In my last blog I talked about the bonus culture. Today I want to talk about corporate risk taking.

All businesses take risks. Risks are an inherent part of company development whether it be should they offer a client more credit, whether they should change a product formulation or whether they should expand the business. In the end risk and risk assessment is a fundamental function of senior management and the Board of Directors in particular.

Three fundamental questions emerge from that. To control risk, management has firstly to identify the risk, secondly assess the level of risk and finally make a decision as to whether it is in the company’s best interests to accept, or reject, that level of risk.

So where did the Banks get it wrong? It seems that some managers within the banks did identify the risk and were able to assess the risk as high. It would seem that those above them either rejected their risk assessment or simply went ahead irrespective knowing the risks. The suspicion is that as the toxic investments had “performed well” before they imploded, the Directors were seduced by the illusion of profit and, I suspect, the actuality of their blooming bonuses. Whether it was company interest or self interest which drove them, the answer for me is the same – they made major errors of judgement and for that they must be dismissed.

Coming out these most expensive mistakes in corporate history, we will undoubtedly see a new raft of management – the Corporate Strategical Risk Assessors. Whether they will be an expensive raft of toothless management or whether they will help steer companies around rapids and waterfalls, depends on the risk culture within the Board of Directors as the Directors remain the people who are responsible for the direction the company takes. If the Corporate Strategical Risk Assessors provide high calibre assessments and the Directors bring that work into their decision making process then all will be well.

Otherwise at some point in the future, we will again see the emergence of the sort of problem the banks fell for.