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“Risk Management Starts at the Top” by Paul Strebel and Hongze Lu: The Cause of the Huge Losses Essay

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Updated: Dec 11th, 2021

Introduction

The title of the article under review is; “risk management starts at the top” written by Paul Strebel and Hongze Lu. The article under review is an issue contained in the journal “Business Strategy Review” volume 21; issue number 1. The article covers pages 18-23 of the journal and was published by “Blackwell publishers” during the 2010 spring period.

The main purpose

The main purpose of this article is to identify the cause of the huge losses and sub-prime write-downs among these three companies, while their competitors were not exposed to the menace. The other purpose of this article is to expose the role of the top authority of institutions; towards the making of losses or profits depending on the extent and quality of control they have on important managerial functions like risk management; questioning the operations of the institution; making of choices and making of corporate judgments regarding corporate values within and outside the business, and the importance of corporate relations.

The major questions

The major questions raised as an attempt to uncover the underlying factors that led to the huge losses with relation to the top management of the companies include; what the work of the CEOs and the board of directors of these firms were when the institutions were investing in the uncertain collateralized liability obligations and structured venture plans. The other question leveled was; what the role of the risk management procedures guiding the commercial governance of the institutions was.

Analysis results

The information, inferences, and concepts that reflected from the analysis made regarding the operations of these institutions included that; there was a major relationship between the unconstructive roles taken by the dictatorial board of chairpersons and the CEOs, the deficiency of monetary market proficiency held by the bank boards, and the resultant huge losses incurred by these institutions. The analysis also indicated that the risk management controlling institutions especially monetary firms rely more on executive decision-making and judgment as opposed to literal computer modeling.

In support of these findings, the article points out that the risk model employed in an institution can be misleading in that; it may not properly evaluate the risk involved in the provision of highly risky loan ventures commonly referred to as sub-prime loans. This situation results in the inability to recover the loans due to the adoption of underlying loaning assumptions that do not house the changing financial variables and lack to give considerations to risks facing the firm.

The other inference supporting the findings is the inability of the top management, to ask relevant questions regarding the extent to which they expose themselves to major risks involved in the business. Some of the relevant questions to be engaged to avoid the situation is applying simplicity and critical perspective in business engagements; which prevents the authorities from asking the right questions when there is still time to do so. Further, there was a lack of expertise among the top authorities in making risk judgments and choices, based on information and experience regarding the financial environment. From the analysis, it was evident that the underperformers had no executive staff with financial expertise and experience; while the performers had up to 28 to 60 percent of board members experienced in financial expertise. From the analysis, it is evident that risk judgment expertise is vital towards the making of choices that increase the performance of a company or rather deter it.

The other finding in support of the inferences as well as giving a directive towards explaining the importance of top management involvement in risk management is that; even with financial information and expertise, excellent judgments regarding risks can be arrived at when there is a decisive figure at the executive level, who is welcoming and sensitive to both internal and external financial warning signs. Some of the warning signs can be learned from being open to ideas from board members, staff, and other information sources; and managing market and risk management measures daily.

The other idea supporting the responsibility of the top authorities regarding the losses is that; all the underperformers had stable power structures in which the top officials had been in place for an average of between four and five years. The failure was fueled by the domination and sole-directive control that these executives had accumulated; as some of these executives were known to fire any individuals attempting to question their decision and directives. The better performers, on the other hand, showed that policies of rotating executives had been employed as it also improved the transparency of managerial operations as well as orientation to varied risk management skills and experiences. As a solution to these problems, the value creation of the institutions was to be protected, and the CEOs needed to be controlled by the chairs and board of directors. As a measure to avoid the domination by CEOs, the board members had to take to the roles of engaging partners, as well as developing alternatives against CEO power accumulation.

The main assumption

The main assumption underlying the authors’ contentions towards arriving at the findings and conclusions in this paper is that; the other operations of the institutions are run efficiently; and that all other parties involved in the operations of the institution are working optimally.

Putting the authors’ recommendations into action

The implication of putting the authors’ recommendations into action means that; another occurrence of the crisis that took place with these financial institutions will not take place. Failures to take the recommendations into action will in turn mean; that the same financial crisis and losses will be experienced.

Conclusion

The main points of view adopted in this paper is that the only way to avoid the phenomena documented in the article is through; board members on top of having financial expertise being able to ask timely right questions, prevent CEO or chairman domination, provide for rotation of executives to avoid domination, and exposure of the different executives with directed risk management expertise.

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"“Risk Management Starts at the Top” by Paul Strebel and Hongze Lu: The Cause of the Huge Losses." IvyPanda, 11 Dec. 2021, ivypanda.com/essays/risk-management-starts-at-the-top-by-paul-strebel-and-hongze-lu-the-cause-of-the-huge-losses/.

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IvyPanda. "“Risk Management Starts at the Top” by Paul Strebel and Hongze Lu: The Cause of the Huge Losses." December 11, 2021. https://ivypanda.com/essays/risk-management-starts-at-the-top-by-paul-strebel-and-hongze-lu-the-cause-of-the-huge-losses/.

References

IvyPanda. 2021. "“Risk Management Starts at the Top” by Paul Strebel and Hongze Lu: The Cause of the Huge Losses." December 11, 2021. https://ivypanda.com/essays/risk-management-starts-at-the-top-by-paul-strebel-and-hongze-lu-the-cause-of-the-huge-losses/.

References

IvyPanda. (2021) '“Risk Management Starts at the Top” by Paul Strebel and Hongze Lu: The Cause of the Huge Losses'. 11 December.

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