View from the plinth

On Monday this week I went to Trafalgar Square to watch my friend, Lawrence Reed conduct his composition "The Ebb of Acrophobia" from the fourth plinth, the empty one. There was a "flash" orchestra summoned by Lawrence and the Internet of some 30 people, playing a wide variety of instruments and singing lustily when required.

Lawrence suffers from Acrophobia which is the fear of heights - a fear sometimes so intense that it sparks a panic attack. The music reflected his anxiety at being perched up on the plinth.

He risk managed the problem of standing up on the relatively narrow plinth and waving his arms around in order to conduct by sitting down in a camp chair and directing operations most expressively. In the course of the hour he had only one moment when he looked as if he was becoming apprehensive.

The consumption of alcohol after the performance by performers and onlookers was sufficient to alleviate any panic attacks brought on by height, some of us were almost horizontal .

The oldest Builder in Enlgand

The building trade has ever been subject to violent fluctations of supply and demand with many famous companies going to the wall when times got tough.

My favourite builder is a local one, Durtnell Ltd in Brasted Kent. It is a remarkable example of risk management over the centuries having been founded in 1591 and its first acknowledged building, Poundsbridge Manor, built for the Rector of Penshurst William Dartnall the father of the owner of the building company is still standing with a date on its front of 1593.

The company has its offices on land owned by the family since 1496 and is managed by three members from the 12th generation of Durtnell's to run the company. It has a staff of 170 and a turnover of £40,000,000 and as a building business specialises in high quality work.

It is the oldest builder in England and long may it prosper.

Bulk of the passengers

There has been a great deal of comment recently about the Ryanair proposal, following a poll of their passengers,to charge very fat people extra for flying if they overlap their seat Unfortunately this is not turning into the public relations disaster they deserve for pandering to their passengers' prejudice. They are getting publicity and not many are criticising them.

However their ploy is doubly cynical because not only are fat people an easy target, but also, as was explained on the BBC this morning, there is a perfectly well known example of how to manage this risk sensitively. South West Airlines in the US indicate that if you think you might not fit into a seat then you should consider buying the one next to you. In the event of the plane not being full then South West refund the cost of the extra ticket.

South West's approach is ethical and compassionate and a good example of thinking about the risks from the point of view of not just the majority but also of those unfortunate not to fit the seat space. They exhibit far better risk management than Ryanair.

Centuries of risk management

An educational trust, started in 1748, with current reserves of £50,000,000 and an annual disbursement of £1.3 million must be doing something right.

Interesting that when the founder, Sir John Cass, died, his will was not complete and it took 30 years of legal wrangling before the trust was established. It has supported and continues to invest in schools and education requirements for individuals in the City and the east End of London and in 2003 was a major benefactor for the establishment of the Cass Business School.

Over such a long time and with many different trustees the opportunities for feckless or reckless investment decisions would have been considerable, so the success and continuing existence of the Sir John Cass Foundation says a great deal about the wisdom with which the original trust was established and the care with which it has been administered. Human beings do not always have to be ruled by markets.

Sir John Cass's birthday in February 20th. He was born in 1661.

WANTED - Risk Manager for 2009

Criteria:

• Able to walk on water when taking off on a new project.
• Works hard to get traction whilst appearing calm on the surface.
• Ability to dive into murky details essential.
• Own carbon neutral transport a plus.
• Suitably equipped to deal summarily with plagues of black swans.
• Resolute - never ducks risk.
  

May you make 2009 what you want of it.


David Gamble
Risk Publishing Online

www.riskrisk.com

A day to remember

October 27th is the anniversary of Vasili Arkhipov's intervention that prevented a Soviet submarine firing nuclear torpedos at a US destroyer at the height of the Cuban missile crisis. Raise a glass in remembrance of a very gallant officer.

Risk Management and Pay

"If [remuneration] policies are not aligned with sound risk management, that is unacceptable. Immediate action will be required to change the policies".

