Management / Rene Carayol: How over-regulation is threatening to take the reward out of risk

Rene Carayol: How over-regulation is threatening to take the reward out of risk

Our traditional approach to management has been well defined, dutifully trained and has had robust processes supporting it for well over a century now. It is well oiled and has all the measurements and protocols that enable the tight control of risk to the business.

Despite this legacy, we still have a litany of near-catastrophic failures that somehow escaped the tight net of management – from Enron to Lehman Brothers to Volkswagen, with many more in between.

Even with ever-more-sophisticated models of risk management in place, companies are becoming more vulnerable to sudden geopolitical crises, natural disasters, and competitive threats.

Everyone thinks more independent board directors will have the necessary risk oversight to mitigate poor decisions but there is no evidence to prove it. When Lehman Brothers went bankrupt, eight of its ten board directors were independents.

The introduction of “balanced score cards” appeared for a while as the way forward. While they have certainly had much acclaim and success, there is little evidence that this tighter measurement and reporting had any real effect in preventing the global financial crash in 2008.

Third-party oversight and policing is the current flavour of the decade. Regulators on both sides of the Atlantic have stepped into the breach, and have collected stupendous amounts of money through fines and penalties. They have been hugely interventionist and quite muscular – but to what long-lasting effect?

“There is no way you can compromise,” says Lars Seier Christensen, CEO of Copenhagen-based Saxo Bank, a financial services firm focusing on online trading. “When allocating resources, meeting regulatory requirements is always top of the list.”

By now nearly everyone recognises the challenges inherent in increased regulation, but less obvious are the sustainable benefits. In the fourth quarter of last year Britain’s productivity figures took a significant plunge. Yet it was not the steel debacle that caused it or anything to do with manufacturing. This was our nation’s golden goose – financial services.

Before the crash, everything from speed and ease of use to solid risk management and systems redundancy marked out the financial services industry for its operational excellence. With the rise of cyber-crime and politically motivated online attacks, risk management has remained at the top of the agenda. Reputations have taken such a hammering that they will take many years to repair.

The huge cost of handling regulatory complexity has led to the hiring of thousands of compliance and risk officers, and internal auditors are also in huge demand. The never-ending demands and ever-higher expectations from regulators and from the customers of financial services firms has provoked even more hiring of these controlling types.

This is all very well intentioned, but it might be time to pause and reflect on the real cause of the slow-down in productivity. This industrial-strength heavy policing of rogue behaviour by individuals has yet to deliver sustainable success but, with all the new processes and checks and balances, the means of production are grinding to a halt.

Many of the envisaged gains provided by the high investments in digital and mobile technology are being frustrated by ever-more strangling controls. While George Osborne’s rather heavy-handed intervention with the CEO of the Financial Conduct Agency last year appeared to be “letting the banks off the hook”, it might just have been provoked by his eyes on the slump in the national productivity figures. He might be on to something here.

Maybe it’s high time for a fresh new approach to risk management. Given all the disruptive technology that is being unleashed, can we not come up with a fully automated “Management 2.0”?


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