I worked about six shifts at a Burger King in a shopping mall when I was in my teens. I quit because I didn’t care much for wearing the brown pants and hairnet. On my final night, the closing shift, I helped the veterans take the trash out. When we got to the Dumpster my colleagues ripped open a trash bags and pulled out a sealed bag that included dozens of Muppet Babies toys which they smuggled out of the store. Despite the manager’s belief that he had controls that were “watertight as possible” if your employees want to screw you, they will always find a way to screw you.
Years later, a trader who managed an arbitrage book explained that the bank hired him to exploit opportunities in the market because he was smarter than rival traders and institutional clients. He said to me that if he really wanted to screw the organization he could screw the organization. But he didn’t because he just didn’t.
Pick up any risk management framework to see a common approach to ERM: identify and assess your risks then do something about them. That part is academic. It’s just content. But the frameworks also have a communication and cultural component to them. Changing culture and making risk management a competency is not easy. That’s process.
Andrew Hill from the Financial Times writes about UBS:
Unfortunately, even risk managers working within a well-designed control structure are largely powerless in the face of an embedded corporate culture and a system of skewed incentives. Recent history – particularly in the financial sector – shows rules and processes are far easier to change than bad behaviour and big bonuses.
Remember anyone can generate a list of risks and even if you think “Risk is our business” creating a risk-friendly culture is where the real work needs to be done.
UPDATE: I love when I write something and someone crystalized my thoughts precisely after I wrote them. Have a look at this post on cnn.com “The catch-22 of catching a rogue trader” by Shelley DuBois as it complements my post. She quotes someone and writes:
You have to hope that your traders are the finest moral people around. Then, you set up your policies and your rules as if they’re all lying, cheating crooks.”