a sign on the door that puts hungry persons on notice – “No backward baseball caps or excessively baggy pants are allowed.” When I acknowledged the sign to the owner, he launched into a diatribe about sloppiness and his goal to promote a certain ambiance. A week later, in response to a friend who mentioned that many of her students are getting tattoos, I remarked that plentiful body ink might be a deterrent to getting a job in finance. While she disagreed with me, several career experts recommend a clothing cover-up if applying for a position in a “typically conservative industry such as accounting or banking…”

I know about clothing rules firsthand. When I first began my career in financial services, the head of the bank credit training program pulled me aside and told me that wearing brightly colored tights would keep me from having a successful career. She strongly suggested that I stick to beige stockings instead. During my tenure with a Fortune 50 company, working as part of a risk management compliance team, the Treasurer gave me the task of telling the outside technology consultant not to return until he purchased (and wore) socks.

In contrast to sartorial trendsetters, there are those who go to the opposite extreme by dressing as if everyday is Casual Friday writ large, much to the chagrin of managers who are trying to set a more disciplined tone. While each industry has its own unique standards for what constitutes an “appropriate” wardrobe, some suggest that client-interfacing professionals in the investment management industry should dress to impress. Outside of recreational events such as golf outings or meetings with venture capitalists who live in khaki, how many investment committees want their asset manager, banker, consultant or advisor to arrive for a presentation wearing gym pants and a tee shirt? The other perspective is that someone who shows up with a Rolex or high-price outfit could discourage a sale with a would-be institutional buyer who gets paid a modest salary and buys off the rack.

Some individuals look beyond the visuals, asserting that slovenly or slapdash costuming can lead to sloppy thinking at work. As a result, promotions and getting new clients may be slow to come about. According to the Ladders career website, one needs to “appear polished and ready for the next challenge.” A Psychology Today article goes further, with its author, Dr. Ben Fletcher, writing that “our clothes say a great deal about who we are and can signal a great deal of socially important things to others, even if the impression if actually unfounded.”

Aside from legal issues relating to allowable clothing, a topic I leave to attorneys, I hope I’m right that a trend towards formality is emerging with regard to both dress and courtesy. Reuters is not singular in its message that “good manners will open doors that the best education cannot.” Did you know about the annual celebration called “Bring Your Manners to Work Day?

Even as research about protocol and appearance continues, those in the investment management industry should embrace opportunities to be seen as professional and competent. There is a certain intimacy about decisions that involve money and investors want to feel good about their service providers, especially now. According to the 2015 Edelman Financial Services Trust Barometer, there is a keen need for more assurances about the integrity of this industry. When buyers don’t trust, they don’t buy.

Said differently, don’t be a “pajama head” when it comes to wardrobe and demeanor.

Dr. Susan Mangiero Earns Certified Fraud Examiner (CFE) Credential at a Time When Global Fraud is Estimated at $3.7 Trillion Per Year

Posted in Fiduciary Liability, Fraud, Susan Mangiero

Fraud, audit, auditor.

Dr. Susan Mangiero, financial expert and author, has earned the Certified Fraud Examiner (CFE) credential from the Association of Certified Fraud Examiners (ACFE), having successfully met the ACFE’s character, experience and education requirements for the CFE credential, and having demonstrated knowledge in four areas critical to the fight against fraud: Fraudulent Financial Transactions, Fraud Prevention and Deterrence, Legal Elements of Fraud and Fraud Investigation. Dr. Susan Mangiero joins the ranks of business and government professionals worldwide who have also earned the CFE certification.

According to its recent comprehensive study, the ACFE estimates that the average organization loses roughly five percent of revenues each year to fraud. This translates into an estimated worldwide loss of $3.7 trillion every twelve months. CFEs on six continents have investigated more than 1 million suspected cases of civil and criminal fraud.

Dr. Mangiero is currently a Managing Director of Fiduciary Leadership, LLC and lead contributor to Pension Risk Matters and Good Risk Governance Pays. Dr. Mangiero has served as a testifying expert and behind-the-scenes forensic economist on multiple investment and financial valuation and risk assessment matters. She is a CFA® charterholder and holds the Financial Risk Manager (FRM®) designation. In addition, Dr. Mangiero has earned the Accredited Investment Fiduciary Analyst™ professional designation from Fiduciary360. She has received formal training in investment fiduciary responsibility and is certified to conduct investment fiduciary assessments.

