Monday, January 27, 2020
Johnson and johnson
Johnson and johnson a.        Executive Summary Johnson and Johnson company has planned a new product lounge in the market specifically for Pakistan where a big number of peoples having not enough awareness of bacterial and germs infection. The product named as Pak antibacterial soap is designed that provides quick, easy and effective hand washing. Proper hand washing is the most effective preventative measure available to combat communicable diseases. Skin problems are common for people of all ages. Whether you suffer with a rash, itchy skin, skin fungus or infection, skin bumps, or skin tags. Improper handwashing. The Market Through analysed facts and figures Johnson and Johnsons Pak antibacterial soap is wide market such as mothers, children and employees. The target market has population of more than 160 million in which 68% of people are not properly wash their hands before eating. People of the country are not much aware about the bacterial infections. So JJ planned an attractive marketing strategy which will educate the people and provide healthy life in their own hands. Based on detailed financial projections,JJwill require22 million Pakistani Rupees and will generatepositive cash flowin first quarter, Year 1. Sales Forecast b.        Introduction 1.a        Background: Johnson and Johnson (JJ) is a global pharmaceutical product company. This company is a well known organization. The company started its first production in 1886 and after one year in 1987 it is incorporated. The company headquarter is in New Brunswick located at prime location. b.b        History: The company Johnson n Johnson was found in 1886 (around 120 years ago) on a revolutionary idea by Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson when doctors and nurses started to using bandages and dressing, sterile suture for treating wounded peoples. The company has maintained friendly environment and very keen in health and safety from the beginning, they first time used non-polycarbonate containers instead of plastic bottles. JJ uses a largest solar power generator as a member of Green House for keeping the environment. b.c        Corporate chairmanship of the Company v Robert Wood Johnson I 1887-1910 v James Wood Johnson 1910-1932 v Robert Wood Johnson II 1932-1963 v Philip B. Hofmann 1963-1973 v Richard B. Sellars 1973-1976 v James E. Burke 1976-1989 v Ralph S. Larsen 1989-2002 v William C. Weldon 2002- b.d        Corporate Governance: Board of directors of Johnson Johnson are listed below: Mary Sue Coleman, James G. Cullen, Dominic Caruso, Michael M.E. Johns, Ann Dibble Jordan, Arnold G. Langbo, Susan L. Lindquist, Leo F. Mullin, Christine A. Poon, Steven S. Reinemund, David Satcher, and William C. Weldon. http://cs.wikipedia.org/wiki/Johnson_%26_Johnson In the first period of their development during 1886 to 1926 they got success to establish a company in New Brunswick and they focused on sterile surgical dressing to save the lives of patients. They participate in saving peoples lives in1906 Francisco disaster. Their global expansion began in 1919 from Canada and 1924 from England. During Their 2nd period of product lines expansion been b.e        Company Structure: JJ is with several business segments in all around the world with 250 companies in 57 countries. The companies are concerning with following particular areas: Consumer Health Care Medical Devices and Diagnostics Pharmaceuticals Products of JJ: Medical Devices and Diagnostics: JJ is helping hospitals with the technologies to restore the joys of precious life of human being who are suffering with diseases and chronic conditions all around the world. They are providing more than 20 kind of technological devices including Orthopedics, Implants, Joint Replacements, Sports Medicins, Heart and Vascular Diseases etc. b.f        Consumer Products: For improving the quality of every day life the consumer companies of JJ target the baby care, skin and hair care, oral care, nutritional, pain relief, topical care and much more. Their vision is very clear and the companys slogan is BRINGING SCIENCE TO THE ART OF HEALTHY LIVINGâ„ ¢. b.g        The Pharmaceutical segment: Johnson Johnson invested over $5 billion in 2008 on RD. This investments majority was in five therapeutic areas where the Pharmaceutical segment is strategically focused and where there continues to be significant unmet medical need. Following areas are included: cardiovascular disease and metabolism, neuroscience (including pain); infectious disease, immunology and oncology. b.h        Recent Products: J J is continue to providing healthier life to their consumers. Here are some recent products lounged by the company: AVEENO ® Intense Relief Repair Cream AVEENO ® POSITIVELY AGELESSâ„ ¢ Firming Body Lotion AVEENO ® POSITIVELY AGELESSâ„ ¢ Warming Scrub CLEAN CLEAR ® ADVANTGE ® Blackhead Eraserâ„ ¢ Exfoliating Cleanser JOHNSONS ® HEAD-TO-TOE ® Foaming Wash JOHNSONS ® Baby Bubble Bath Wash 1.        Situation analysis: Our antibacterial soap is specially produced to protect people from germs and bacteria. Especially in Pakistan where is not a complete understanding of peoples about the bacterial infection. People in third World countries are not fully aware of these kinds of problems. Even in rural areas of Pakistan where people are not literate, they are facing new skin problems every day. Our new product targets those areas of the third world where people are not aware of bacterial protection. First we focus people who are living in rural areas of Pakistan especially interior Balochistan. 1.1        Market Summary: 1.1.1Market Demographic: According to a survey population and growth rate of Pakistan is under the following: Population of the country: 172,800,000 (according to July 2008 best estimation) Growth rate of population: 2.2% (according to 2008 estimation) Birth ratio: 31 births per 1,000 population (2008 est.) Death ratio: 8 deaths per 1,000 population (2008 est.) Net migration ratio: -1.0 migrant(s)/1,000 population (2008 est.) Refr:        wiki http://en.wikipedia.org/wiki/Demographics_of_Pakistan In this survey more than 68% population of Pakistan is living in rural areas where people are not aware about the bacterial infections. 1.2        External Analysis: 1.2.1Political Analysis: Constant political instability does affect the company in terms of building relations with the governments. It is very difficult to maintain long term relations with all the governments. Pakistan is aligning with US against the terrorism and because of this their peoples are victims of terrorism and are stressed. 1.2.2Environmental Analysis: Solid waste burning, bad-quality fuels, and the growing use of motor vehicles are contributing towards in air pollution that in some cities as exceeded levels deemed safe by the World Health Organization. The country is suffering a lot from the dry climates. The country has poor water infrastructure even more than 70% population dont have refined water for drinking. Moreover country has not a proper sewerage system. 1.2.3Social Analysis: JJ has to be very careful according to implementation of its promotional campaign. Since the social culture of Pakistan is very conservative and any suggestive advertisement face a lot of reactions on the part of consumers. 1.2.4Technological Analysis: Pakistan is a big consumer of new technology. Internet companies are providing a wide range of coverage. Transportation is cheaper than other big countries but there is a big problem of electricity. Existing infrastructure is unable to fulfil the complete requirements of the country. 1.2.5Economical Analysis: The economic condition of Pakistan will always affect the company. As Pakistan inflation rate is going high and high and income of peoples is not increasing as pricing of products are going up. Pakistan has a semi-industrialized economical country. The growth poles of the countrys economy are situated along the Sindh River (Indus River), diversified economies of Karachi, Lahore and Faisalabad are located with less developed areas in other parts of the country. Pakistans economic growth rate has been increased in last 40 years and getting strong as compare to 1947. But still there are not enough facilities that fulfil economic requirements of the population. 1.2.6Legal Analysis: There are no legal issues in Pakistan for JJ as company meets all the legal requirement of the country. 1.3 SWOT Analysis: 1.3.1Strengths: The major strength of JJ in Pakistan is affiliation and support from the Johnson and Johnson global organization which has a good reputation in health sector. Another advantage is availability of high technology infrastructure. JJ never compromise on the quality of services and the products, they provide to the consumer. 1.3.2Weaknesses: JJ have only a weakness that they are coming in that market where already have strong competitors and they are well known and have very strong relations with the consumers. Accordingly JJ is not enough strong in that market so capturing new market is very challenging goal for the company. 1.3.3Opportunities: Although the existing antibacterial soap manufactures have already started the campaign to be aware peoples of the country about the bacterial infection but there is still a big market to capture. We believe that JJ have an opportunity to capture rural areas of the country where people have not mentally prepared to buy these antibacterial products. In urban areas people of Pakistan already familiar with JJ baby shampoo and other valued products for baby care, they will automatically buy these products. 1.3.4Threats: In every market there is a chance of new comer in the same field. Soap industry has very good margins and growing up and up day by day, so there is always a chance to have more competitors. Other main players in the antibacterial soap category (Safeguard by PG, Dettol by Reckitt Benckiser and Lifebuoy by Unilever) in Pakistan have strong positioned their brands for everyday use against bacteria. They are offering some sort of additions in their products by regular basis, they can challenge JJ by providing new improvements and they also reduce their prices to beat JJ in competition. 