Читать книгу Implementing Enterprise Risk Management - Lam James - Страница 16

In my previous ERM books I introduced the Wheel of Misfortune, which illustrates that risk management disasters can come in many different forms and can strike any company within any industry. Beyond purely financial losses, the mismanagement of risks can result in damage to the reputation of the companies, or a setback for the careers of individual executives. The Wheel of Misfortune is the response I use to those managers and executives who aren't swayed by the potential pain of ineffective risk management. These doubters will often express the sentiment that “it couldn't happen here” or “if it isn't broke, don't fix it.” In these cases, it is worth reminding the skeptics that history has repeatedly demonstrated how bad things can and do happen to good companies.

When my first ERM book was published in 2003, the direst illustration of how negative events can quickly escalate was the cumulative losses suffered by U.S. thrifts in the mid-1980s. These losses not only bankrupted individual companies, but also threatened the entire industry. There were other examples as well. Important spokes of the Wheel included accounting fraud, trading losses, and misrepresented revenue.

Now, however, risks are even more diverse and unpredictable. They can start anywhere in the world and quickly ripple across the global economy, affecting industries that on the surface had little in common with those at the epicenter of crisis. Figure 2.1 represents the new Wheel of Misfortune.

FIGURE 2.1 Wheel of Misfortune

A close examination of these disasters underlines the importance of risk management, including how the nature, velocity, and impact of risks have evolved. Here's a brief, woeful look at the some major corporate disasters, many of which are shown in the new Wheel of Misfortune. Take note that those caught up in the Wheel represent some of the world's best-known and most highly regarded brands.

Operational Risk involves any event that disrupts normal business operations. Losses resulting from operational risk may stem from inadequate or failed processes, people, systems, or external events. It includes employee errors, fraud, or criminal activities, as well as the failure of information, manufacturing or other systems:

• In 2012, UK-based drug maker GlaxoSmithKline paid a $3 billion fine for illegally marketing the depression drug Paxil. The company was found to have deceived and bribed doctors into prescribing the drug for children, with whom it has been shown to increase the likelihood of suicide.19

• Pfizer, the world's largest drug company, reached a $2.3 billion settlement with U.S. federal prosecutors in 2009 for promoting the painkiller Bextra for unapproved uses that endangered patients' lives.20

• In 2014, auto manufacturer Toyota, often lauded for its Toyota Production System intended to reduce error and waste, agreed to pay $1.3 billion to avoid prosecution for covering up severe safety problems with “unintended acceleration” and continuing to make cars with parts the FBI said the company “knew were deadly.”21

Bribery and Corruption are risks that any company working with governmental agencies around the world may face. The risks are multifold: costs associated with “shakedowns” of corrupt officials, loss of reputation, and, of course, the financial consequences of prosecution.

• German manufacturer Siemens paid fines and other penalties totaling $1.6 billion in the United States and Germany after pleading guilty to violations of the U.S. Foreign Corrupt Practices Act (FCPA) in 2008. The company admitted that bribery had become a common way win government contracts around the globe.22

• Alstom, a French power and transportation company, paid a $772 million fine in 2015 for FCPA charges related to a widespread corruption scheme involving at least $75 million in secret bribes paid to government officials in numerous countries; falsifying its books and records; and failing to implement adequate internal controls.23

Antitrust regulations in most countries aim to foster open competition and prevent market-share leaders from artificially manipulating price, supply, and other factors. What constitutes anticompetitive behavior is in the eye of the beholder, varying from country to country and court to court. As a result, some companies may face costly litigation for what they feel are legitimate business practices. Others, however, clearly intended fraudulent activity.

• After years of litigation, Visa and MasterCard reached a $7.25 billion settlement in 2013 for a class-action lawsuit claiming that the companies conspired to force merchants to pay excessive fees and follow onerous rules for accepting their credit cards. The settlement was recently thrown out by a federal appeals court as “unfair to retailers.”24

• In 2014, chip-maker Intel paid a $1.45 billion fine in Europe for unfair and damaging practices against its rival AMD. This was in addition to a $1.25 billion settlement with the United States in 2009.25

• Taiwan-based AU Optronics paid $500 million in the United States for participating in a conspiracy to fix prices on LCD panels. Two of the company's senior executives were sentenced to three years in prison and fined $200,000. The Justice Department claimed that AU Optronics was part of a price-fixing cartel involving every major manufacturer of standard-sized LCD panels, including LG and Samsung.26

