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Corporate Governance and Financial Health

16414033-abstract-word-cloud-for-corporate-governance-with-related-tags-and-termsThree years ago I did some work for an independent credit rating agency utilizing a quantitative methodology to determine financial health of corporations.  Dr. Patrick Caragata founder of the firm conducted a study of 200 TSX listed firms with high CGI ratings (Governance Metrics International).   Dr. Caragata was seeking to determine the correlation of Corporate Governance (CG) and financial health.  His findings revealed that “CG ratings failed to indicate when a company was in poor health 75% of the time.  In fact, they wrongly identified 32% of weak companies as being highly rated on GMI.”

Dr. Caragata also extended his model to use financial health score as an early warning signal for a listed company’s share price.  KMV, established ratings agencies, Altman’s Z Score were also determined as lagging predictors of share price.  Dr. Caragata’s research on bond pricing and CDS where better predictors of financial health momentum and ultimate predictors of share price but still failed to correlate financial health score as an early warning signal for share prices.  The problem that the model continually encountered was that valuation always exhibited a bias towards share price (market momentum)  not financial health score.  The determination of a “fair value” based on historical spreads of financial health score and share price was overly and overtly price sensitive. Perhaps a signal of an inefficient market?  This was particularly true for bubble stock anomalies and commodity sensitive equities.

Purveyors of Business Process Management (BPM) suggest that listed practitioner’s of BPM trade at a 15% premium to non-practitioners.  I wonder if its marketing boast.  Though BPM is not CG;  it does speak to having CG excellence in the corporate DNA.   A cultural commitment   to sound practices create valuation premiums and sustainable business models.  That’s the message well managed companies consistently deliver as a central theme of their value proposition.  Integrating sound practices and CG excellence into the corporate culture does create valuation premiums because it suggests an intentionality of business process deeply wedded to the enterprise mission.

I believe the radical reconfiguration of Wall Street offers a telling example of incongruity of good CG practitioners and financial health.  It was always a self evident truth that Wall Street firms that folded or transformed into commercial banks were probably some of the best rated CG enterprises.  CG excellence can do nothing to save an enterprise with a structurally flawed business model.  Though CG excellence does presuppose a board of directors in tune with the vicissitudes of the market; who would have thought that we would be looking at the extinction of the global investment banking business?  Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns and the mighty Goldman Sachs were walking dinosaurs with flawed unsustainable business models?  All either folded, were acquired or became FDIC insured commercial banks.  I still can’t believe it but it’s true.  The world is being turned upside down.

Sum2 is a firm believer in coupling quantitative and qualitative risk measures to maintain operational excellence to build a healthy sustainable enterprise.  Effective CG alone cannot assure financial health.  It  must be a critical pillar of the governance, risk and compliance (GRC) triad.

When we speak about the principles of good governance, how about the original dissertation on the ideal of governance excellence.  Seemingly an insistence on an honest evaluation of reality to determine what is good is all it takes.  Its really that simple.

Visit the blog Risk Rap and the Allegory of the Cave post on FAS 157:

Sum2 welcomes the opportunity to speak with partners who share our passion for GRC excellence.

originally published 6/12/13

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June 12, 2013 Posted by | Bear Stearns, business continuity, credit crisis, Credit Redi, culture, FASB, operations, risk management, sound practices, sustainability | , , , , , , , , , , , , , , , , , | Leave a comment

Deloitte’s Nine Principles of Risk Intelligence

risk_triangleIs your business risk intelligent?  A review of  the following principles offers company executives a concise outline of objectives central to a risk intelligent enterprise.   Deloitte recently published White Paper, Effective Integration, Enhanced Decision Making, The Risk Intelligent Tax Executive outlined the following nine fundamental principles.

Nine fundamental principles of a Risk Intelligence Program

1. In a Risk Intelligent Enterprise, a common definition of risk, which addresses both value preservation and value creation, is used consistently throughout the organization.

2. In a Risk Intelligent Enterprise, a common risk framework supported by appropriate standards is used throughout the organization to manage risks.

3. In a Risk Intelligent Enterprise, key roles, responsibilities, and authority relating to risk management are clearly defined and delineated within the organization.

4. In a Risk Intelligent Enterprise, a common risk management infrastructure is used to support the business units and functions in the performance of their risk responsibilities.