1.4        Competitor Analysis: The following are three big companies are already operating in this area. 1.4.1PG Proctor Gamble has positioned to provide every day new advertisement and they have 20 percent of market share. A series of marketing campaign distinguished safeguard soap to all other market competitors. They have variety of types and different flavours of products. 1.4.2Uniliver Uniliver have 10 percent market share in the target market. They started marketing campaign and competing with PG but their marketing strategy is not as effective as PG has. 1.4.3Reckitt Benckiser Reckitt Benckiser are producing antibacterial soap named Dettol Soap, they have 5 percent of market share. They are well behind the both top companies products (Unilivers Lifebouy and PGs Safeguard). 1.5Distribution Pattern Analysis Regional providers are providing distribution in the soap industry. These distributors serve a large portion of the market based on the size of the market and delivering to the organizations monthly and weekly depending on the demand of the company and usage patterns. Food services deliveries typically of cleaning products once in a month. Hospitals have a different distribution system; they receive monthly a large amount of soaps. Restaurants typically receive once in a week delivery of soaps and the stores receives some times weekly and some times after two week according to the demand. 3.        Objectives Develop a complete prototype which meets regulatory standards by June2010. Become thespecialty soap of choice for day cares across the Pakistan by December 2010. Achieve sales of Rs10 million by the end of 2010. 4.        Mission Statement: Johnson and Johnson believe on the launching of new products. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Johnson and Johnson is an innovative consumer company which provide new products and new ideas in health sector. Johnson and Johnson never compromise on quality and have well reputation around the world. 5.        Vision: Johnsons Johnsons vision is very clear. There vision is: -Keeping children free of infection We partner with Task Force for Global Health so children can stay healthy -Focussing on Wellness and prevention We remain commited to expand the ways we care the people through out the World. -Fulfilling new need of new markets Our vision is to improve the quality of peoples daily life. Peoples and values are our companys biggest assets. We know that our companys every invention and every product is powered by the people. We also recognise that different age, nationality and sexual orientation, physical ability, thinking ability and backgrounds bring richness to our work environment. 6.        Strategy Our executive team willbuild loyaltyfor our products withdecision-level managers of the organizations in the target markets, and they will create such a strategy in which target people directly target. For this purpose they will make some effective advertisement and will use children, male and mothers to deliver the specific messages to the audience. 6.1        Strategy Pyramid Ourultimate strategyisto build JJ products intothe standard forhome and workplacehand washing and bathing for cleanings and free of bacteria by targeting daily routine of children, mothers and workers. We will contract the insurance, advertising companies as well as government companies to start strong branding campaign to make aware of the peoples of the brand. 6.2        Competitive Strategy: To achieve good results we need to concentrate on the quality price and the same time on the competitors. PG is providing a good product with cheap price. According to the Porters Generic Strategy we will use diversification because our product and market is new, where risk of level is high we need to provide low cost soap and with some new and different attributes of our new brand soap. Reckitt Benckiser is also lounged a campaign through advertisement to educate children about the bacterial infection. Same time Uniliver is playing vital role and they are also focusing on the school level children. In accordance to above factors Johnson Johnson is very keen on pricing and quality of products. 6.3        Marketing Strategy For our initial target market of home consumers, JJ will implement two parallel marketing efforts. One is aimed to the parents of young children who use this antibacterial soap and other is to educate the children regarding bacterial infection. We need to create a push factor by effectively convincing the mothers of children that our product provides an ideal solution for the bacterial infection to the hand washing compliance and bathing.A branding campaign will build awareness and provide education the children of rural areas where children do not have a proper education of germs and bacteria in their daily life. 6.4Market Segmentation: 6.4.1        Demographic: Our antibacterial soap targets the children, adult and households. According to CIA World Fact book age structure of Pakistan is: Age structure: 0-14 years: 36.7% (male 33,037,943/female 31,092,572) 15-64 years: 59.1% (male 53,658,173/female 49,500,786) 65 years and over: 4.2% (male 3,495,350/female 3,793,734) (2009 EST.) Our primary target are children and females those are more than 50% of total population who want to fulfil an everyday needs. Females are very conscious about their health and skin diseases. They want full protection against bacteria. We also believe that children are potential agents of change in life and imparting education of the importance of hand washing with antibacterial soap will bring healthy habits in their early life. 6.4.2        Market Growth: The overall market of soap is growing up by 10% in recent scenario and particularly 7% growth in antibacterial soap in Pakistan. 6.4.3        Socioeconomic Middle class and upper middle class will be the main target of the product. Primary target will be cities and surrounding areas of the cities. Rural market penetration is limited and is primarily driven through wholesalers. Psychographic: In this we can target young house wives and mothers who care about the health of whole family and can educate their children about bacterial infections, health and hygiene. 6.4.4        Positioning Strategy Our strategy is to provide healthy life with low cost product and high quality. Our product provides conclusive evidence every time a child washes his or her hands for only a marginally higher cost than traditional soaps. The cost is significantly less than gloves or other hand washing liquids available in the market. 6.5Product 6.5.1        Product Name: Pak Soap 6.5.2        Product Type: Anti-bacterial Soap 6.5.3        Ingredients: Tricloson Palm Oil Water Sodium laurel Sulphate Laura Mide DEA Glycole Disterate Cocamidopropyl betaine Sodium Sulphate Fragrance Guar Hydroxypropyltrimonium Chloride Citric Acid Hydanation Tetra Sodium EDTA FCD Red No 4 FDC yellow No 5 Alovera Vitamin E 6.5.4        Physical and Chemical Properties: Boiling Point:        Above 21 oF Specific Gravity:        1.02 Volatile by Volume:        80% approx Solubility in Water:        Complete Evaporation Rate:        Same as Water 6.5.5        Convenience good: The product will provide complete protection from all seen and unseen germs and bacteria. 6.6Pricing Strategy Retail pricing for anti bacterial soap will generally be around Rs8/eachand will command a 30% price premium overother available conventional liquidsoaps available in the market. Our values product will not be only attractive toextremely price sensitive customers it will also capture the buyers who are very much caring of their health. The soap market is generally inelastic, but we offer some different benefits overcurrent available soaps that justify the different qualities and price. 6.7        Promotion: 6.7.1        Agency Selection Around 135 advertising agencies working in the market but Johnson Johnson has selected Manhattan International Limited (MIL) Advertising Company because the company has extraordinary technology and well reputation with government and civil sector in Pakistan. TV Advertisement Radio Ads News Paper and Magazines Sign Boards 6.8        Place Pak soap has also planned an in-store placement strategy to promote and market their product so to have maximum visibility to the consumer; they have assigned dedicated shelves to the product and are also promoting their product in metro and makro as well. Their placement strategy is mainly focused on v Place Pak Soap next to Safeguard v Equal or more faces than Safeguard, Dettol and Lifebouy. v Place between Dettol Safeguard where Possible. v Build brand block wherever possible. 6.9        Distribution Strategy Initially our distribution strategy will involve a combination of both distributors and direct sales through some available channels in the market.Relationships with local Pakistani distributors then will be established for promotional reach and potential users. Our executive team will get the first order after direct delivery to the wholesalers and will give some discount to them.In the future entirely outsourcing distribution will allowJohnson Johnson to focus its efforts on marketing and expanding as quickly as possible. 6.10        Action Plan 6.10.1Gantt chart 6.11Financial Strategy (Budgeting): Johnson Johnson pvt ltd is a sub company of Johnson Johnson which operates in the country. This project is only for Rs22 million. We will buy machinery for production of soap which will cost only Rs120,000 and purchase for Raw material is only cost for Pakistani Rs.40000. So all other expenses and salaries of employees for production for the first quarter is can be seen in the following: Pak soap is a Rs 1 billion brand annually and so the marketing budget allocated to it approx 20 % of total Net revenue, not much resources have been allocated to Pak soap marketing efforts due to its squeezed margins and close competition with other antibacterial soaps, it mainly derives its sales from the brand equity of Pak Soap. 6.12Sales Forecast 7.        