About the ACFE

The ACFE is the world’s largest anti-fraud organization and premier provider of anti-fraud training and education. Together with more than 75,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession. Identified as “the premier financial sleuthing organization” by The Wall Street Journal, the ACFE has captured national and international media attention. For more information about the ACFE visit

About Fiduciary Leadership, LLC

Fiduciary Leadership, LLC is an investment risk governance and forensic economic analysis consulting company. Clients include asset managers, transactional attorneys, litigation attorneys, regulators and institutional investors.

Halloween Pop Ups and Investment Risk Management

Posted in Fiduciary Liability, Investment Management, Pension, Risk Management

concept of change of plans

Around this time each year, I know what is going to happen to my neighbor’s inflatable Halloween decorations. They get blown up each morning, popping skyward with pride, only to fall to the ground, sans air, by the end of the evening. Despite his enthusiasm for this October 31 holiday, one wonders if he has ever given thought to doing things differently. Pumping up plastic goblins to no avail seems like an exercise in futility. Nobel Prize winner Albert Einstein might agree, having remarked that insanity is “doing the same thing over and over again and expecting different results.”

This notion of what I’ll call unproductive repetition came up in a recent conversation with a senior attorney. His lament was that industry behavior, in some circles, continues to fall short of best practices, even after many years of lessons learned. There are lots of reasons why improvements are slow to materialize, some of which are listed below.

  • A limited budget to hire outside advisers is one possibility.
  • Investment complexity may preclude a full understanding of attendant risks and, by extension, the creation of a strategy to deal with those uncertainties.
  • An organization may face wage caps or head count restrictions that make it impossible to put necessary staff in place.
  • When goals conflict with one another, pitting trust sponsors against beneficiaries, it is hard to know how to prioritize. Some assert that this is happening with greater frequency in pension land. Cash-strapped companies or governments may seek to jettison what they deem to be expensive retirement plans. In contrast, plan participants push back, questioning the legitimacy of proposed reforms. (I just wrote about this issue in a blog post entitled “Public Pension Fund Litigation Database.”)
  • The fiduciary risk-reward ratio is highly asymmetric. If something goes wrong, the downside in terms of professional and personal liability exposure is potentially large. In contrast, when all goes smoothly, few investment stewards receive the proverbial Main Street parade. Motivating people to innovate in a “tails – you lose, heads – I win” operating environment is a tough sell.
  • Another reality is that some organizations don’t embrace a top-down risk culture. As a result, getting decision-makers to shift away from a “returns-only” lens and instead focus on risk-adjusted performance is tantamount to trying to turn a gigantic ship around on a moment’s notice. It’s almost surely never going to happen.

The good news is that recalcitrant investors (and their advisers) in need of improvement are increasingly getting pushed in the direction of fiduciary best practices. There are lots of reasons for this positive trend. No one wants to see his or her name splashed across the front page of a newspaper, alleging scandal or mismanagement. The risk of litigation and losing one’s livelihood are contributing factors. Heightened regulatory discussions about the fiduciary standard have done little to quell the fears of some.

For those institutional investors (and their service providers) that carry the flag for disciplined and comprehensive risk management and oversight, keep up the good work. As for my neighbor, I’m still rooting for him but wonder if he should quickly consider adopting a Plan B or Plan C for next year.

Publicizing Corporate Ethics and Values

Posted in Ethics

Vector Mission, vision and values diagram schema made from puzzle pieces

Financial Times columnist Lucy Kellaway questions why companies publicize value statements, writing that “Values may be important, but they are also slippery. The minute anyone tries to write them down they become trite and unhelpful.” As she explains, anecdotal evidence that supports the value of value statements is weak. Individuals she interviewed about their respective employers either mistakenly selected another company’s value(s) from a given list or confessed not knowing. She also found that large British companies that were silent about their values outperformed those with a message to tell by a big percentage.

This got me thinking about whether a company is right to publicize its values, especially because I heard support for the opposite perspective last week during a fraud detection and deterrence workshop I attended. Attorney instructors repeatedly spoke about the need to clearly convey company values like honesty and transparency to employers, shareholders and clients alike. One instructor described a company that made it known that it would not offer kickbacks or be party to any questionable arrangement in procuring a contract. He continued that, as a result of this outcry about ethics and values, its sales rose thereafter. The point was likewise made that apprising relevant parties of a company’s zero tolerance attitude towards theft of any kind (such as physical inventory or trade secrets) would logically discourage bad behavior. The recommendation was to punish any wrongdoers swiftly and let lots of people know. In other words, become a squeaky wheel.

According to Fortune writer Holly Lebowitz Rossi, mission statements or other expressions of values codify behavioral expectations, can unify workers into effective teams and encourage sales and productivity. Click to read “7 core values statements that inspire” (March 13, 2015).