5. In a Risk Intelligent Enterprise, governing bodies (e.g., boards, audit committees, etc.) have appropriate transparency and visibility into the organization’s risk management practices to discharge their responsibilities.

6. In a Risk Intelligent Enterprise, executive management is charged with primary responsibility for designing, implementing, and maintaining an effective risk program.

7. In a Risk Intelligent Enterprise, business units (departments, agencies, etc.) are responsible for the performance of their business and the management of risks they take within the risk framework established by executive management.

8. In a Risk Intelligent Enterprise, certain functions (e.g., Finance, Legal, Tax, IT, HR, etc.) have a pervasive impact on the business and provide support to the business units as it relates to the organization’s risk program.

9. In a Risk Intelligent Enterprise, certain functions (e.g., internal audit, risk management, compliance, etc.) provide objective assurance as well as monitor and report on the effectiveness of an organization’s risk program to governing bodies and executive management.

Sum2’s business mission is to help small and mid-sized enterprises (SME) become risk intelligent enterprises.  Sum2’s product suites enables managers to implement sound risk management practices guided by these principles of risk intelligence.  We firmly believe that consistent practice of sound risk management  holds the key to profitability and long term sustainable growth.

Sum2’s Profit|Optimizer product series provides mangers a consistent framework and scoring methodology to assess, aggregate and price risk, identify actions, assign responsibility and align business functions to mitigate risks and achieve business goals.

Sum2’s IARP, helps managers to assess and manage the rising threat of tax risk exposures that present significant compliance risk to the enterprise.

We welcome an opportunity to help you erect a risk intelligence enterprise.

Risk: risk management, business intelligence, compliance, sustainability, profitability

November 11, 2009 Posted by | branding, business continuity, compliance, IARP, operations, regulatory, reputational risk, risk management, SME, sound practices, Sum2 | , , , , , , , , , , , , , , , | 3 Comments

Sum2 Announces Business Alliance with CreditAides

sum2 risk managementSum2, LLC is pleased to announce that they will begin to offer the corporate rating products of CreditAides. CreditAides is an independent corporate rating and research firm that provides financial health assessment reports and credit risk analysis ratings on companies using the Z-Score methodology. The CreditAides reporting system is a predictive tool that helps managers gain insights into the financial health of a company.  The insights help managers identify a company’s ability to remain competitive and financially sound while measuring the impact of business initiatives to achieve profitability and growth.

James McCallum, the President of Sum2 stated, “The CreditAides quantitative assessment tool is a wonderful compliment to the qualitative risk assessment applications offered in the Profit|Optimizer.  Now our clients have a recognized standard to measure the financial impact and returns on capital allocation decisions they implemented as a result of a Profit|Optimizer review.  The challenging business cycle requires that managers allocate capital to a few select initiatives.  It is critical that managers fund initiatives that mitigate the greatest risk and provide the potential of optimal returns.  The combination of CreditAides reports with the Profit|Optimizer will provide our clients with the ability to discern the optimal initiatives to fund and measure the effectiveness of their capital allocation decisions.”

The Profit|Optimizer guides business managers through an thorough enterprise risk assessment.   Uncovering the risks and opportunities associated with products and markets, business functions,  numerous macro risks and critical success factors are key components of  effective enterprise risk management (ERM).  ERM requires the assessment and aggregation of hundreds of risk factors.  The Profit|Optimizer helps managers identify the key initiatives that will  help to maintain profitability and sustainable growth.  The use of CreditAides provides an important measurement tool to affirm and validate that managers have made correct bets on capital allocation decisions.

Z-Score Financial Analysis Tool

The Z-Score formula for predicting bankruptcy was developed by Edward I. Altman a Professor of Finance at New York University.  The Z-Score is used to assess the financial health of companies and the probability of  bankruptcy.   The Z-score uses multiple corporate income and balance sheet values to score  the financial health of a company. The use of  Z-scores is a strategic tool managers use to measure and validate the effectiveness of their business strategy.

Risk Assessment and Opportunity Discovery

The recession has created macroeconomic conditions that are causing widespread business failures.  Small and mid-size business enterprises (SME) require effective risk management tools to effectively manage business threats to survive extreme business downturns.  Assessing, measuring, aggregating, prioritizing, pricing and initiating actions are the tactical means risk managers use to support the business objectives of the enterprise.  Sound risk management practices are central to a healthy corporate governance culture and are central to maintaining profitability and long term sustainable growth for the business enterprise.