Evaluation and Control Johnson Johnson is a family company that prides itself on improving the health and well being of its consumers. By targeting all age groups, socioeconomic statuses, and partnering consumers, the new product will provid 22 million of net profit for the first quarter after the launching of the antibacterial soap, which is the actual amount of the projectDomestic sales increased .2%, while international sales increased 13.8% (2.6% from operations and 11.2% from currency). These figures represent Johnson Johnson meeting and exceeding consumer needs, which is partly the reason why it is a Fortune 500 company. 8.        Conclusion and Recommendations: We have carefully research and analysed the market strategies adopted by Johnson Johnson Pakistan to boost the sales of new anti-bacterial soap () in the country and in first quarter Johnson Johnson will capture the 20% of market share. Following are the some suggestions for Johnson Johnson Pakistan Pvt. Ltd.: Price of soap will be set the according to the competitors. If competitors reduce their price they reduce their margin and should reduce the price. After successfully launched they should provide some flavours in the soap, so customers can enjoy different flavours as the other competitor Safeguard have 7 flavours in the market. Start a program in which they can educate children, industrial workers and mothers by hiring teams which will go door to door. 9.        Individual Critical Reflection Report: Marketing Management subject was never interested for me before studying this module. When I started to learn, very first class creates my interest in this subject in which tutor gave us an assignment to analyse the market, which was the turning point for me. And we visited some clothing stores than I get knowledge about how to analyse the different things. Before starting my MBA I was not familiar with the appropriate terminologies used in the marketing field, but I was very much sure that I will understand these concepts. I have managerial experience but not in marketing field and I wasnt know even about to write the different types of marketing. As module was passing day by day I feel many things change in myself, for example when I visit any place or store I started to analyse the things around me. This is the first development which I feel in myself. The concept of learning through case studies was very effective. It polished my reading and implementation of concepts and I come to know how the concepts can be taken out from the printed and electronic Medias. This developed my reading power and I learned how we extract the main points from a whole passage. Initially when I start to read a passage I feel difficulties to take out specific points from the articles, but day by day I feel change in myself, I feel confident and really enjoy reading articles and magazines. Presenting on the front of the class is another opportunity which I got from marketing management module which is very important for a marketing manager or MBA student, because people says presentation is very important for sell some thing. By preparing Wilkinson case study in early classes and presenting on the front of the tutor was an awesome experience which developed a self confidence level and enhanced my presentation and speaking skills. By learning in very depth of the marketing concepts I understand how the all stakeholders are very important in the process of marketing such as how the competitors can effect on the business. After completing this module I can write the marketing plan for any organization as I did in this assignment. Now I know how to use the marketing mix and how we can analyse the performance and how can we position an organization in the marketing. Porters Generic Studies, Ansoffs matrix, consumer behaviour, segmentation strategy and decision power of buyers were new for me and now I completely understand that how these models can be implemented in the marketing strategy of a company. Evolution of marketing metrics, ethics and social responsibilities and managing a marketing team is now not difficult for me as I am planning to start my own business after my MBA, I am very happy that I have enough knowledge of measurement and control a marketing plan and how to write a project plan by assigning different tasks to different teams. As a conclusion the whole module was very helpful to build and develop marketing concepts for me. References and Bibliography: Course Book http://www.jnj.com www.wikipedia.com www.uniliver.com http://www.marketingprofs.com/ http://www.articlesbase.com/marketing-articles/ https://www.cia.gov/library/publications/the-world-factbook/fields/2010.html 1 / 27 LSBF (MBA)
Sunday, January 19, 2020
Citizenship, Political Liberalism and the National Curriculum Essay
Citizenship, Political Liberalism and the National Curriculum I shall maintain in this essay that the civic education proposed in the new National Curriculum subject called Citizenship is not in harmony with the educational aims and principles stated in The Education Reform Act, 1988, in which the National Curriculum itself was established. I shall argue further that the present institutional arrangements for the whole of education are contrary to the spirit of the civic education outlined in Citizenship. To pursue the argument I shall draw on John Rawls’ insight that, in a modern democracy such as that in the UK, the idea of a democratic state with a single generally agreed moral or religious doctrine is no longer useful. In Political Liberalism he writes about this notion: That conception of social unity is excluded by the fact of reasonable pluralism; it is no longer a political possibility for those who accept the constraints of liberty and toleration of democratic institutions. (p.201) He uses the notion of justice as fairness to indicate how the state may deal justly with its citizens in a pluralist society. He defines justice as fairness in terms of two principles of justice. The first is that all people must have the same political rights and liberties. The second principle is that of equality of opportunity. Rawls then restricts the sphere of influence of these principles to that of political, social and economic institutions. This position he calls ‘political liberalism’. He maintains that this political liberalism should be seen as a freestanding moral system applicable only to political, social and economic institutions. This is somewhat difficult to swallow if only in terms of exactly how this limit... ...ply to all pupils. Pupils do not receive the same civic education. Fourth, the institutions are not freely available in terms of fair competition although both systems are state controlled. If, therefore, equality of opportunity is indeed One of a broad set of common values and purposes which underpin the school curriculum and the work of the school as the Secretary of State claims, then I submit that both our current National Curriculum and our current institutional arrangements are not in line with this value, and that, therefore, the aims of Citizenship are unlikely to be realised. Bibliography RAWLS, J. (1996) Political Liberalism, Columbia University Press, New York, Chicago, Chichester Education Reform Act 1988: Secretary of State’s Preface and opening sections National Curriculum Values 2002 Citizenship, Programme of Study Key Stage 4
Saturday, January 11, 2020
Critical Issues For The United States
Deliberation suggests careful thought or reflection, consideration of alternatives, but may also imply public discussion, processes working toward collective judgments. For different reasons, liberals and their critics would agree that deliberation is central to citizenship. For liberals, deliberation in the public sphere is instrumental to the purposes and interests of free individuals, combining with other private citizens to articulate and pursue common interests. For those with a more communitarian perspective, public deliberation is part of the process through which citizens are socially constituted and democratic participation is thus intrinsically rather than instrumentally valuable. At Syracuse University’s Maxwell School of Citizenship and Public Affairs, we have developed a team-taught, cross-disciplinary social science course which emphasizes public deliberation not only on policy issues, but on the meaning of citizenship itself. Our course entitled Critical Issues for The United States – along with its sister-course, The Global Community – originated with a year-long process of intensive discussion and planning among a group of faculty drawn from the various academic departments and programs of the Maxwell School†¦ The courses we developed were first offered during the 1993-94 academic year, and have undergone annual revisions – some modest, some more substantial – ever since. The fundamental ideas underlying the courses have not changed, however: they remain focused upon citizenship, understood in terms of practices of public deliberation. Our courses were designed as multidisciplinary survey courses which would, in the process of discussing issues important to the lives of our students, introduce them to some of the major concepts and modes of analysis employed in the various social science disciplines represented at the Maxwell School. There was from the outset, then, a sense of multiplicity of perspective built into the core concept of these courses. They would not present a single seamless vision of social life or seek to find the one right answer. Rather, they would present multiple interpretations of each issue we dealt with, some convergent, some in direct conflict. We would try to link these interpretations to fundamental assumptions about the nature of social life, and to show how these basic conceptual frameworks were related to different normative orientations and political positions  that is, to different practices of citizenship. We would invite students to ponder the implications of the various perspectives we discussed, to consider the consequences for their lives as citizens, but we would not push for closure or consensus. We would emphasize the process of deliberation, rather than any particular result. We expose students to different ways of knowing