Don Tapscott’s Transformation Agenda for Risk Management in Financial Institutions

Paul Roberts pointed me to this Don Tapscott video about how wiki-type collaborative knowledge might transform risk management in financial institutions. Tapscott draws on his coauthored book Wikinomics (2008) to pose the following points:

(1). Financial institutions need to share their intellectual property (IP) about risk management in a commons-based model similar to the Human Genome Project or Linux.

(2). The key IP are algorithms and ratings system for risk.

(3). In response to an objection that the key IP should remain proprietary, Tapscott points to the failure of algorithms and rating systems to prevent the systemic risk of the global financial crisis.

(4). Tapscott appeals to financial institutions to act as peers — “a rising tide lifts all boats” — and that through sharing this information, they can compete more ethically in new markets, reinvent their industry, transform the practices in risk management, and act with a “new modus operandi.”

Tapscott is a persuasive business strategist who manages above to integrate his advocacy of “wikinomics” with the current debate on financial institutions, and his earlier, mid-1990s work on how technology would transform business. He echoes Umair Haque’s call for a Finance 2.0 based on transparency and social innovation in financial markets.

Here are thoughts, some ‘contrarian’, on each of Tapscott’s points.

(1). Read Burton Malkiel or the late Peter L. Bernstein and you will see that finance is driven to innovate new instruments, methodologies and institutions to hedge or arbitrage risk. Some of these are commons-based such as the actuarial development of insurance. Some innovations are now blamed for the problem, such as RiskMetricsValue at Risk methodology. The Basel II Accord which attempts to provide an international regulatory framework raises an interesting question: Under what conditions can a commons-based approach be successfully implemented in an institutional form and practices? Off-balance sheet items and special investment vehicles are two potential barriers to this goal. As for Tapscott’s examples, their success is due to a combination of public and private approaches, such as the parallel research by the National Institutes of Health‘s Human Genome Project and Craig Venter‘s Celera Corporation. This combination dynamic can be left out of an advocacy stance for a commons-based solution.

(2). Tapscott and Haque are correct to identify these as points of leverage. Some of the algorithms and rating systems are public information, such as Google Finance and Morningstar metrics, and trader algorithms on public sites. There are however several potential barriers to Tapscott and Haque’s commons-based view. Investors will have different risk appetites and decision/judgment frames despite access to the same public information. Philip Augar discloses in The Greed Merchants (Portfolio, New York, 2005) that proprietary algorithms rarely remain as private knowledge within institutions unless the knowledge is kept tacit, or in the case of ex-Goldman Sachs trader Sergey Aleynikov, through lawsuits. Aleynikov’s expertise in high-frequency trading which uses complex algorithms and co-located computer systems highlights other barriers: access to technology, information arbitrage, learning curves, and market expertise. As Victor Niederhoffer once observed, this advantage renders large parts of the financial advice or investor seminar industry obsolete, or as noise and propaganda at best. Finally, although public information may help investors it may never completely replace risk arbitrage based on private information or market insight.

(3). Tapscott’s observation about the global financial crisis echoes Satyajit Das, Nassim Nicholas Taleb, Nouriel Roubini and others on the inability of institutions to deal with the systemic crises which the complex instruments and methodologies created. Some hedge fund managers however have been very successful, despite the crisis. Others, notes Gillian Tett in her book Fool’s Gold (The Free Press, New York, 2009) helped create the financial instruments which led to the crisis, yet largely avoided it. So, a more interesting question might be: How did such managers avoid or limit the effects from the systemic crisis, and what decisions did they make?

(4). This is Tapscott as inspirational advocate for change. He echoes Haque on momentum and long-based strategies for investors. He also channels Adam Brandenburger and Barry Nalebuff’s game theoretic model of cooperating to create new markets and then competing for value. This is unlikely to happen in competitive financial institutions. A project to develop a commons-based approach to financial risk management may however interest a professional organisation such as the CFA Institute (US), Global Association of Risk Professionals (US) or the Financial Services Institute of Australasia. Will Tapscott lead an initiative to develop this?

Foreign Direct Investment In North Korea’s Kaesong Industrial Park

For many people North Korea evokes the comic image of the lonely playboy Kim Jong-il in Trey Parker & Matt Stone’s Team America World Police (2004).  I found a more complex sociopolitical reality in 2006 whilst researching a Masters mini-thesis which dealt in part with North Korea’s covert nuclear weapons program.  A week after handing the mini-thesis in Disinformation’s video producer Nimrod Erez sent me links to stark photos of daily life in North Korea’s capital Pyonyang (folio 1, folio 2 & discussion board): deserted highways, military monuments to past battles and derilect residential towers.

Kim Jong-il’s nuclear ambitions were a significant barrier to foreign direct investment (FDI) in North Korea notably under South Korea’s Sunshine Policy to achieve geostrategic stability in the Korean Peninsula.  Jong-il’s nuclear rollback “opens the way” to Hyundai Asan‘s FDI investment in the Kaesong Industrial Park (YouTube promotional video).  South Korea’s small and medium enterprises (SMEs) spearhead the FDI initiative which creates an emerging market, provides knowledge transfer, and hedges against country and currency risks.  South Korea’s government further offsets the SME’s country and operational risks with “low-interest loans and insurance.”  The SME’s engagement strategy also benefits emerging market watchers such as the blog North Korean Economic Watch.

If the FDI initiative fails then North Korea officials can always turn Kaesong Industrial Park into a subsidiary of the Erich von Daniken theme park in Interlaken, Switzerland.

Harvey Weinstein’s Priority Management

The Village Voice‘s Tony Ortega reveals how uber-media mogul Harvey Weinstein organises his priorities, in-progress projects and key stakeholders:

(1) a “Calls you owe” and “Need to call” daily telephone list
(2) a one-line summary of contactees and their needs
(3) a coterie of personal assistants to handle those sensitive emails

The first two are sparse and remind me of David Allen‘s productivity/workflow heuristics Getting Things Done.

Ortega cites an email to Weinstein by former Weinstein Company employee Lori Sale as a model of succinct communication management:

(1) a one-line summary of the background context for negotiations
(2) the deadline for a decision to be made
(3) the spread of negotiation offers made — with financial details and impact
(4) any counterparty offers and response relevant to (2) and (3)
(5) contact protocol and email signature

M&A communication streamlines (1) – (3) while game theory, negotiation and risk management provide frameworks and methodologies for (4).

Ortega’s garbological adventures to discover Weinstein’s strategies for management (communication,
priority & stakeholders) are on par with
HBO’s Entourage television series on deal-making in Digital Hollywood and Nikki Finke’s blog Deadline Hollywood Daily.