By Professor Suresh Cuganesan
The recent sentencing of UBS rogue trader Kweku Adoboli continues a series of scandals in the financial services sector (think Barclays Bank, HSBC, JP Morgan, Lloyds Bank). However, financial services are not alone in experiencing an increasingly obvious point, trying to maintain if not increase profitability in a down financial market can be incredibly risky.
Striking a balance between risk and return requires leadership and direction from the top – and that is why it is vital that the leaders of tomorrow are equipped with the skills they need, and be able to implement forward-thinking solutions, rather than relying on outdated solutions.
A down market will often provide business with the need to look elsewhere for new market opportunities, often in a hurry. These new opportunities can look very tempting against a backdrop of stagnating or decreasing profitability – and that tempting nature can lead to hurried decisions from managers and CEOs who are blinded by the positives, and fail to consider the risks.
Likewise, the push from the executive for a business to be agile, innovative and actively seeking new profit opportunities can override adequate and thorough risk assessment.
Business has historically employed quantitative risk models and static ‘heat map’ approaches, which have a tendency to offer assurances that the potential downsides have all been taken into account. However, the models they have used are based on events that occurred when the markets were far less volatile than they are at present, and are rarely updated in light of emerging trends – often until it is too late!
Worse still, these outdated models are often used by management to justify risky positions, instead of providing a reason to look deeper, and ask more questions, about the risks involved in the venture.
The business leaders of tomorrow need to be able to exercise sound judgment in times of economic turmoil – and that judgment needs to be backed by an increasing culture of responsibility and accountability. Leaders also need to put the right tools in place– key performance indicators, key risk indicators, planning and incentive systems and the proliferation of ‘big data’ can either support or hinder the right conversations and asking of the right questions. Effective leadership is important for many reasons – clarity around strategy and the desired risk-return profile is certainly one of these.