FSA, 13 October 2008

High Impact, low probability risk

For more than 10 years the Council of the Association of Insurance and Risk Managers ( AIRMIC) have insisted that their reserves be placed with three separate banks, despite their lead bank offering significantly better interest rates. An example of risk managing for what, for the last ten years, would have been seen as a high impact but low probability risk.

Who decides on the risk?

A Chief Executive and his Chief Financial Officer, faced with a deteriorating situation in their markets, decide on a drastic course of action, supported by their banker.

Under their governance rules they submit their plan to the risk management committees. The first risk management commitee, having talked through the proposals with the stakeholders refuses to support the plan, which almost causes an apoplectic fit from the Chief Financial Officer who is not used to such detailed risk management consideration of his proposals.

The second risk management committee, composed somewhat differently, then refines the plan, adds some additional controls and benefits and confirms their agreement with it.

It then remains for the first risk management committee to decide whether their concerns and those of the stakeholders have been sufficiently addressed.

Is this a model for future corporate governance and for putting the risk manager right in the centre of the risk management process at the point of the decision?

Spreading the risk

Here's a risk management story from Tom Cahill's report on Bloomberg today;

"John James, who runs the Chicago-based firm with $25 million of assets, didn't buy Lehman stock or debt. Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds. He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on Sept. 15. "

Never rely on just one provider, if you can help it.

A week is a long time in the markets

Stelios Haji-Iannou remarked that " If you think risk management is expensive, try an accident".

Last week we started to count the cost of not having sufficent risk management is place in the derivatives' market. There is one estimate that this market is 11 times the value of the global GDP . No one knows how long or how painful it will be to extract the leverage out of that market or what the shape of the global financial industry will look like when it is finished.

Warren Buffet told us that derivatives were "weapons of mass destruction" back in 2002 when he reported on what he found when he unravelled General Re's derivative book. No one else comes close as a risk manager in the insurance business.

Impact on the public domain

Great risk management quote from Sir Edwin Nixon's obituary in the Telegraph today;

"Write nothing internally without considering its impact on the public domain."

Nixon became managing director of IBM UK in 1965 and retired as Chairman of its holding company in 1990, a remarkably long tenure, by today's standards. He also was Chairman of Amersham International from 1988-1996 overseeing notable growth.

In 1968 when I worked at Dexion, known for its slotted angle storage systems , Eddie Nixon was still proudly remembered after his four year stint as a Dexion management accountant, his first business post, as " the one who got away". He certainly managed his career risks extremely well and the obituary records that "although both approachable and good humoured, he was at the same time a perfectionist who liked things done well, and with style."

How does your CEO match up?

Too close for comfort

Well,well who would have thought it, the Transport Research Laboratory has found that 10,000 accidents in 2006 were caused by tailgaiting, the practice of driving right behind the car in front in an effort to intimidate them to move over or because you don't want anyone to cut in. Such car owners are known in the Welsh Valleys, I am reliably informed, as dog drivers - work it out.

Then there was the information that 90% of motorist were tailgated when they kept to the speed limit and only 50% when they drove without regard to it. It doesn't say how many of these are Central Lane Only Drivers (CLODs to the police) who add to a journeys' frustration.

The only three reliable risk management ploys I have come across with regard to tailgaiters are 1. to fit a switch to the dashboard to flash the brake lights without braking - one of my sales managers used this very effectively - smart man - he was also the only sales man in our electronic component company that Alan Sugar had time for 2. Follow the sensible advice of an American friend - drive so you have fast idiots in front, slow idiots behind 3.Have a number plate like my mother's - R2NEA -she has never been in a tailgate accident in 72 years of driving, but then she doesn't do motorways these days.

Risk Management is like a sheep dip

Risk Management is like a sheep dip. In order for it to be really effective the whole flock needs to be periodically immersed in the process.

Growler

Nigel Lucas, the Chairman of Risk Publishing Online, was an officer in the merchant marine years ago and tells me that , contrary to landlubbers' belief that all icebergs are 10% above the waterline there is another type which is totally submerged. This is called by sailors a " growler" presumably from the noise the hull makes on contact.

In risk management terms you either need sophisticated sonic detectors to pick it up or a look out on the prow of the ship.