Others shake their head, preferring a place out of the spotlight. I recall asking a senior attorney why more was not made of his employer’s recognition as an ethical enterprise a few years ago. Interestingly, he replied that the firm did not want to set the bar too high, fearing that any slip, however small, could encourage investors to file a lawsuit. I can appreciate that sentiment but am nevertheless troubled that a firm deems it better to keep quiet about a demeanor that is acknowledged as “best practice.” One wonders if there is a natural inclination to give repeat offenders more of a pass than a one-time cheater.

If the decision is made to integrate ethics and good corporate citizenship as part of a brand, subsequent outcomes should mimic the message. It defies logic to shout one thing from the rooftops and then do the opposite. Author and corporate communications expert James S. Kunen points out the fact that the now defunct Enron strayed from its statement of Vision and Values that emphasized respect, integrity, communications and excellence. Leadership guru David Burkus suggests that errant behavior on the part of Enron’s senior management set the tone for employees to take shortcuts, despite the existence of a sixty four page ethics manual. The implication is that the tone at the top matters. See “A Tale of Two Cultures: Why Culture Trumps Core Values in Building Ethical Organizations” (The Journal of Value Based Leadership, Winter/Spring 2011).

Interested readers can take a quiz about corporate values, ethics, fraud and leadership. The answers are telling. Click to access “What’s your fraud IQ” by Andi McNeal (Journal of Accountancy, April 13, 2015).

Effective Business Communications – Is Squeaky Clean Better?

Posted in Banking, Derivatives, Ethics, Financial Reporting, Investment Management, Trading

comic style illustration

During a recent conversation with colleagues about effective business communication, the topic arose as to whether it is okay to use a swear word or two in conversations with colleagues and clients. Having worked on several tradings desks at different banks, my experience likely reflects two extremes. At one financial institution, I traded foreign exchange spot and forward contracts and over-the-counter currency derivatives. As far as I know, there was no formal policy about language but the frequency with which certain four-letter words were spoken led me to believe that all was okay. Elsewhere, when I consulted with institutional investors and companies – helping them assemble hedges with futures, listed options and over-the-counter derivatives – profanity was verboten and considered déclassé at best and career-busting at worst.

In researching the topic of acceptable words and demeanor in business, with a particular emphasis on the import for the investment management industry, what I uncovered conveys a mixed bag about what makes sense when it comes to spicy utterances. According to “Why You Really Shouldn’t Curse at Work (Much),” Harvard Business Review contributor Anne Kreamer (December 27, 2011) writes that so many of us are hardened to foul language in business that its negative impact is often slight. (I think the same concept applies to the use of profanity in popular culture as well. Consider that the movie “The Wolf of Wall Street” is said to have set a profanity record with more than 500 instances of a four-letter word that starts with “f” and rhymes with “truck.”) Ms. Kreamer references interviews she conducted that support the strategic role of swearing “as an effective social tool that can enhance work relationships and allow women in particular to present an equal-to-men…identity.” Notably she cites research that bodes poorly for women who like to swear, explaining that they are often held in lower regard.

Last year, Bloomberg published the results of its review of thousands of conference calls held in the last decade and concluded that “CEO cursing spiked after the recession in 2009 and waned as the recovery strengthened.” Whether this portends an onslaught of bad words in the event of further weakening of financial markets remains to be seen. For those seeking job advice, writer Sarah Butcher provides five “golden rules for workplace cursing” (, June 14, 2013). These include the following:

  • Evaluate whether cursing is deemed acceptable as part of the organizational zeitgeist and adapt accordingly;
  • Make it about issues and not individuals;
  • Avoid sexual references;
  • If you are going to swear, do so with colleagues and not your boss; and
  • “Don’t swear if you’re a woman.”

Forbes writer Sean Stonefield goes further in “Does Swearing At Work Get The Job Done?” (June 10, 2011) by explaining that curse words may be a way to blow off steam and add humor to a difficult situation. He expounds about the power balance by asserting that managers may be able to get away with profanity when underlings cannot. His warning about litigation risk bears repeating. If someone is offended and uncomfortable as the result of a particular slip of the tongue, a lawsuit could follow.

My view is that business communication deliverables (whether written or spoken) are most effective when clear, crisp and objective. Profanity that reflects negative emotions such as anger or frustration could worsen an already difficult situation. Moreover, the use of bad language could impede the delivery of information if someone tunes out or thinks less of the errant author.

