Change, culture & risk: a primer for financial services executives with agendas

RMA Journal, The,  Dec, 2003  by Thomas R. Hofstedt

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However, there are times when more dramatic action is called for--a deliberate tampering with the business rationale and core values. These will test the leadership of the institution and have the potential to shape the future.

Two Case Studies of Value Contagion

Case A: In the late 1990s, the largest bank holding companies focused on the rapidly growing and highly profitable investment banking opportunities. This focus shaped enterprise-wide risk management systems and policies and drove credit decision making at the transactional level. Some of the effects were pernicious, leading to fired executives, jury trials, and large fines. Other effects were beneficial and long lasting, e.g., improvements in risk metrics.

Case B: The CEO of a $500 million community bank embedded in a declining rust belt city developed a vision that featured the bank as the engine for community redevelopment. He committed all of his time and energy to that vision, and the bank's advertising and marketing strategies were aligned with that vision. Over the next 18 months, the bank's customer mix and Joan portfolio shifted to reflect public and quasi-public agencies, social programs, and start-up commercial ventures concentrated in the downtown area. The bank was subsequently acquired by an out-of-town institution that offered shareholders a 50% premium.

Mostly true or mostly false.

Categorize each of the following 10 statements as either "mostly true" or "mostly false." Do it quickly, based on your first impression. Assume that the statement refers to your own institution, but also note where you feel your own institution may be unique on a particular item.

1. Genuinely strategic decisions (e.g., new products, acquisitions) are made with an appropriate degree of consideration for the risks involved.

2. Most of the officers in the institution have an appropriate level of understanding for how much risk appetite the company has for the particular product or customer set they are responsible for.

3. Executive management (say, the top 10 officers) of the company can articulate clearly the company's risk vision.

4. Key line managers throughout the company have a uniform, simple, easily understood answer to a shareholder's question at a cocktail party: "How much risk is the company taking?"

5. Unit-level plans and budgets include explicit risk targets as well as return targets.

6. Management is acutely aware of and pays extra attention to the risk potential imbedded in "stars," whether products, units, managers, channels, etc.

7. Lending units understand how their transactions and portfolios drive operating and market risk.

8. The CEO's values and views concerning risk taking generally are replicated down through the ranks.

9. Theoretical, technological, and mathematical sophistication is a necessary condition for having a strong risk management culture.

10. Formal risk analyses and periodic risk reports are integrated into pricing, performance evaluation, and planning systems.