social reality: the hypothesis-testing approach of orthodox social science, rudimentary rational choice theory, more interpretive understandings of social action, and critical theory models which seek organic links between knowing the world and recreating the world. We try to underscore the idea that different ways of knowing are associated with different modes of action and, ultimately, with alternative possible worlds. How knowledge is socially constructed is thus a crucial dimension of citizenship, and an important aspect of this course. FormatAs part of our emphasis on processes of deliberation, we wanted to move away from the passive, lecture-based format typical of introductory survey courses at larger universities. In many such courses, if students are involved in smaller discussion sections at all, they are typically led by graduate teaching assistants and are at best an adjunct to the primary, lecture-driven substance of the course. In contrast, the Maxwell courses were designed so that two-thirds of students’ class time would be spent in discussion sections of no more than fifteen, led by members of a team representing a cross-section of the Maxwell School faculty. To underscore for students that these discussion sections were not merely the caboose on a lecture-driven train, but were rather the motor of this course, a substantial part of their final course grade (currently 25 percent) is directly linked to their level of participation in these discussions. Particular faculty members meet twice each week with the same discussion groups so that a sense of mutual familiarity and group identity could develop, fostering candor in discussion and a willingness to think out loud. Once a week, rotating pairs of faculty share the responsibility of lecturing to a â€Å"plenary†in which all the discussion sections meet together. These lectures typically present alternative perspectives or ways of thinking about some general question or issue area. Faculty attempt to â€Å"model†intellectual activity for students, thinking through the strengths and weaknesses of various perspectives, underscoring their implications for politics and social life. Often, faculty will present perspectives with which they do not agree, and will state so at the outset. In this way, they may illustrate for students that there is an intelligible train of reasoning behind each position, and that our fist task as critical thinkers and citizens is to try to understand that reasoning. Implicitly we pose the question: why would reasonable people hold such a view? In the first instance, then, our objective is to help students to feel the attraction which draws scholars and citizens to a particular perspective, its intellectual power, its political promise, its vitality. We then try to explore the tensions or limits of each perspective. Again, the emphasis is on deliberation rather than mastery of a given fund of â€Å"knowledge†, but we do expect students to understand key concepts, arguments and supporting evidence for each of the major positions we deal with, and ultimately to be able to incorporate these into their own critical judgments and deliberations. To deemphasize rote learning, we abandoned conventional exams altogether. Instead, frequent writing assignments are integrated into the course as one more mode of deliberation and discussion. Students contribute regularly to a computerized â€Å"citizenship log†in which they are asked to exchange comments on a particular issue or idea in the course material. To encourage students to come to class prepared to actively discuss the material at hand, we may ask them to write a brief paragraph responding to each day’s readings and perhaps to post this response on the electronic log for other members of the class to see. In addition to addressing regular prompts from the faculty, students may also engage each other on the electronic log, continuing or anticipating classroom discussions. Often, faculty will review students’ e-log entries prior to class and use them to construct an agenda for more focused group discussion. We also employ more traditional forms of writing. From time to time, we ask students to write very brief (1-2 page) response papers which focus their attention directly upon substantive points judged by the faculty team to be especially significant. Frequently these will be concepts or issues which will be important for future deliberative essays. This helps students early on to begin come to grips with key claims or ideas, and enables the faculty to gauge their success in doing so. This may be a useful diagnostic tool: disappointing performance on response papers may then signal to us that particular students need additional help with key concepts, or they may reveal that the entire class needs to spend more time collectively working through some especially difficult points. Finally, each major unit of the course culminates in a somewhat longer â€Å"deliberative essay†in which students are asked to critically assess various perspectives and formulate a position relative to the major theme or issue of that unit. These essays are kept short (typically around five pages) in order to encourage students to be as concise as possible, to make deliberate decisions about what material is most significant, to develop summarization skills and to preclude the â€Å"kitchen sink†approach to paper writing. To aid students in the development of essay writing skills, the faculty have prepared extensive writing guidelines which include such fundamentals as how to construct and support a reasoned argument, how such arguments differ from assertions of opinion, how to use sources and avoid plagiarism. To reinforce our seriousness about the development of analytical writing skills, our grading criteria are keyed to these guidelines and we provide extensive written feedback on essays pointing out where there is significant room for improvement. We also make available to students annotated examples of especially strong essays so that students can see for themselves the kinds of work they are capable of producing and what faculty graders are looking for in student writing. Altogether, students would write 5-8 papers of various lengths, and anywhere from a dozen to several dozen computer log entries. To aid faculty in designing these writing assignments, and to advise students on how to construct them, our faculty team includes an instructor from the university’s writing program who has been involved in course planning from the outset, is familiar with the readings, attends all our lectures, and participates actively in faculty meetings. We have found the writing instructor to be especially valuable in helping us to design writing assignments which balance the open-endedness necessary for real deliberation with the concreteness required to hold student interest. In keeping with this relatively open-ended format, we avoided adopting any standard textbooks, and instead assembled a custom reader which presents students with the challenge of interpreting multiple voices and engaging a variety of perspectives. In addition to our reader, we assign three books representing particular positions on each of the major issues under discussion. To maintain creative tension and space for deliberation, we are careful to include in our reader several counterpoints to each of the books we assign. Our goal is to provide students with enough material to construct a critical and also a supportive position with regard to each major reading. We have also developed a home page on the World Wide Web in order to give students the opportunity to explore the vast array of resources available in cyber-space. Our home page contains all the materials which would be found in a syllabus, together with guidelines for the different kinds of writing assignments students will encounter, annotated examples of strong student essays, information about members of the faculty team, links to computerized discussion forums for each class section, and links to a variety of resources external to the university. Newspapers and magazines, government agencies, political parties, advocacy groups, think tanks, data bases and archives are made accessible through our web page. Our hope is that this array of electronic resources will not just facilitate learning through the classroom experience, but will also prompt students to consider the links between issues and perspectives discussed in class and those they encounter in the media and on the web. To further encourage this, we directly incorporate web materials into some of our class sessions: for example, we used material from the web sites of industry, environmental, and citizens’ groups to facilitate a role-playing exercise in which groups of students were asked to interpret the position of a particular group and to come to class prepared to assume their identity and negotiate with others based upon what they had learned from the web sites we assigned. Substantive VehicleCritical Issues for The United States began as a series of debates on issues which faculty planning teams thought to be important ones for students as citizens. Early versions of the course focused upon such issues as: individual rights and the responsibilities of citizenship; the size and scope of federal government as well as the relative merits of governmental centralization and decentralization; unequal access to quality education; race and affirmative action; and the environment. However, over successive semesters, student evaluations suggested that these issues and the arguments relevant to them were being perceived as separate and disconnected. The course was not providing students with a way to connect these discussions to contested visions of civic life, to see that positions on different issues might be linked by similar understandings of citizenship, to understand that policy debates are also debates about the kind of society we wish to live in and the kinds of citizens we want to be. To provide a substantive vehicle which would refocus the course on contested meanings of civic life and citizenship, and to help students see more clearly the linkages between these visions