A move from living off yesterday’s reputation is gradually taking over the market. One failure has come from the “best of breed” philosophy for hiring the best and paying the most. This attitude has been severely tested in an era of underperformance and corporate cost-cutting.
People are trying hard to forget the reputations of the prestigious accountants and the “best” investment banks. The fines against Wall Street and the investigations of Jack Grubman, Frank Quattrone, Martha Stewart et al. showed a belated attempt to rein in the corporate excesses. Should culprits try to destroy incriminating electronic evidence, then data recovery procedures will be able to retrieve much of the destroyed evidence. Email audit trails in forensic accounting procedures will find them out.
A star fund manager is no longer accorded the status, but earns it. Disappointing performance drops them into the satellite group of also-rans. The research done by actuaries, forensic accountants and other financial analysts offers sound ground for assessing staff selection. Background checks for finding real suitability, rather than professional skill listed in a glossy CV can find out the sad truth. Otherwise, risk and return appetites become more estranged.
Similarly, the reputation of a “top” services company can be just as short-lived and cheap as a bacon-lettuce-tomato sandwich. Go for performance delivered. Give them a check-list or interview to see if they can show results and sincerity.
Comments Off
Shop around for the best service or risk-return offer. Get the most suitable value for money plus caution-danger calculus for you. Because an investment is a labour project, keep a proper log of time worked on your behalf and materials used by contractors. A bank or fund should use people like hiring a plumber. Employing a star trader without value for money or risk considerations is a recipe for disaster. The cross-reference table of staff selection based upon return (alpha), risk (sigma) and behavioural (theta) factors brings a more organic and profitable view of risk management.
Fund management has had to become more compliant with additional regulations. Funds are recognising the value of focusing on consistent return, not on reputation of individual staff deemed as “stars”. Alpha, the active return, is a better and consistent profit compared to the ephemeral advantage of trader’s luck, or fraud. This screening of investors and diversification of assets helps us to separate the real stars from the also-rans in the surrounding satellite performers.
Similarly, capital expenditure projects should be assessed for cost benefits rather than simply high profile. Most of the financial dealing systems we have worked on rely on a higher expenditure and publicity for the glamorous front-office dealing end. The drab back-office and accounts side was largely side-lined by comparison. This attitude can have a serious, unintended cost.
Had Barings purchased a system that enabled the settlements department in London to reconcile trades made in any part of the world with clients’ orders . . . . . . . . . Leeson’ s fraudulent of the 88888 account would have been exposed within months, if not weeks. Such a system, known as BRAINS, would have cost about £10 million.
The resulting fraud by Leeson was estimated at £800 million.
Comments Off