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Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery...
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Transcript of Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery...
Upside of Risk Management vs. Unintended ConsequencesWilliam McCabe
AGA – Montgomery County/Prince Georges County Chapter
March 11, 2015
History• Internal Controls Have Existed Since the Hellenistic Period
• Not Formally Detailed Until 1977 Under Foreign Corrupt Practices Act
• Previously Reporting and Transparency were the key risk management tools
• Sarbanes Oxley Made it Easier to Criminalize Bad Business Judgment and Complex Accounting in Hindsight
• SOX Was an (Un)-necessary Step at Best
• SEC Acts of ’33 & ‘34 prohibited fraud & deceit through reporting & disclosures
• Did not create an environment of government supervision
• American Capital Markets Dominated the World under these rules
History• 1980’s Drexel Burnham Lambert
• Michael Milken
• Rudy Giuliani
• 2000’s Tech Bubble Burst – Economic Externalities
• Eliot Spitzer pursued investment banks
• Cratering stock prices
• Exacting Expensive Settlements
• 2002 Spitzer went after Merrill Lynch - Settled for $100 M
• Proceeds went to Government coffers, rather than investors or stockholders
Currently • So Far this year Bank of America, JP Morgan Chase, Citigroup ,
Goldman Sachs have paid more than $50m, for supposedly misleading investors
• BP has paid a $13 billion penalty for Operational risk management
• Wasn’t until 1909 that Corporations were even capable of being found guilty
• Corporations had neither
• Bodies to be punished or
• Souls to be condemned
Criminalizing Business Conduct• When America was Founded There were only 3 Federal Crimes
• Treason
• Counterfeiting
• Piracy
• By the 1990’s – Over 300,000 Federal Statutes existed with criminal penalties attached
• Virtual double jeopardy for Investors, Stockholders, and Bondholders
Modis Operandi • Find a Large Company (may or may not have done anything wrong)
• Threaten Manager with Commercial Ruin
• Force them to pay enormous fines using shareholder money
• To Drop Charges (if any)
• Under a Secret Settlement - (no case law exists)
• No one can check the details (sealed settlements)
• Results - Increased government revenues
• In 100 years we have moved from requiring disclosure as the primary risk management tool, to in many cases criminalizing risk taking, bad decision making, and complex accounting issues