The Profit|Optimizer

Profit|Optimizer helps managers assess risk factors and uncover opportunities that are always present in the business environment. The product is based on Basel II working group recommendations that outline optimal risk profiles of SMEs.  The Profit|Optimizer incorporates four focus areas.

1.) product and market dynamics (products, clients, competition, supply chain, market segments)

2.) business functions (management, sales and marketing, operations, facilities, IT, HR, accounting)

3.) critical success factors (generic and specific)

4.) macro risk factors (macroeconomic, STEEPLE, SWOT, segment benchmarks, business plan optimization)

SME’s lack of agility and reluctance to change has made it difficult for these businesses to survive severe market conditions. There are tremendous market forces at work in the current business environment that are creating dangers and opportunities for SMEs if they can effectively assess and adapt.  Business managers must be astute and exacting how they allocate the precious capital resources required to achieve business objectives.  The Profit|Optimizer helps managers make better capital allocation decisions.  CreditAides provides fiscal metrics to validate or adjust business strategy and initiatives.   Sum2’s risk assessment products coupled with the measurement tools provided by CreditAides creates a leading edge solution for SME risk management.  The ease of use and superior value proposition  of the combined solution is unsurpassed in the market.

About CreditAides

CreditAides (www.creditaides.com) online business analysis and credit assessment portal provides business managers with important insights into the financial health of their company. Automated financial analysis improves efficiency of the business enterprise.  CreditAides reports are used to assess the financial health of clients, supply chain and used to demonstrate financial health and credit worthiness to credit and equity providers.

True underlying financial health of companies has never been harder to identify and never been of greater importance. Across both equity and credit markets, understanding relative financial strengths of companies is paramount for effective business decisions.  Good decisions cannot be made without good quality information generated by incisive tools.

About Sum2, LLC

Sum2 (www.sum2.com) was founded in 2002 to promote the commercial application of corporate sound practices. Sum2 manufactures, aggregates, packages and distributes innovative sound practice digital content products to select channels and market segments. Sum2’s sound practice products address risk management, corporate governance, shareholder communications and regulatory compliance. Sum2’s objective is to assist businesses and industries to implement sound practices to create value for company stakeholders and demonstrate corporate governance excellence to assure profitability and long term sustainable growth.

You Tube Video: Ella Fitzgerald, A-Tisket A-Tasket

Risk: bankruptcy, default, market, credit

November 5, 2009 Posted by | banking, Basel II, business, credit, CreditAides, recession, risk management, SME, sound practices, Sum2, sustainability | , , , , , , , , , , , , , , , , , | Leave a comment

Sum2 Announces New Business Webinar Series: Recovery Tools for the New Economy

sum2 large corp logoGreat Falls Festival Paterson, New Jersey September 7, 2009: Sum2 is proud to be participating again in this year’s historic Great Falls Festival and is pleased to announce a new webinar series entitled “Recovery Tools for the New Economy.” The webinar series is designed to highlight the dramatic changes occurring in the economy and provide business managers with a set of tools to assess business risks and uncover opportunities the trying business cycle is creating.

The Great Falls Festival presents a perfect opportunity for Sum2 to announce its new webinar series. The Festival brings together leading industry executives, business associations, academic institutions, service providers, government agencies and capital market participants. Sum2 believes economic recovery will require concerted action by all these participants.  Sum2 invites all of their participation to more effectively address the problems and opportunities confronting business and industry to effect sustainable economic recovery.

Recovery Tools for the New Economy

The Recovery Tools for the New economy Webinar Series will consist of three modules.  Those modules include:

  • Macro Risk and Opportunity Assessment: Macroeconomic, STEEPLE, SWOT, Financial Ratios, ROI Analysis
  • Product and Market Segment Assessment: Product, Customer, Competition, Supply Chain, Market Dynamics
  • Business Function Performance Scoring, Management, Sales and Marketing, Operations, Accounting, IT, Human Resources, Facilities

Each webinar will provide participants with an SMB 360 workbook and a series of interactive worksheet templates to conduct assessment exercises.  Each webinar session will run approximately 1 hour in length.  Each webinar module subscription fee will be $75.00.  Subscribers can purchase a subscription to all three modules for $200.00. Subscribers that license all three modules can also purchase a Profit|Optimizer license for $200.00.  Subscriptions to the webinar can be purchased on the Sum2 website www.sum2.com.