Whatever the detection method "growler" is a great name for risks which you cannot identify until almost on top of them, but which lurk just under the radar! The people best able to detect them are at the sharp end of the business.

The Fantods of Risk: Essays on Risk Management

The Fantods of Risk: Essays on Risk Management
By H.Felix Kloman, published by Xlibris. Available from http://www.xlibris.com/ or Amazon http://www.amazon.com/ for $20

Roger Miller,a previous Executive Director of AIRMIC and no slouch with the apposite phrase, once described Felix Kloman to me as having a“luminous mind”.

The range and reading of that mind are on display in Kloman’s latest collection of essays on risk management,esoterically entitled “the Fantods of Risk”. Fantods are either a state of extreme nervousness(the fidgets) or a sudden outpouring of rage ( a fit).

Kloman ,I guess, is more likely to take to his keyboard in a fit ,one perhaps brought on by extreme nervousness as he contemplates the risks facing us and our general incomprehension. He has the seriousness of an Old Testament Prophet, laying down the law ( he likes lists),citing other scriptures including the saintly Peter Bernstein and the blessed John Adams, both known to members for their presentations at the AIRMIC Conference. Kloman is remarkable amongst the IRM membership for being struck dumb when giving their Lecture, an event which he describes in the book, graciously thanking the crisis management of the IRM and the hosts Willis.

He has read very widely and across many disciplines. He is one of the few writers on Risk Management from an insurance background who has become an active member of GARP, the Global Association of Risk Professionals, the financial risk managers who have recently been weighed in the balances and found wanting in their knowledge of risk. He chastises the improvident and the impertinent- including AIRMIC on two occasions in this book for the Partnership agreements which Kloman considers an outrageous conflict of interest – I disagree with him, but I can see why he might get a touch of the fantods when considering the situation from Maine or Connecticut, where he is in residence.

We need more prophets like Kloman, more such writers and thinkers ( not always the same thing of course) and his essays are always illuminating, as Roger said he found the man. They are full of wonderful insights, irritations, the odd haiku, a dash of Monty Python and serious analysis . He makes the study of risk an essential and central activity ,not some obscure calling. He has striven mightily to have the word “risk” accepted as having an upside as well as a downside. It makes you realise that if you look hard enough, within a prophet you may often find a poet.


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Risk Management can never be perfect

The title of this blog comes from Alan Greenspan's article in today's Financial Times. He is referring, in particular, to the exercised state of the financial markets. He points out that the risk management models do not adequately account for human nature, in one of its manifestations he referred to "irrational exuberance" when he was Chairman of the Fed. Now he considers that "paradoxically,to the extent risk management succeeds in indentifying such episodes,it can prolong and enlarge the period of euphoria."

By which I guess he means that people rely on risk management methodology too much and that, only when it is proven inadequate, such as now, does fear replace euphoria and greed.

Timing is all

Keynes said "In the long run we are all dead." He also observed " wordly wisdom teaches it is better to fail conventionally than it is to succeed unconventionally."

It is that second quote that is mentioned in today's Telegraph obituary of Tony Dye , the Phillips and Drew Fund Manager. Dye was a contrarian who in 1996 considered the FTSE 100 overvalued at 4000 and took a sizeable part of his clients' money out of the market. In March 2000 when the index stood at 6400 he was fired , yet within a month of his leaving the stock market turned. Many of those fund managers who had followed the herd kept their jobs.

Dye's story indicates the importance of timing in risk management. If he had made the switch out of equities in January 2000 he would have been hailed as one of the greatest fund managers of all time. He was right that the market would fall, but completely out on his timing, partly because he underestimated the power of Alan Greenspan to support irrational exuberance whilst at the same time fulminating against it.

There is nothing intrinsically wrong with going with the herd although it is always worth remembering that the Gadarene swine thought the going was good for the first part of the way . Warren Buffett always reckons it is best to fearful when others are greedy and greedy when others are fearful and as for timing, Bernard Baruch said "I have made my fortune by buying too late and selling too early".