and particular political positions, we introduced a new integrative theme for the course as a whole: â€Å"the American Dream reconsidered†. We ask students to deliberate on questions such as the following: What has the American Dream meant historically? What meanings does it have for people today? How do visions of the American Dream help us to think about ourselves as citizens, and what difference does it make if we think about the Dream in one way or another? How have issues of race, class, and gender figured in various interpretations of the Dream? Are there nationalist or nativist undertones in some or all versions of the Dream? Can, or should, the prevailing interpretation of the American Dream survive into the 21st century? To engage students on issues where they feel they have some stake and where they already know something, we approach these questions not in the abstract but as they have confronted us in three major areas of public controversy. EconomyWe ask whether the American Dream has been associated with the rise of a large and prosperous â€Å"middle class†, and if that version of the Dream is threatened by economic changes currently underway. What kinds of economic conditions are needed to support the Dream? Who can, or should, participate in such prosperity? What is the meaning of participation in an economy, and how is that participation related to different notions of citizenship and community? This unit of the course introduces the basic market model, emphasizing individual choice and the role of prices as transmitters of both information and incentives. We present the case for the proposition that, in the absence of external intervention, individuals acting in pursuit of their own self-interest will realize through market institutions the most efficient allocation of resources. This implies a limited role for government and a tolerance for the economic and political inequalities which are intrinsic to a system of individualized incentives. We present the classic critique of governmental policies aimed at fostering greater equality: such policies are counterproductive insofar as they distort price signals and undermine incentives for the efficient allocation of resources, and are undesirable since they restrict individual liberty. On this view, then, the American Dream entails the protection of individual rights and liberties and a system of opportunity in which individuals are rewarded in proportion to their hard work and merit. America became a wealthy and powerful world leader through the pursuit of this vision of the Dream and, to the extent that we have in recent decades experienced diminished opportunity, prosperity and power, it is because we have strayed from the original version of the Dream. We also present in this unit a view of the American Dream of individual reward and prosperity as embedded in sets of social institutions which unequally allocate power, wealth and knowledge, and which limit opportunities for meaningful self-government. These inequalities are woven through relations of class, race, and gender, and have intensified in recent years as the American economy has become more polarized in terms of power, income and wealth. This view offers its own vision of the American Dream, one which has markedly different political implications from the first view. The political horizon projected by this vision of the Dream constitutes a community of actively self-governing citizens. To the extent that economic institutions foster inequalities which preclude the realization of this Dream of participatory democracy for all citizens, institutional reforms aimed at equalization and democratization are warranted. We then explore some of the reforms proposed by critics of the contemporary American political economy, as well as the concerns which a more individualistic perspective would raise about those proposed reforms. EducationWe look at education as a pathway to a better life for individuals, or as a prerequisite of an actively self-governing community. What kind of educational system do we need in order to fulfill different versions of the Dream? How are different visions of citizenship implicated in contemporary debates about educational reform? We explore problems of unequal access to quality education, both in K-12 public schools and at the college level. We examine analyses which argue that some Americans receive first-rate education at public expense, while there are entire classes of citizens who are not provided with education adequate to enable effective participation in public deliberations, and thereby become disempowered, second-class citizens. Accordingly, some prescribe a more centralized and uniform administration of public education in order to eliminate the grossest inequalities and insure for all citizens the â€Å"equal protection of the laws†promised by the Fourteenth Amendment. We also explore arguments which locate the problems of public school systems in over-centralized and bureaucratized administrations, and which prescribe institutional reforms which move education closer to a competitive market model based upon consumer sovereignty and choice. Finally, we grapple with the dilemmas of affirmative action in college admissions, and ask how a liberal individualist society can cope with persistent inequalities of race in higher education. EnvironmentWe look at the relationship between the natural environment and the American Dream. Can the prevailing vision of the Dream coexist with a healthy environment? Can we imagine more environmentally friendly versions of the Dream? What would be the broader social and political implications of enacting a more environmentally sustainable vision of the American Dream? We examine the anthropocentric view of nature as having value only insofar as it serves human purposes, and which further suggests that the market mechanism is the best way to determine to what extent humans should exploit the natural environment. Establishing property rights over natural resources creates a direct incentive for their wise management. Further, the price signals and incentives of the market will call forth effective substitutes in response to resource shortages and new technologies which may minimize or eliminate our costliest environmental problems. This â€Å"free market environmentalism†is entirely consistent with the individualistic vision of the American Dream, promising consumers a world in which self-interested market behavior continues to generate high standards of living into the indefinite future. This view is encapsulated in Jay Lenno’s snack chip advertisement: â€Å"Eat all you want; we’ll make more†. In contrast to this market-based view, we also examine the perspective of environmentalists who suggest that our relationship with nature is best viewed not in terms of the instrumental exploitation of an external object, but rather as a necessary aspect of any sustainable human community. On this view, then, our obligation as citizens of the community extends to future generations, and we must make environmental decisions based upon social norms of long-term sustainability. Such decisions cannot be made through the instrumental calculus of the market, but must instead be made through processes of public deliberation. This, in turn, requires institutions to support such processes of democratic deliberation and citizens competent to participate in them, and thus also suggests certain linkages to the other units of our course. In addressing each of these critical issues we hope to lead students to ask: What does the American Dream promise? Does it mean individual liberty? Does it mean democracy? Does it mean equality? Does it mean opportunity for material success? A â€Å"middle class†standard of living for most, if not all, citizens? The freedom to succeed or to fail? Freedom from oppression or poverty? Is it a promise of a better life for individuals? A better society in which all of us can live? Is mass consumption a necessary centerpiece of the Dream, or might it involve a more harmonious and balanced relationship with nature? What can, or should, we expect from the American Dream now and in the future? And what do those expectations mean for our own practices of citizenship? In these ways, we try to encourage our students to see this course as being about themselves, their political community and their future. In that sense, the course as a whole represents an invitation to enter into the public deliberations which are at the heart of various understandings of citizenship. ReflectionsI came to these special courses with some modest experience of teaching discussion-oriented and writing-intensive courses. After an introduction to the teaching profession which involved lecturing three times a week to faceless crowds of 250 or so students, I was fortunate to be able to teach international relations for several years in the Syracuse University Honors Program. These were some of the best students at Syracuse, accustomed to putting serious effort into their education and expecting a more intensive learning experience. It was exhilarating, a whole new kind of teaching for me: the students were eager to learn and it seemed as though all I had to do was present them with some challenging material and prompt them with a few provocative questions and off they went, teaching each other and, in the process, teaching me about teaching. Eventually, though, I began to feel a nagging sense of guilt, inchoate at first, increasingly clear later on. I was doing my best teaching with those students who least needed my help. In that sense, I began to feel that I wasn’t really doing my job. Then I was offered the opportunity to join the Maxwell courses. Reflecting back now on five years of continuous teaching with these very special courses, the thing from which I derive the greatest satisfaction is that we have been able to create for a cross-section of first and second year students a learning experience very much like that which was previously the privilege of Honors students. In that sense, our courses have been about the democratization of education, as well as the education of democratization.
