HBR: Set Appropriate Company Policies to Mitigate Risky Behavior
In the wake of the JPMorgan Chase $2 billion loss and fallout, Harvard Business Review writer James Lam lays out various rules and guidelines for managing risky behavior.
As noted by Mr. Lam, “If risky behavior can happen at the house of Morgan under the watchful eyes of Jamie Dimon, it can happen anywhere,” and companies should have policies in place – at all levels – to protect from deceit.
Setting clear policies is one of Lam’s five most important rules for managing risky behavior. “For enterprise risk management, key policies include a statement of risk appetite and explicit risk tolerance levels for critical risks,” says Lam. But, “the right people have to be setting the rules,” he says.
As an example of unclear policies designed by those set out to deceive investors and regulators, Lam offers up the case of former Enron Chief Executive Officer Jeffrey Skilling.
Skilling, upon his hire, insisted upon mark-to-market accounting for Enron’s balance sheets. As a result of marking the company’s financial positions to market, Enron’s actual cash generated was a mere 3% of reported income. “Appropriate risk, compensation, and financial policies will set the incentives and boundaries for employee behavior,” Lam concludes.