Sum2: Sound Practice Thought Leader

For the past three years Sum2 has used the occasion of the Great Falls Festival to announce a new product or market initiative.  Last year Sum2 unveiled The Hamilton Plan.

Sum2’s announcement of the Hamilton Plan is in response to the compounding economic and political crisis that is confronting the United States. The credit and energy crisis, inflation pressures, trade deficits, geo-political instabilities, global warming and ecological degradation are the result of long term systemic problems that government and industry has failed to address effectively.

Sum2 put forth a 10 Point Program that squarely addresses these pressing issues.  The previous year Sum2 announced the SMB|360° product series which has grown to include the Profit|Optimizer, IRS Audit Risk Program and the Macroeconomic Risk Assessment program.

The Profit|Optimizer is a qualitative risk assessment and opportunity discover tool. It assists SME’s to identify and score business vulnerabilities and opportunities. The Profit|Optimizer conducts over 200 assessments encompassing products and markets, business functions and critical success factors. The Profit|Optimizer aggregates risk assessment scores and presents action items on a series of dashboards that enable managers to decide what initiatives mitigate the greatest risk and produce the greatest return.  The Profit|Optimizer demonstrates to shareholders, bankers and other stakeholders that company management are effective risk managers and are committed to corporate governance excellence.

Sum2 offers a series of products and services to help SME’s effectively manage risk, improve stakeholder communication, implement effective corporate governance that create sustainable business practices to assure long term profitability and growth.

Sum2 also offers the award winning PACO™ (Patriot Act Compliance Officer). PACO™ helps financial services companies comply with the anti-money laundering provision of the Patriot Act.

About Sum2, LLC

Sum2 was founded in 2002 to promote the commercial application of sound practice programs. Sum2’s sound practice program addresses risk management, corporate governance, shareholder communications and regulatory compliance. Sum2’s objective is to assist businesses and industries to implement corporate sound practices that add exponential value for stakeholders, employees, customers and to be exemplary citizens within the communities in which they operate and serve. Sum2 manufactures, aggregates, packages and distributes innovative digital data content products to selected channels and markets.

For more information on this program or to order products offered by Sum2 please contact customer.service@ sum2.com or call us at 973.287.7535.

September 8, 2009 Posted by | IARP, product, SME, sound practices, Sum2, Uncategorized | , , , , , , , , , , , , , , , , , , , , , | 1 Comment

What Are Sound Practices?

What are Sound Practices?

Sound practices are a set of standards and controls that mitigate numerous risk factors in the corporate enterprise. Sound practices must address corporate governance, operational and market risk factors, regulatory compliance, corporate citizenship, and stakeholder communications within a set of defined expense ratios.

Corporate Governance

James Wolfensohn, former President of the World Bank stated, “Corporate governance is about promoting corporate fairness, transparency and accountability.” Sound practices are a necessary prerequisite for effective and ethical corporate governance. Businesses must accept its precepts and clients and investors must demand compliance, ethical trading principles, honest and timely disclosure, operational integrity and a full commitment to its implementation and adherence. Effective corporate governance practices maintains the faith of investors and provide clear measures of transparency, accountability and performance measurement of business managers and owners.

Financial Health

The implementation of a sound practices program is a powerful value creation tool. A sound practices program provides investors and creditors an enhanced level of confidence that operational risk factors are minimized and other classes of risk are being monitored and controlled. Corporate and transactional transparency and shareholder disclosure is assured. Investor confidence and a more thorough understanding of a corporations strategy and risk characteristics will be the result of a sound practices program.

Investor Communications

The sound practices program advocates the delivery of reports, analysis tools and management compliance statements to investors and corporate stakeholders through accessible media channels. All communications should support a stated level of transparency for investor disclosure. Investors should expect timely disclosure of corporate risk factors and other events pertinent to corporate performance, profitability and potential risk events and factors.

Brand Building, Regulatory Compliance and Best Practices

Sound practices require that regulatory compliance programs be embraced as a brand building exercise. Corporations that approach compliance by implementing best practice solutions will mitigate reputational and regulatory risk, attract high end clientele, and command premium product margins.

April 2, 2008 Posted by | sound practices | , , , , , , , | Leave a comment