Mortgage Underwriting

• Bank of America paid a cumulative total of $50bn in U.S. government settlements between 2009 and 2014, when it coughed up a record $16.65 billion to resolve allegations it misled investors in its mortgage-backed securities.27 In similar cases, JPMorgan Chase paid $13 billion,28 and Citigroup $7 billion.29

Foreclosure Practices

• In 2012, the U.S. Federal government and state attorneys general reached a $25 billion agreement with the nation's five largest mortgage servicers: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. Violations included the use of “robo-signed” affidavits in foreclosure proceedings, deceptive practices in the offering of loan modifications, failures to offer alternatives before foreclosing on federally insured mortgages, and filing improper documentation in federal bankruptcy court.30

• The following year, 13 mortgage servicers, including Bank of America, Wells Fargo, and JP Morgan Chase, paid $9.3 billion to settle similar charges.31

Department of Justice Prosecutions are risks that any U.S. company faces not just for intentionally fraudulent behavior, but also as a result of unintended negligence.

• Anadarko Petroleum paid a record $5.15 billion in 2014 to settle a DoJ prosecution over toxic waste at about 4,000 locations over decades caused by a company it had acquired in 2006.32

• In 2012, BP paid $4.525 billion and pled guilty to 11 counts of manslaughter, two misdemeanors, and a felony count of lying to Congress and agreed to four years of government monitoring of its safety practices and ethics over the 2010 Deepwater Horizon spill. In 2015, the company paid an additional $18.7 billion in fines.33

SEC Actions: Though it has been criticized for not coming down hard enough on financial institutions whose risky behavior triggered the 2008 meltdown, the SEC is still a force to be reckoned with, pursuing violations of disclosure and other regulations.

• In 2010 Goldman, Sachs & Co. paid $550 million and agreed to reform its business practices to settle SEC charges that the firm misled investors in a subprime-mortgage product just as the U.S. housing market was starting to collapse.34

• In 2012 BP paid a $525 million penalty to the SEC for securities fraud stemming from the Deepwater Horizon spill. The SEC charged the company with misleading investors by significantly understating the oil flow rate in multiple reports filed with the commission.35

Trading Losses: Organizations trading in the financial (and energy) markets can suffer large losses due to unauthorized activities or trades executed beyond reasonable limits.

• In January 2008, the French bank Société Générale lost approximately $7 billion due to fraudulent transactions created by a trader with the company.36

• In the infamous “London Whale” incident, a team of JPMorgan Chase traders bet on derivatives in 2012 that ultimately cost the bank $6.2 billion. Moreover, JPMorgan Chase later paid about $920 million in fines to U.S. and U.K. regulators for engaging in “unsafe and unsound practices.”37

Anti–Money Laundering has become a hot-button issue for governments with the growth of terrorism and illicit drug trade. Financial institutions that turn a blind eye to suspicious behavior (or actively solicit it) face heavy fines and tremendous reputational damage.

• In 2013, HSBC, Europe's largest bank, paid $1.9 billion in an agreement with the United States to resolve charges it enabled Latin American drug cartels to launder billions of dollars. HSBC was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of U.S. currency from its Mexico subsidiary. The bank was also accused of violating U.S. economic sanctions against Iran, Libya, Sudan, Burma, and Cuba.38

• In 2014, France's largest bank, BNP Paribas, pleaded guilty to concealing billions of dollars in transactions for clients in Sudan, Iran, and Cuba in violation of U.S. sanctions and agreed to pay $8.9 billion in fines. Prosecutors say BNP, France's largest bank, went to elaborate lengths to disguise illicit transactions with sanctioned countries.39

Market Manipulation on a global scale seems like the stuff of James Bond movies or wild conspiracy theories. But at least two major cases show that large financial institutions are exposed to significant financial and reputational damage by the actions of their employees.