Best-selling author Mark Henshaw recommends the avoidance of questionable language as one way to advance “a more polite society,” elaborating that its use (especially when excessive) adds little to nothing to enhance the flow of ideas. He reminds readers that profanity was once rare and makes real his message by pointing out that that the 1939 blockbuster movie “Gone With The Wind” (courtesy of writer Margaret Mitchell) gave us the words that were later voted by the American Film Institute as its number one “Greatest Movies Quote.” Do you remember Rhett Butler’s line to Scarlett O’Hara? “Frankly, my dear, I don’t give a d__.”

I concur with Mark Henshaw that profanity is a faux substitute for competently conveying concepts to others and should be avoided.

Unicorns, Valuation and the Search for Investment Returns

Posted in Investment Management, Liquidity, Pension, Private Equity, Valuation, Venture Capital

Magic Unicorn seamless pattern with dots in tree different colour

Thanks to Matthew Crow, President of Mercer Capital, for an interesting analysis of regional venture capital trends. In his blog post entitled “Are VC trends the canary in the RIA coal mine?” he points out that valuations in New York, Silicon Valley and Boston are deemed by many as “too high.” As a result, venture capitalists are actively seeking potential elsewhere with a focus on generating mega returns for themselves and their institutional limited partners (“LPs”). He adds that taking equity in companies with a $1 billion plus assessment – at least on paper – may not always be the best way to generate returns when full exits are rare. The takeaway is “a growing concern that there is an emerging venture capital overhang in the public equity markets, as funds seek exits for larger investments.”

He is not alone in his prognostication. As Forbes contributor Todd Hixon wrote last year, pension funds, endowments and other LPs may be better off allocating money to smaller funds that eschew unicorns and hunt for “dragons” or “companies that return 100% or more.” As he explains in “Unicorn Hunting Is Not The Only Way To Make Money In Venture Capital,” lots of “investors in these companies are muscular funds that commit at later stages and high valuations, paying a big price for a small share.”

At least one venture capitalist is letting data do the talking. According to “Welcome To The Unicorn Club, 2015: Learning From Billion-Dollar Companies” (, July 18, 2015), Aileen Lee writes that unicorns are rare at “.14% of venture-backed consumer and enterprise tech startups.” This founder of Cowboy Ventures points out that it is seven years on average before dollars are returned to investors for the “39% who have ‘exited’ and that “surprisingly low” capital efficiency of the 61% of unicorns that remain private “will likely impact future returns for founders, investors and employees.” Click here to access an interesting graphic that shows a clear decline in the number of unicorns each year after the 2007 to 2009 period. Another visual makes it clear that e-commerce and software as a service (“SaaS”) are dominant business models for unicorns.

In a similar vein about the realities of “paper unicorns” that have not yet tested their respective price tags in the marketplace, venture capitalist Hemant Taneja, refers to the “whole valuation bubble” as “the elephant in the room.” He cautions that certain organizations are “spending money like drunken sailors” and worries that some firms “will fail spectacularly.” His bright spot is that, unlike more than a decade ago, lots of venture-backed companies are better disciplined now and can benefit from access to cheaper capital. Click here to read this week’s Silicon Valley Business Journal interview with this Managing Director of General Catalyst Partners.

In an ideal world, unicorns are dragons and general and limited partners alike can realize solid risk-adjusted returns in a timely fashion. Unfortunately, wants do not always materialize. In a December 14, 2014 update entitled “Unicorns Vs. Dragons,” authors John Backus and Hemant Bhardwaj make it clear that not all unicorns are dragons. Indeed, statistics paint a grim picture. Their analysis shows that, in the last ten years, there were only twenty-one of 339 investments, made by seventy-four different venture capital funds, that “delivered a dragon to their investors.”

For the institutional investor, the sine qua non is to distinguish between fairy tales and reality when deciding whether to allocate to a fund that invests in private companies that are expected to hyper grow over many years. Being able to sustain double digit increases in sales, cash flow and profit is challenging at best and unrealistic at worst. At a minimum, LP due diligence should include questions about an asset manager’s valuation policy, how it decides to back a particular company and whether that fund has a successful track record with public exits and other types of liquidity events. Interested readers can check out documents such as the “International Private Equity and Venture Capital Valuation Guidelines – December 2012.”

Failure to Vet Service Providers Is Risky

Posted in Compliance, Fraud, Key Person, Risk Management

Bad competition between employee. Flat vector illustration

The adage “know your customer” rings just as true when it comes to third parties that provide products and services to your business. Engaging a vendor without doing sufficient due diligence is a gamble. Every organization has its share of risks. The last thing a buyer wants is to be saddled with its problems as well as those of its seller(s). That is why it is vital for a buyer to check out how well the seller is addressing a long list of items such as technology back-up, cyber security, oversight of employees and compliance with prevailing laws. A chink in the supply chain armor can be both expensive and time-consuming for a busy executive who is already wrestling with a growing “to do” list and limited hours.

