May 5, 2009
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As the housing and economic crisis enters its third year, unfortunately much of the political and intellectual capital continues to be squandered on assigning blame, rather than dedicated to the true spirit of collaboration needed to produce realistic and long term solutions to the economic crisis that the nation is so desperately seeking. Far more productive than participating in a “blame game” that points fingers at institutions, politicians and regulators would be to identify and, if we must, blame a systemic flaw that has so far been given little attention. That shift in perspective and the insight it provides would yield productive reform and restore the public confidence in our nation’s markets. It would place the private and public institutions that have been the foundation of America’s greatness on solid footing once again.
This systemic flaw is the “intellectual chasm” - the professional, cultural and practical divide that has perpetuated a universal failure to fairly balance risk and reward for the benefit of the economy at large. It encompasses a myriad of dynamics, including, the timing and depth of knowledge, the allocation of resources to training, present notions of business values and ethics, and a system of individual economic rewards that fails to drive the evolution of a team effort that fosters sustainability and discipline alongside the entrepreneurial spirit.
Don’t confuse this intellectual chasm with intellectual capacity. We are smart enough to solve the problems that confront us.
The intellectual chasm plagues virtually every component of the system, including the private sector, the bureaucracy that regulates it, and political leaders and other stewards of the taxpayers’ money who lack a solid understanding of the underlying issues.
In the private sector, the financial crisis has exposed a gap between the practical knowledge base of corporate leadership and that of their business line managers (traders, brokers, investment managers, quantitative analysts, etc.). The crisis has also uncovered a failure to address that gap through individual self-improvement and cultivation of the depth and quality of talent needed to independently monitor business lines. Corporate leadership placed a premium on generating revenues (without dissecting their quality and future risk exposure), and those responsible for independently monitoring the related risks were relegated to second-class status.
Given that investment banking and global banking institutions for years followed a business model that allowed both strong returns for shareholders and a hefty bonus pool, there certainly was greater opportunity for parity in the compensation and reward structure for those that independently monitor risk. To properly balance quarterly performance and sustainable value for shareholders, the education, skill set, continued training and financial opportunities need to be more closely aligned. While top executives cannot be subject-matter experts for every business line, they should maintain a minimum knowledge base and both participate and facilitate in ongoing, face-to-face dialogues between risk management and each business line. This personal interface must be clearly documented and adhere to a disciplined schedule. But this doesn’t usually happen because most executives climbed the executive ladder through success in a single business line and, even in that arena, their accumulated expertise may have grown stale over time.Display article as PDF for printing.
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