Tuesday, June 23, 2009

Put risk managers on corporate boards (particularly the self-promoting ones)

A Sober Look reader pointed out an article written by Mr. Donald van Deventer from Kamakura (a software firm named after a town in Japan). The commentary on RiskCenter.com is called "Where are the Risk Management Experts on Bank Boards?".

And indeed we could use some risk management expertise in the boardroom. But where does one find such expertise and what qualities should that person possess? Well according to Mr. van Deventer here are some "suggestions".

Education: The board member needs a graduate education, preferably a Ph.D
hmmm, maybe some common sense with that Ph.D?
Specialist Training. It's not enough to be "a doctor" if the specialty needed is brain surgery, not urology.
Does that mean that any doctor can be a urologist? Maybe Mr. van Deventer will change his mind when he needs one.
Experience. An academic background in finance needs to be combined with training in the hard knocks of risk as a business person or advisor to business people.
With some hard knocks, no doctor will be able to help at all. How about a board member that knows how to build a business?
Guts. The director will ultimately have to take a stand against the CEO on risk issues.
Guts? There you would need a GI specialist. And by the way, taking on CEOs has little to do with being a risk manager. It has more to do with the Board's independence and shareholder involvement.

Mr. van Deventer provides a curious list of potential candidates for the "risk manager on the board" position. The list covers academic celebrities, quants who developed models for banks, financial software gurus, etc. Not clear how many know anything about running a business (which may be helpful to being on the board.) It includes celebrities like Fischer Black, Robert Merton, and William Sharpe. There is also Allen Wheat who nearly brought down CSFB with their exposure to Russia and even John Meriwether (Salomon, LTCM). Both are perfect for a BOD of a bank.

Warren Buffett is not on that impressive list of risk management talent because he either doesn't have a Ph.D., doesn't understand risk management, or can't stand up to corporate CEOs. But there is one candidate on that list who stands out, and it is none other than Mr. Donald van Deventer from Kamakura.

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