Strategic Risk Management – The Beanstalk Syndrome

October 10, 2013 Leave a comment

Strategic Risk Management – The Beanstalk Syndrome

Patrick J. McConnell Macquarie University, Applied Finance Centre

September 19, 2013
Journal of Risk Management in Financial Institutions, Vol. 6, No 3, September 2013

Abstract: 
Growth can be good – but can also be dangerous! When firms grow with superior products and services, then directors, executives, staff, shareholders, customers, suppliers and the general economy benefit. But delivering on a ‘growth strategy’ is notoriously difficult, as such a strategy often involves committing all of the firm’s resources to achieve growth targets. If such a strategy succeeds, riches can follow but, if not, the outcome can be catastrophic.This paper looks at several examples of large financial institutions that adopted some form of aggressive growth strategy only to have it blow up when the Global Financial Crisis (GFC) hit. All of the banks considered in this paper had adopted strategies that were built on significantly growing their balance sheets but they failed to manage the risks inherent in these strategies, in particular the need to manage their leverage and their liquidity. Their Boards and management were, this paper argues, bedazzled by a type of ‘Beanstalk Syndrome’, where they believed they could, like the mythical Jack, plant some ‘magic beans’ that would somehow grow into a constant supply of profits. Prudence was abandoned as each firm discovered a ‘golden goose’ that could seemingly produce profits forever. Unlike Jack, however, the beanstalk came crashing down, killing not the giant but the bank itself. This paper argues that these cases illustrate a lack of proper Strategic Risk Management (SRM), or the proactive management of the risks to corporate strategies. It further argues that regulators have a responsibility to ensure that Boards of Systemically Important Banks (SIBs) that adopt risky strategies, put in place the necessary risk management policies to ensure that taxpayers do not have to bail the companies out if/when the strategies fail.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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