Readers of a recent survey carried out by KPMG learn that scarce resources are an impediment to vetting third parties, even when contracts include a right-to-audit provision. Authors of “Anti-Bribery and Corruption: Rising to the challenge in the age of globalization” explain that one line of defense – data analysis – is used by only one out of every four respondent organizations to assess whether it is vulnerable to anti-bribery and corruption (“ABC”) risk. Keep in mind that the problem is far from small. According to the World Bank, the “Global Corruption Industry” topples $1 trillion with no indication of diminution.

Even when information is available, language differences and variations in reporting could impede its helpfulness to a company that needs to contract with foreign entities. Additionally, numbers don’t mean much if they have been assembled under faulty premises or a resulting analysis gets thrown into a pile of documents but is never read. Consider the following. A vendor is obliged to provide an internal controls document such as a SSAE 16 report to its client. It sends the report on a regular basis. Each time a new report is received by the recipient, the unopened envelope is tossed into a filing cabinet abyss. Does that action make sense?

The takeaways are several. First, a buyer should adopt an appropriate Vendor Risk Management (“VRM”) program if one is not already in place. Second, the buyer should revise its VRM infrastructure as needed to reflect changes in circumstances. Third, the buyer needs to recognize that a failure to understand and mitigate its third party risk could lead to a disastrous outcome with potential harm to its own customers and, by extension, to its shareholders as well.

On a related note, if you missed the earlier post about corruption as applied to beneficial owners such as pension plans that do business with foreign asset managers or portfolio companies, click to read “Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel” by H. David Kotz and Susan Mangiero (The Corporate Counselor, September 2014).

Litigation and Due Diligence of Investment Service Providers

Posted in Litigation, Pension, Regulation, Risk Management

pensive businessman looking at the balance

According to “Firms at risk of losing pension business because of LIBOR convictions” (Pensions & Investments, August 28, 2015), the U.S. Department of Labor “is tentatively denying” certain organizations the okay to work with ERISA retirement plans. Given the billions of dollars at stake, a failure to secure a Qualified Professional Asset Manager (“QPAM“) exemption could be quite costly. In a related Bloomberg article, the point is made that a waiver was made last year for one bank with the proviso that it obtain annual audits for five years, inform pension clients of its problems and “prominently” alert the public that a “conviction jeopardized its QPAM status.”

Elsewhere, a Groom Law Group newsletter urges readers to check out DOL Advisory Opinion 2013-05A. Dated November 1, 2013, it offers guidance about criminal conduct on the part of a QPAM and/or any affiliate and regulatory requirements.

While it makes sense that a Request for Proposal (“RFP”) might preclude an organization from being considered if tainted by a criminal past, a key question is what happens if a firm has been hired and bad news follows. Unwinding an entrenched relationship can be complicated. Terminating a money manager entails transition costs. Saying goodbye to a custodian could mean months of reconciliations and systems checks with a new bank. There is no easy way to say au revoir yet that is exactly what might happen soon if certain financial institutions are not accorded a QPAM green light.

For further reading, check out:

Investment Risk Management and Making the Bed

Posted in Investment Management, Risk Management

business travel

According to the character played by actress Ellen Page in “Smart People,” everyone should make their bed each morning as it sets the right tone for the day. In contrast, her freewheeling uncle (played by actor Thomas Haden Church) offers that not making one’s bed sends a message too.

The same thing can be said about investment risk management. As an asset manager or provider of other services to investors, your creation of a robust infrastructure speaks volumes. The converse is true as well. If your proverbial “risk management bed” is unkempt, there is a greater chance of things slipping through the cracks. Should that occur, your clients will likely pay in the form of losing money or foregone opportunities. Either way, future business can suffer when it is discovered that an organization could have taken steps preemptively to mitigate risks but declined to do so.

Over time, risk management has come into its own. A multitude of companies and financial institutions have recognized risk management as a strategic imperative. Yet there are still organizations that see risk management efforts as expensive and far removed from the act of growing revenue and profitability. In my experience, this mindset is dangerous in the long-term. With a heightened awareness of their fiduciary duties, enlightened beneficial asset owners understand that effective due diligence means (a) taking a deep dive of how their existing and prospective service providers seek to tame uncertainties and (b) satisfying themselves that things are tidy and neat.