Risky Business

I just finished reading House of Cards, by William Cohan, which details the fall of Bear Stearns.  The unfettered greed that the book described is something I expected to see.  The surprise, however, was that the firm’s top leadership and board were clueless as to the potential impact on the firm resulting from the decline in the housing market and the concomitant collapse of the sub-prime mortgage markets.

Executives at Bear who understood how Bear’s very complicated business actually operated and how its funding arrangements worked could see the potential for a liquidity crisis.  The warnings fell on deaf ears and appeared never to reach the board.

Between the firm’s treasurer, who is the Cassandra in this story, and the board was a layer of senior executives loath to interfere with anything that in the short term would impact Bear’s numbers negatively.  Gee whiz!  That sure sounds like Enron redux, another situation in which those who understood the liquidity risks were drowned out by those making huge money by refusing to heed them and in which there appears not to have been a direct line of communication to the board or audit committee.

In both Bear and Enron, would a direct line from those who understood the liquidity risks to the audit committee or to the board have averted disaster?  We can only speculate on the answer to that question.

What can boards today learn from these disasters?  As boards work to organize the processes and procedures by which they can oversee and monitor risk they should take into account the need for information from a variety of sources within the company.  Information and perspective will vary depending on where in management one sits.  Organizing for risk in this respect involves reviewing communication channels between board and management so that the board can have a holistic picture of the company and the risks that it faces.

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