Friday, January 3, 2020
Financial Institution Management Failures During The Crisis Finance Essay - Free Essay Example
Sample details Pages: 18 Words: 5508 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? The Global Financial Crisis of 2008 was brought about by a confluence of factors such as imbalances in savings-rates, prolonged periods of loose monetary policy and regulatory oversight. Financial Institutions involved in rapid innovation to improve profitability in this environment. With abundant money supply and availability of innovative products, banks continually leveraging themselves and expanded their assets both on the balance sheet and off the balance sheet. However, an important aspect that cannot be ignored in this analysis of the Financial Crisis is that management failed to protect their institutions resulting in the near-collapse of the entire banking system. In particular, management failed to cope with the rapid changes in the environment, to adequately assess the new risks brought about by financial innovation and to arrest the growing culture of greed that ultimately consumed the institutions. Don’t waste time! Our writers will create an original "Financial Institution Management Failures During The Crisis Finance Essay" essay for you Create order In this paper, we analyse the various management failures that eventually led to the financial crisis and attempt to come up with remedies for the core issues. We also look at Credit Suisse and give an insight on how the bank learned from the crisis and on how it is adjusting its business model to the current and future market conditions. Incentive Structures of Front Line Managers Among the many factors that contributed to the financial crisis was the structure of the compensation and reward system, which financial institutions used to attract staff with the motive of increasing profitability. Investment banks allocate an unusually large portion of their revenues about 40 to 50 percent[1] to employee compensation. Instead of having a reward system in place, which protects the shareholders interests and focuses on long-term objectives (i.e. sustainable growth), short-term targets were being generously compensated; this jeopardized the companys long-term strategies. In a system where huge profits bring huge rewards, the set up of the incentive system created a culture of excessive greed that led to the near collapse in the U.S. banking system. Bonus system A big part of the profit, which determined the size of the bonus pool, came from trading and generous fees charged on both sides of client facing transactions. Financial managers were willing to take more risk for higher revenues in order to increase their profit and benefit from bonus increases. This had significant implications for the institution and its shareholder. The transactions with expected ongoing fees feed into the annual total compensation, which meant basically that the immediate reward was financed by the income, which was extrapolated over a number of years. In many cases revenues were not correctly assessed. Profits were not real as many assets turned out to be illiquid. Managers received excessive payouts at the cost of long term unconfirmed income to the financial institution. In other words, managers benefited at the cost of shareholders. The chart below illustrates the bonus distribution on Wall Street prior to the financial crises. The compensation counted in 2006 USD 34.4 billion, USD 33.0 billion in 2007. This also underpins the short-term revenue generating philosophy. Source: www.WallStreetComps.com, 4th Annual Investment Banking Compensation Survey 2009 Commission System Bankers focused excessively on short-term revenue generation and failed to assess product suitability to the clients. High-risk products were being sold to investors with a moderate risk profile such as retail investors and pension funds. This approach was not questioned as long as market rose, however when Global markets collapsed, many investors who thought their money was safely invested, learned that their investments were exposed to high risk and were illiquid. The marketing terminology for certain products was also misleading, for example the term mini-bonds suggesting that these are bond-like instruments whereas in reality they carried much higher risk equivalent, if not higher, to equity. Failure to balance risk-taking and risk-controlling The very nature of banking requires that financial institutions take on some of societys risk. However, the long-term success of these institutions requires them to carefully evaluating and managing the risks with a clear view on the overall risk-appetite of the bank. This is a fundamental conflict that banks are faced with. On the one hand, there is a pull towards higher risk-taking driven by profitability whereas on the other hand the threat of insolvency pulls towards de-risking. Ideally, a bank would organize itself in way that allows these two opposite forces to harmonize and as a result maintain the right balance between risk and reward. The lack of harmony between these two forces has led to many imbalances, which threatened to bring down the global banking system. The pull towards profitability was allowed to dominate over the opposite pull towards de-risking. This was reflected in the organizational structure of major banks, where risk-takers wielded far more power than risk-controllers. Independence and power of risk-controllers The financial crisis revealed the flawed organization structure of the major banks. The risk-controlling functions such as Legal, Compliance, Internal Audit and Risk Management often did not have sufficient power to approve or disapprove key investment decisions. These functions were also often reporting into the business and they only served to make the banks offerings more marketable by working around regulatory constraints and proving that these instruments were low-risk or to find a legal way to participate in more risk-taking activities. With the expectations of generating both high returns for investors and profits for the firm, complex products with underlying structure which carry an element of risk were being executed from the front line without sufficient time to interpret or analyse data on a broad perspective and to consolidate IT infrastructure manage the risk. Many institutions did not integrate early warning signs to capture risk into their Key Performance Indicator (KPI) for financial controls, accounting, funding, treasury, settlement, counterparty and liquidity risk. Top Management involvement in Risk Management Even before the global financial crisis, the importance of Risk Management in financial institutions was widely acknowledged as a key area of organisations overall strategy. However different firms had made varied degrees of progress in strengthening the Risk Management function by the time they were hit by the credit-crisis. A key indicator of the importance risk management function within an organisation is how actively the top management of the firm is involved with risk management. A global risk management survey by Deloitte published in 2007 found that 70% of executives surveyed said, that ultimate responsibility for risk management lies with very top of organization i.e. board of directors. Source: Deloitte Survey 2007 The survey found regional differences in how the ultimate responsibility of risk management is viewed across different regions. While in Asia Pacific, 8 out of 10 respondents thought the responsibility should be with the board of directors, only 6 out 10 of in Europe Americas shared their opinion. Centralised vs. Decentralised Approach The approach towards Risk Management differed in institutions. The Deloitte survey found that 44% of institutions preferred centralized approach in regards of managing risk, while 35% believed in decentralized approach. The rest responded that risk should be managed either by business unit, risk type or by region. Source: Global Risk Management Survey by Deloitte. A centralized approach offers a consistent basis of risk management and fast implementation of decisions. However it suffers from a slow decision making process due to difficulties with data capture and reporting across different areas of organisation. It may also fail to correctly capture the specific risks to some products, functions or customers. A decentralized approach can provide a better insight into product-, function- or customer specific risks. It also provides flexibility in the risk management approach. Some firms try to implement a hybrid model that captures best of both worlds. Intellectual gap between risk-takers and risk-controllers Although a number of factors influence an individuals career choices, there are a certain observable trends in each industry, which show that top talent tends to concentrate in certain professions. In the financial industry, it can be observed that on an average, the trading desks are able to attract top talent more than Internal Audit or Risk Management departments. Certain distinct thinking patterns can also be observed between the two types of professions. It can also be observed that in general, individuals who choose Internal Audit or Risk Management as a profession tend to be conservative and risk-averse while those who choose to be traders tend to have higher risk-appetites. It can be argued that there is a divide between the risk-takers and risk-controllers both in intellectual capacity and in thinking patterns and that the odds are skewed in favour of the risk-takers. While this divide can be beneficial because the varying thinking patterns would complement each others, it also opens up the risk that the risk-controllers not being able to keep up with the thinking-speed and thinking-pattern of the risk-takers. Senior Management challenges and failures The ever-increasing complexity of activities conducted by Financial Institutions and particularly the rapid pace of innovation posed a new challenge to the senior management of financial institutions. Information Asymmetry Traditionally, senior