• In 2012, Swiss banking giant UBS agreed to pay U.S., U.K., and Swiss regulators $1.5 billion for its role in a conspiracy by multiple banks to manipulate the LIBOR rate that banks charge each other for short-term loans. The banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.40

• In 2015, five global banks including Citigroup were fined $5.7 billion for fixing benchmark foreign exchange rates by colluding in online chat rooms to make transactions minutes before rates were set. When it comes to crime, Citibank has a lot to learn about risk vs. reward: The bank suffered about $2.5 billion in fines for illegal activity that netted a mere $1 million.41

Tax Evasion, typically via financial privacy-friendly havens such as Switzerland, the Cayman Islands, Bermuda, Panama, and Luxembourg (among many others), can lead to reputational damage even when legal. But pressure from governments across the globe has led some jurisdictions to name names, so to speak, resulting in fines and other penalties.

• In 2009, in a deal to avoid its criminal prosecution, UBS agreed to pay $780 million in fines, penalties, and restitution to the U.S. government and provide names of suspected U.S. tax cheats. UBS had an estimated 19,000 U.S. customers with undisclosed Swiss accounts.42

• In 2014, another Swiss bank, Credit Suisse, pled guilty and paid $2.6 billion to settle U.S. tax evasion charges in addition to the $196 million penalty it paid the SEC earlier that year. A Senate subcommittee report detailed malpractices by the bank's employees to earn more business from U.S. citizens looking to hide income and assets.43

• In 2016, the Panama Papers data leak of 11.5 million files from the database of the world's fourth biggest offshore law firm, Mossack Fonseca, revealed the secretive offshore tax-avoidance schemes of thousands of individuals, ensnaring 12 national leaders, including Vladimir Putin and David Cameron, in embarrassing scandal.44

Government Bailouts: During the 2008 financial crisis the U.S. federal government took the controversial decision to bail out some of the country's largest financial institutions and manufacturers amid fear that their failure could lead to an even more catastrophic economic meltdown. The bailouts, while they may have saved many companies from extinction, came at the price of greater public and government scrutiny (or outright control), reputational damage, and costly financial terms, not to mention additional regulation and the threat, as yet unrealized, of breaking up institutions deemed “too big to fail.”

• In 2008 AIG's $85 billion bailout package left the U.S. government with a 79.9 % equity stake in the insurer. The two-year loan carried an interest rate of Libor plus 8.5 percentage points.45

• Later that same year, General Motors and Chrysler received a total of $13.4 billion in federal loans. As a result of the bailouts, GM emerged from bankruptcy as a new company majority owned by the U.S. Treasury, and Chrysler emerged owned primarily by the United Auto Workers union and Italian automaker Fiat.46,47

Sustainability: As public concern continues to focus on environmental and social issues, many companies are making sustainability a top priority. Environmental disasters such as oil spills, chemical releases, or nuclear accidents can cause horrendous damage, nearly limitless liability, and destroyed reputations. But even lesser missteps along the path to sustainability can raise accusations of “greenwashing” and call unwelcome attention to environmental practices and records.

• BP's Deepwater Horizon oil spill of 2010, was the largest marine oil spill in history, causing untold environmental damage and dire economic effects across the Gulf Coast states. The disaster made BP CEO Tony Hayward a source of global derision and had the additional economic consequence of a moratorium on offshore drilling that left an estimated 8,000–12,000 temporarily unemployed. By the following year, Hayward lost his job and the company had lost almost a quarter of its market value.48 As of 2015, BP estimated the disaster cost the company $54.6 billion.49

• Wal-Mart built the promise of “everyday low prices” into the largest retailer in the world. But fulfilling that promise means squeezing profit out of every transaction throughout the supply chain and labor market. How long, critics wonder, can this business model sustain itself?50 As Michelle Chen argued in a 2015 article in The Nation, “Every pricetag in Walmart's food inventory – which accounts for a quarter of the nation's grocery bill – is the product of agricultural subsidies, financialized commodities exchanges, and hyperinflated marketing.”51 Similarly, a report by Americans for Tax Fairness concluded that Walmart's low-wage workers cost U.S. taxpayers an estimated $6.2 billion in public assistance, including food stamps, Medicaid, and subsidized housing.52 Walmart's success at addressing the economic and social costs of these practices around the world has been mixed. In 2005 the company set out bold environmental goals including making 100 percent of its energy supply renewable and create zero waste, which have not met initial timelines. The retailer's own guidelines for ethical and sustainable sourcing, which pledged that outlets and suppliers “must fully comply with all applicable national and/or local laws and regulations…related to labor, immigration, health and safety, and the environment,” while admirable, have drawn unwelcome attention to its own labor practices.53