From the Executive Director
Polyphony, Not Cacophony
our practitionEr Journalists prEsEnt
DivErsE approachEs to corE QuEstions
As global financial institutions rebound from the meltdown, key questions emerge: How will the new world order take shape, and which emerging economies will present the greatest challenges to developed nations? How must risk be considered and managed in order to avoid another catastrophe? What corporate governance structures need to be put in place? We address these and other questions in this issue of the Investment Professional®.
Leading economists, academicians, and strategists weigh in on the first of these questions in Amy Buttell’s cover story. They note that the credibility of post-World War II institutions such as the IMF, World Bank, and WTO is waning; the dollar as the reserve currency is under threat; and peoples in Latin America, Asia, Africa, and the Commonwealth of Independent States are seeking a greater share in the international marketplace. Though the US remains the largest economy and political power, younger, faster-growing economies will undoubtedly play more significant roles on the world stage.
Boards of directors of financial institutions, with responsibility for firms’ overarching strategies, risk management, and executive incentives, are regarded by many as obvious culprits in the financial crisis. As Neil O’Hara explains, numerous boards are composed of friends who were invited in before SOX limited the nominating committee to independent directors. Unqualified directors, and directors who pay undue allegiance to CEOs, must make way for new blood if boards are to function effectively. Boards must take a more commonsense approach to risk management and ensure that committees accept full responsibility for both operational and financial risks. Shareholder access to the proxy is considered by many to be key to good corporate governance.
Still, the fact remains that risk committees may stifle rather than promote innovation, and that many boards have turned their focus from strategic guidance to self-managing their own fiduciary liability. John MacKessy’s “hierarchy of risk,” an alternative to the one-dimensional enterprise risk management scheme adopted by public companies after SOX, channels risk events into three dimensions—reputational, financial, and competitive impact risk—and analyzes risk from multiple angles. “[Companies’] new risk management systems must recognize that risk is both opportunity and misfortune,” states MacKessy. “A little less confidence and a little more pessimism in risk mitigation processes may help us avert the next financial crisis.”
The same risk management fallacies that led to the collapse are inherent in popular criticisms of the Treasury’s plan for toxic assets, argues Phil Kongtcheu. Certain prominent critics’ approach to risk poses a dangerous framework for investors who are evaluating Secretary Geithner’s public–private investment plan. Basic instrument contracts, a set of hedging contracts developed by Kongtcheu, can help investors determine the profitability of participating in the program.
To meet our goal of providing a practical resource for members and readers, we have introduced a department called “Education for Practice” that will teach skills and present tools that are essential for today’s practitioners. To inaugurate the section, Tom Arnold and David North provide a step-by-step guide to programming a pro forma analysis template for firm value into a PDA. Ehsan Nikbakht examines the strengths and weaknesses of the Black–Litterman model—which combines the traditional MVO of Markowitz and Sharpe with an algorithm to quantify analysts’ views of the markets—and offers a schematic that you can use to implement the model. If there is something you wish to see covered in this section, or if you have a proposal for an article, reach out to us at editor@theinvestmentprofessional.com.
Eight NYSSA members have written book reviews for this issue. We are pleased that interest in submitting reviews is growing, and want to know what you are reading. What new or forthcoming books promise to have significant impact on the markets or the profession? Contact us if you are interested in submitting a review.
As always, we invite you to send in comments and questions. Keep an eye on www.theinvestmentprofessional.com, for information on upcoming issues. Content from previous issues is available online.
We look forward to receiving your suggestions and submissions.