management had to deal with the bottom-up flow of information in the institutions. This creates an information asymmetry between the on-the-ground staff and top management. Important information may not reach the top management on a timely basis or there is a lack of quality in this information. The break-neck pace of financial innovation only exacerbates this asymmetry as the top managers lacked experience in dealing with these complex new instruments. This dilutes the effectiveness of top management scrutiny of bank operations. In extreme case, internal fraud is made possible because of this phenomenon. For example, Barrings Bank debacle of 1995 was brought about because of the lack of visibility of top management into the activities of a trader called Nick Leeson who happened to wear multiple hats of General Manager, Head Trader and Head of Back Office Operations. Information asymmetry allowed Nick to carry out fictitious trades to hide his mounting losses for a prolonged period. Lack of Intuition Psychological studies have shown that experts in a field, over the years, develop a certain intuition of understanding the trends in their field[2]. Traditionally, senior management positions are occupied by people who have years of on-the-ground experience in the activities of the institutions. Hence, conventional wisdom expects that these top managers are capable of picking up early signals of things moving in the wrong direction through their intuition. However, given the aggressive pace of financial innovation, the intuition of these managers is either unable to understand the new patterns or even when they do pick up the warning signals, they could be expressly dismissed as being based on old wisdom. Lack of Risk Literacy The senior management did not understand the risks inherent in the products and was not proficient enough in the specifics of risk management or in the new and complex area of structured products (Synthetic Collateralized Debt Obligations Synthetic or CDOs[3]) as these were relatively recent innovations. Pessimism is not well-received during bullish times Pessimism is usually not well received during bullish times, particularly when the bull-run is as prolonged as it was during the years leading up to the Financial Crisis of 2008/2009. This makes it harder for risk-controllers to convince the management to constraint risk-taking activities during bullish times. Peer Pressure Peer pressure has a significant impact on the prudence and decision-making capabilities of bank managers particularly during prolonged bull runs as noted above. Analysts, Shareholders and the Media constantly compare banks with one another and in general (and particularly during bullish times), they tend to over-emphasize profitability and under-emphasis the riskiness of the bank. Shareholders are less likely to be forgiving of the management that produces relatively lacklustre results during bullish times, even though it was done with utmost prudence. This constrains the willingness and courage of the management to apply prudence and refrain from risky behaviour during bull-runs, thus encouraging herd-behaviour among the financial institutions. Failure to make Risk Management functions attractive As mentioned in section 3.4, Top managements failed to make the risk-controlling jobs more attractive and hence allowed this intellectual divide to build up. Failure to empower Risk Management function As mentioned in section 3.1, Top Management failed to provide sufficient empowerment to the risk-controllers to step in and slow down the risk-taking activities. Failure of Information Systems The global financial crisis has exposed many limitations of the internal information systems used in financial institutions for risk identification, measurement and reporting. While financial engineering innovations created many complex products like structured credit products, the risk management systems did not keep pace with these changes with similar innovation and engineering. This gap in the development of these two areas of Front Office Risk Reporting units of the banks meant that the senior management had an incorrect picture of the true risk of the banks portfolio. As per a Global Risk management survey conducted in late 2009 by Deloitte[4], most executives in financial institutions rated their technology platform for operational risk management as not adequately capable. Only roughly one quarter of executives considered their institutions operational risk management technology platforms to be very capable in data gathering, risk assessments, reporting, or risk capital calculations. Ratings were even lower for scenario analysis and causal event analysis Source: Global Risk management survey; 2009 by Deloitte Risk Management in the letter than in the spirit When the credit-crisis occurred, many banks were still implementing the regulatory risk management requirements into the systems mandated by Basel accord. However the main focus of many internal risk management systems in banks was to comply with the regulatory guidelines with bare minimum requirements. Many banks did not invest in internal systems that would measure the true risk of the bank and the capital requirement to cover worst-case losses in the true spirit of managing the risk. In-efficient Models The banks mostly followed Value at Risk (VaR) based statistical technique for measuring market risk. The methodology relies on historical data and fails to predict the catastrophic scenarios or tail events. Despite the obvious limitations of these models, most banks relied heavily on this and other mathematical models for measuring and managing the risk. The rating agencies also used these same flawed models to assess the risk of these complex credit derivatives. The risk engines used simplified factors in the risk calculation, which often underestimated the exposure, as the risks specific to unique product features was not captured. Information Systems lag behind Financial Innovation The technology infrastructure for risk management varied significantly across different firms and also across different product lines within firms. As the structured derivatives desk embarked on newer and more exotic products, the technology infrastructure limitations became more critical in tracking and managing this product proliferation. New products were introduced before the technology infrastructure could develop to correctly evaluate those and capture the risk correctly. Risk Managers across many firms had prevalent practice of risk calculation using legacy end user computing tools like excel spreadsheets. In absence of sophisticated and automated information systems, the risk managers had little time to carry out in-depth analysis or discussion with business units. Fragmented Systems Most banks did not have fully integrated information systems that could give an aggregate picture of enterprise wide risk for the top management. The risk was measured in different systems many times separated for different desks, products or individual positions. These systems even used different approaches to market and credit risk, which means the risk numbers for different desks, or departments were often not compatible. The risk measurement also failed to capture the correlations in the underlying collateral and impacts of potential rise in rate of defaults. The structured credit products, due to their unique nature, required a holistic approach to risk management. Most of these products in a trading portfolio were measured for market risk but the underlying credit risk was not considered with the aggregate enterprise risk. The risk management responsibility for these products fell between market and credit risk functions. Case Study: Credit Suisse Mispricing London CDS In 2008, Credit Suisse London branch faced a penalty of 5.6 million pounds from the Financial Services Authority (FSA) for deliberately mispricing certain CDOs they held. This lead to the $2.65 billion of write-downs. The fine relates to supervision failures by management and the lack of trader monitoring systems and controls. Although this has been primarily a case of rogue traders deliberately mispricing the instruments, it can also be attributed to the lack of information systems that are sophisticated enough to value these instruments. A comprehensive risk management system equipped with the right models to evaluate these complex CDOs would have detected the inconsistencies in pricing early on. What are the possible remedies? The financial crisis revealed significant flaws in the management of financial institutions. Banks have managed their business for many years with most senior executives and traders operating on the expectation that the market would grow indefinitely with their investment yielding high returns and that taking risky positions is the way to get paid handsomely through the year-end bonuses. Compensation schemes were very closely linked to top-line performance without adjustment to risk. This fostered a culture of involving in financial transactions without necessarily understanding the inherent risk. Banks should foster a strong culture of risk awareness and accountability at every level in particular Front Office being the first line of defence against risk taking. They should also look at centralising its overall risk-management functions and ensure that all front line managers and subsidiary entities are held accountable for amount of risk they are taking on. Risk culture, infrastructure and flow of information are critical to firms and we identify some of these remedies that need to be established to prevent future crises. Board level focus on risk management The Board of Directors should increase their focus on firm-wide risk management The Board or Board-approved risk management committees need to be competent and understand the inherent risks with innovative products and although they are not responsible for managing risk, they should provide oversight and guidance. There should be a clearly defined risk management framework to define roles and responsibilities. Senior