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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

Day of Atonement: Al-Chet for Risk Managers

YomKippurTNToday is Yom Kippur.  It is the Day of Atonement.  The Jewish faith marks this day each year as a day to reflect on our sins and shortcomings we have committed during the past year.  It is a day of personal assessment.  Calling all to examine how we have failed to live a life in conformance to our highest aspirations and ideals.  It is customary to recite an Al-Chet confession prayer.  The Al-Chet is a confession of a persons past year sinful behavior. It is hoped that this admission of sin leads to  reconciliation with the aggrieved and an awareness that helps to establish a pattern of improved behavior in the future.

It is good that we commemorate such a day and use it to a constructive purpose.  After all, how many among us are without sin?  How many of us have achieved a level of perfection that obviates the need to reflect on how we can improve and make amends to those we may have hurt?   To be sure, even the best among us have fallen short of the glory of God.  A Higher Power surely keeps mere mortals rightsized and humble when our egos and perception of ourselves grows too large and burdensome.  The need to keep a strong self will from running riot is critical.  It is particularly dangerous when a person or corporation is unaware and ambivalent to the collateral damage its actions  spawn through the naked pursuit of self interest and ambition. In a sense, God is the ultimate celestial Chief Risk Officer that keeps wanton will in check.

The Day of Atonement is an important day because it is a day of transformation.  It calls for self examination and transformation.  Once we have learned the nature and extent of how our actions and inaction have negatively impacted ourselves and others,  we are called to make amends to set things right.  It is a day that requires considered action to improve ourselves so we can become a positive force for change in the world.

Considering the year that just transpired in the financial services industry, I wonder what an Al-Chet confession for risk managers would include.   We need a strong dose of atonement so we don’t repeat the egregious mistakes we committed last year.

An Al-Chet for Risk Managers:

I was not strong enough to stand up to my boss

I put selfish gain ahead of ethical considerations

I falsified or hid data to conceal results

I failed to be objective

My risk model was too subjective

I ignored warning signs

I was in over my head

I did not understand all the risk factors

I failed to get an outside opinion

I was beholden to monetary gain

I was victim to group think

I placed institutional interest ahead of ethical considerations

I  failed to admit I was wrong

I was not honest with regulators

I was not honest with shareholders

I looked the other way

I failed to act

I conveniently overlooked infractions / irregularities

I made exemptions

I did not understand the depth of the problem

I know there are many more.

Please help me to uncover, understand, make right and overcome.

Shalom

You Tube Music Video:  Aretha Franklin,  I Say a Little Prayer

Risk: compliance, reputation, catastrophic risk, moral hazards

September 28, 2009 Posted by | banking, corruption, credit crisis, regulatory, reputation, reputational risk, risk management, sustainability | , , , , , , , , , , , , , , , , , , | 6 Comments

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

Credit Redi Blog

Credit Redi is a company sponsored blog of Sum2. The purpose of Credit Redi is to help small and mid-size enterprises (SMEs) protect and improve their ability to access credit and equity financing from banks , shareholders and other funding sources.

Sum2 is dedicated to the commercial application of sound practices. Our sound practices program and products address:

  • corporate governance
  • risk management
  • stakeholder communications
  • regulatory compliance

Sum2 believes that all enterprises enhance their equity value by implementing a sound practice program. Sound practices are principal value drivers for corporate and product brands. Practitioners are awarded with healthy profit margins, attraction of high end clientele, enterprise risk mitigation and premium equity valuation.

Sum2 looks forward to helping you address the pressing challenges of the current business cycle.

You Tube Video: Herb Alpert and the Tijuana Brass, Work Song

Risk: abundance

January 28, 2009 Posted by | banking, credit, risk management, SME, Sum2 | , , , , , , , , , , | Leave a comment

Profit|Optimizer Presentation 1108

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Profit|Optimizer Presentation 1108

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December 16, 2008 Posted by | Uncategorized | , , , , , , , , | Leave a comment

Official Company Blog of Sum2

sum2logo1

Sum2llc is a company sponsored blog of Sum2. The purpose of sum2llc  is to help small and mid-size enterprises (SMEs) implement sound business practices to build profitability and maintain sustainable growth.

Sum2 is dedicated to the commercial application of sound practices.

Sum2’s  sound practices program and products address:

* corporate governance

* risk management

* stakeholder communications

* regulatory compliance

Sum2 believes that all enterprises enhance their equity value by implementing a sound practice program. Sound practices are principal value drivers for corporate and product brands. Practitioners are awarded with healthy profit margins, attraction of high end clientele, enterprise risk mitigation and premium equity valuation.

Sum2 looks forward to helping you address the pressing challenges of the current business cycle.

You Tube Video: Herb Alpert and the Tijuana Brass, Work Song

Risk: abundance

April 1, 2008 Posted by | Uncategorized | , , , , , | Leave a comment