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Dilemmas: Damned if you do and damned if you don't?

MAY 13, 2021

A dilemma exists when a difficult choice has to be made between two or more alternatives, especially ones that are equally undesirable.

In business, dilemmas often involve questions of how much risk we are willing to take in order to grow our bottom line. This is not easy. Too much risk, and bad things happen. Too little risk, and nothing happens.

I think it's fair to say that risk management is particularly complex in the finance industry, and we see again and again how presumably intelligent people in leading firms make “unintelligent” decisions.

Recently we have seen a shareholder revolt against the board of Credit Suisse, after spectacular losses related to exposure to two fund companies, Archegos Capital Management and Greensill Capital. While details are still emerging, it seems clear that the bank had developed a culture where senior management overrode red flags from the risk people in favor of what was seen as growth opportunities.

In short, there were red flags, but senior management suppressed them.

Going further back: During the financial crisis in 2008, the risk management functions in the high-street banks didn’t really see the crisis coming. The traditional models and procedures didn’t capture the true risks that obviously were there. I was the CEO of a bank at the time. I can assure you that we certainly didn’t see it coming, and in the senior teams we didn’t manage to come up with a better or different view than what surfaced through our processes. We weren’t good enough to challenge and to take another perspective.

In short, there weren't any red flags, and senior management accepted this.

However, there are different examples from the financial crisis. For instance, in Goldman Sachs, the looming crisis never surfaced through the risk models the bank was using at the time. But even so, and despite what the very competent professionals recommended, the senior executives took the opposite view, and Goldman Sachs took hedging positions enabling the bank to get through the financial crisis relatively unharmed. Today, they are more profitable than ever.

In short, there weren't any red flags, but senior management did not accept this without a broader discussion.

The takeaway ought to be that we must start out with a solid process based on good models and thorough information gathering, with sufficient scrutiny, diligence and quality. We need to “do things right”.

But this is not enough. We also need to take a holistic view, weighing all factors and seeing things in perspective, in order to “do the right things”.

Is there a dilemma between “doing things right” and “doing the right things”? I guess my answer is no, but the premise is that when doing things right, there needs to be a high-quality process, not one where uncomfortable or negative outcomes are hidden. With that as a basis, I believe that it is possible to reach a decision where the right action is taken, all things given. That may very well be a different decision than what the analysis showed, as in the Goldman Sachs case, or one that is firmly based on the best possible facts that the internal processes have generated.

The end result should be that we do the right things, not just do things right. And almost needless to say, we need to do good!

Stay safe.  

Kind regards, Klaus-Anders