21 April 2010

Operational Risks: Undercover Boss to the Rescue...

Operational Risk Management is becoming a more relevant topic these days in the Board Room. Does "John Q. Public" realize that these events are the result of "Operational Risk" incidents:

  • Fabrice Tourre, the Goldman Sachs Group Inc. banker at the center of fraud
  • No doubt, Gizmodo has turned the tech news cycle on its head this week with its exclusive on the iPhone 4G. Everybody from MSNBC to Good Morning America, and even the ladies on The View are talking about what is arguably the biggest leak in consumer technology history.
  • Twelve people were missing and seven critically injured after an explosion and fire at an oil-drilling rig in the Gulf of Mexico.
  • Airports across Europe began reopening Wednesday, six days after ash from an Icelandic volcano forced the shutdown of airspace and stranded thousands of passengers around the world.

Each quarter, Boards of Directors and Executive Management are becoming more concerned about the risk of loss resulting from inadequate or failed processes, people and systems or from external events. Operational Risk includes the exposure to litigation from all aspects of an institution’s activities.

Operational risk is not new yet it is being talked about in a whole different context these days. At it's origin in the financial services industry the focus and discipline fell into the categories that market risk and credit risk did not substantially address. Today, Operational Risk Management is a core discipline that spans the flight decks of naval aircraft carriers to the halls of corporate enterprises as they study the latest plaintiff litigation matter that just arrived by courier.

In the past six plus years that we have been blogging on this subject and becoming more of a subject matter expert each day the clarity of effective operational risk management improves. To understand the interdependent attributes of a "Credit Default Swap", the details of a sophisticated transnational eCrime syndicate or the exposure to the loss of life from workplace violence or acts of mother nature requires a sound framework, methodology and systems thinking approach.

In many incidents the after action reporting, lessons learned and the investigative report find that human behavior was a factor in the failure. When earthquakes hit or volcanoes erupt the question set focuses on resilience and preparedness because these are events that we can't predict yet know will occur.

It is with great amazement that still to this day the corporate enterprise is deluged with the amount of human perpetuated fraud incidents that could be mitigated with the proper controls, awareness building and training sessions. Whether it be the insider who has embezzled from the accounts payable supervisor position or the external ID Theft non-state actors who have targeted your institution for ACH cyber bank thefts the fact remains that people's behavior is the culprit in the operational risk incident.

Regardless if you are a small business owner or the CEO of Goldman Sachs you can be sure that "Operational Risks" are present in your organization. Even the likes of companies in the US such as Walmart have recognized the impact of a robust OPS Risk program that spans the front office to the logistics and transportation departments. Understanding the risks themselves however is only a very small part of the equation. Realizing and exploring the interdependent relationships between assets and entities will remain the most unsolved challenge.

In light of the recent US over haul of the financial industry to abate future operational risks and the legislation pending to increase the oversight and compliance mechanisms, one can only wonder what will change? Hopefully the law will compel the CEO's to become a participant in the latest CBS series "Undercover Boss."

Michael Corkery at WSJ has a great idea:

With news that the reality show “Undercover Boss” is coming to Wall Street, Deal Journal couldn’t help but suggest some plot lines.

The CBS show features CEOs going “undercover” at their own companies and working along side their every day employees. The first episode involved a top executive of Waste Management disguising himself as a blue collar worker.

What is the Wall Street equivalent of a hauling trash or cleaning out porta potties? We thought we’d run down the list of possible roles for the various CEOs, starting with JP Morgan’s Jamie Dimon.

Dimon has been joining other big bankers in pushing back on calls to modify mortgages of underwater home owners. Well, it might make for good TV watching Dimon man the phone lines at a JP Morgan call center, fielding calls from some of those borrowers. How would the CEO who Forbes magazine recently dubbed “Master Banker, Master Schmoozer” stack up against that unemployed family, looking for a principal reduction on their Option ARM mortgage?

How about Lloyd Blankfein, of Goldman Sachs? We suggest he spend some time with the programmers who run the firm’s super computers, which are driving a good deal of Goldman’s profit machine. Blankfein might just meet the firm’s next CEO. Hello Hal.

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