To The Readers Of The Metropolitan Corporate Counsel:
The Financial Crisis Inquiry Commission, created by the Fraud Enforcement and Recovery Act of 2009 to "examine the causes, domestic and global, of the current financial and economic crisis in the United States" concluded in its January 2011 report that the financial crisis was avoidable. It found that chief among other factors there had been dramatic breakdowns in corporate governance, including too many financial firms acting recklessly and taking on too much risk; as well as systemic breakdowns in accountability and ethics at all levels.
These findings were reinforced in a report released April 13, 2011 by the Senate Permanent Subcommittee on Investigations entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.In expanding the list of culprits to include regulators and credit ratings agencies, the report found that "the crisis was not a natural disaster, but was the result of high-risk complex financial products; undisclosed conflicts of interest; the failure of regulators; the credit rating agencies; and the market itself to rein in the excesses of Wall Street." Further, "together these factors produced a mortgage market saturated with high-risk, poor-quality mortgages and securities that, when they began incurring losses, caused financial institutions around the world to lose billions of dollars, produced rampant unemployment and foreclosures and ruptured faith in U.S. capital markets."
Unfortunately, it could happen again, perhaps in another sector this time. Therefore, if for no other reason than self-preservation, corporations and their boards must proactively take steps to implement more robust and effective risk management (including ethics programs) - regardless of when or even if the regulators do anything.
Very simply, effective risk management ensures the continuity of the business by eliminating or mitigating those risks that can be controlled. Risk management cannot simply be left to insurance; even if you can get coverage for a reasonable price, high deductibles and multiple exclusions does not make insurance the complete answer. Done right, effective risk management allows a business to prosper, and while it usually generates additional paperwork and some cost (unavoidable annoyances), it is ultimately and unquestionably in the shareholders' best interests.
We have learned a few lessons from the recent global economic recession:
Don't wait for the regulators to be the last word in the regulation of the financial services industry because they haven't got it right yet. Prior to the recent financial meltdown, they adopted hands off, "let the free market correct itself" policies that, as we now know, created a lack of professional skepticism and the regulatory teeth needed not only to deal with high-powered manipulators such as Bernie Madoff but the banks, investment banks, and credit-ratings agencies, whose practices caused the collapse, according to the government's own reports. In addition, regulators are now finding they are unable to implement the regulatory changes called for in the Dodd-Frank legislation on a timely basis because they are being starved of the funding and manpower required to write the hundreds of new regulations called for in the legislation.There are frequent news reports detailing how far the rule making process has fallen behind. Indeed, they may never be able to implement the regulations if the legislation is repealed - an outcome that is sought by many in Congress voicing a desire for less government intervention in American lives.
Neither the public nor our federal coffers is likely to stand for another bailout of the magnitude seen in 2008 to 2010. More corporations will simply fail should there be another widespread financial collapse.
Even sophisticated investors were taken in by the financial bubble and were unprepared for the market collapse. Willful blindness or unbridled greed, (depending on your perspective) is alive and well and not likely to be eliminated from our basic natures.
To deal with the uncertain timing of new government regulations and to implement the lessons we have learned, it seems that giving your corporate risk management program as well as your code of ethics more teeth and making them comprehensive (not piecemeal) and transparent and then actually following them is the only way to go. Not all risk can be eliminated and in a tentative economic recovery it may be difficult to expend resources on a broad-based risk management program, but it could well be the key to survival.
As the Financial Crisis Inquiry Commission observed, there is much to be learned from the recent financial meltdown. And, whether it was George Santayana or someone else who originally said it, "Those who fail to learn from history are doomed to repeat it."
Yours very truly,