Management, Board of Directors and the Chief Risk Officer should define an enterprise-wide KPIs for risk management and review them periodically. Empower the risk-controlling functions Risk Controllers should be empowered to wield sufficient authority to challenge risky decisions made by risk takers or by Front Office managers. Furthermore it is important that the Risk Controllers have adequate influence over the decision making by rejecting the trading of new innovative products that have not undergone rigorous stress testing and which potentially is putting the firm at risk. The role of Risk Controllers should be made more attractive to encourage top talent into these roles. Maintaining strong independence of risk control functions with oversight as high as possible within the organisation. There must be a true risk management and not just a risk reporting. The Chief Risk Officer and Risk Management Committees functions need to be independent from the business units. Firm-wide integration of risk management functions Business lines and the Front Office managers who are responsible for executing and managing their risk have to ensure a proper implementation of internal risk guidelines. They should also work closely with risk management as trusted partners in the strategic decisions. Effective communication and accurate reporting should be provided by the heads of various risk disciplines to the Risk Management Committee for a complete view of the firms risk. Operation in silos should be replaced with an integrated collaborate among all departments. Review and stress-test risk valuation models Review the current risk valuation models to evaluate whether they are still relevant and also stress test them with new correlation data that has become evident during the financial crisis. Include all types of risk when defining risk appetite, including those that may come from off balance sheet vehicles. Mitigate the significant tail risk, which was not transparent within existing risk methodologies, risk management procedures and their methodologies. It should include firms size, mix of businesses and exposure to leveraged counterparties, market and other systemic factors. Stress-testing techniques are effective to deal with the changing market conditions and to offset deficiencies and the shortcomings from risk tools such as VaR. Organization-wide risk culture Make clear that senior management especially the CEO is ultimately responsible for risk management with the Chief Risk Officer providing leadership in respect of the execution on the organisations risk management plans. Develop and cultivate a robust risk culture embedded in the way that the organisation operates in all areas and activities with accountability for risk management as a priority. Improving the Internal Information Systems There is a need for greater investment in risk management infrastructure, which is scalable and is able to extend to accommodate new products, new type of risks and higher volumes. The firm may need to build a proprietary application or some sort of data warehouse to enhance system integration to have one consolidated robust technology platform Systems should be in place for stress testing for tail risk and analysing the correlation of risk with various components of a product. Aligning Employee incentives to shareholder interests Without doubt, people, rewards and culture played a key role in the development of this crisis where decision-making are made based on a short-term gain rather than a longer-term strategy for the firm. Central to the debate is how firms are going to structure their incentives without encouraging excessive risk. Financial institutions must make it a priority to develop a better way to capture their risk-adjusted-returns and to adopt a fair value approach to compensation aligned to long-term sustainable value. Ensure a risk-adjusted performance based on qualitative measurement and oversight. The new structure should be consistent with the guidelines for best practice as announced at the G-20 summit for the fair, balanced and performance-oriented compensation policies that are aligned with the long-term employee and shareholders interest. Risk adjusted measurement system should be cascaded top down from board level to the various business units. Increase the basic salary with deferment on bonus structure. In order to attract and retain talent from senior executives and front line managers, banks need to strike a balance in the accountability of risk rewards process. Deferment on bonus payout over a course of a few years, which are not guaranteed, may not be for everyone. So banks may wish to consider a higher basic salary. Defer compensation with the compensation value brought closer to the value of the business over a sufficient period of time especially for high earners. There is a need to strike the balance between ensuring individual accountability and also supporting a partnership. Deferment can be in the form of cash and stock. However, there is an inherent challenge if there is business restructuring so such approach should be considered to avoid fragmentation. Banks need to also consider appropriate provisions for claw backs for deterioration in performance. Create a strong accountability culture at all levels within the organization. What has Credit Suisse done so far? Credit Suisse has a business model that is less risky and more capital efficient with increased focus on client flows and reduced proprietary trading activities. With its risk-adjusted returns over a long- term period approach, Credit Suisse did remarkably well during the financial crisis. Prior to the financial crisis, Credit Suisse had already adapted an integrated One Bank strategy with combined strengths of Private Banking, Investment Banking and Asset Management to deliver customized products, comprehensive solutions and advisory services to its global clients. During the crisis, this integrated model proved to be both resilient and flexible, enabling Credit Suisse to respond quickly to market developments. It allowed the bank to stay focused on most attractive markets and client segments providing a solid platform for profitable growth. Under the leadership of the Brady Dougan, the current CEO, Credit Suisse adopted the vision of becoming the most admired bank, which implicitly emphasises reputation over profitability. Strategy: Capital Efficient Flow Based Business Model Credit Suisse fine-tuned its business model[5]for 2009 and 2010 by reducing its risk exposure and introducing a reduced-risk and capital-efficient business model. Furthermore it continued to strengthen its capital base. Increased Capital Base Credit Suisse had already met the BIS Tier 1 capital requirements before the Basel II accords were announced in 2007. Over the past couple of years it strengthened its capital base ratio further. By Q4, 2009 BIS tier 1 ratio of Credit Suisse was 16.4%.[6] Source: Credit Suisse AG In October 2008 Credit Suisse raised 10 billion Swiss francs in capital by selling treasury shares and bonds. Existing shareholders Qatar Holding LLC, Tel-Aviv-based Koor Industries Ltd. and Olayan Investments Co. of Athens took part in the capital increase. Taking into account its fund-raising, Credit Suisses Tier 1 ratio would have been 13.7 percent at the end of September 2008. With this capital raising Credit Suisse capital ratio exceeds the Swiss Federal Banking Commissions 2013 capital targets and minimum leverage requirements. De-leveraging From the lesson learned by the financial crisis, Credit Suisse reduced its leveraged finance exposure continually. In March 2010, its finance exposure was reduced by 97%, from CHF 11.9 billion to less than CHF1 billion. Furthermore it reduced its commercial mortgages by 31%, from CHF12.8 billion to CHF8.8 billion, and RMBS and CDO trading assets were down 25%, from CHF6.8 billion to CHF5.1 billion.[7] Risk Reduction in Investment Banking In December 2009 Credit Suisse realigned the Investment Banking structure aiming for overall risk reduction and diversification of the revenue stream. Within the Equities department, key client businesses were repositioned. Businesses such as high structured derivatives and illiquid principal trading were exited. Instead the concentration was with Equity trading with focus on quantitative and liquidity strategy / convertible. Fixed Income exited mortgage origination and CDO, Non-US leveraged finance trading, Non-US RMBS (Residential Mortgage-Backed Security), highly structured derivatives, Power and Emission trading and focused instead on Emerging Markets by maintaining leading business but with more limited risk/credit provision. Within US Leveraged Finance, maintain leading business but focus on smaller/quicker to market deals. Advisory focused on exiting origination of slow-to-market, capital-intensive financing transaction instead of focusing on corporate lending by improving alignment of lending with business and ability to hedge. Risk Management CRO organization The mission of Credit Suisse risk division is to protect the banks capital by establishing a strong control environment for all kind of risks. The division uses four primary function in order manage all relevant issues. These functions are Strategic Risk Management, Credit Risk Management, Risk Analytics and Reporting and Operational Risk Oversight. Under the leadership of the Chief Risk Officer, the risk division acts as an independent check and balance function, hence the Chief Risk Officer reports directly to the banks CEO. The following chart illustrates the risk interaction across the bank. Source: Credit Suisse AG Employee compensation aligned to Shareholder interest Credit Suisse has taken a number of steps to align employee compensation with long-term shareholder interest, starting in 2004-2005, which was a period of fundamental change for Credit Suisse. Pre-crisis compensation realignment Credit Suisse had introduced its performance oriented compensation policy in 2005, aligning the interests of employees and shareholders in a long-term perspective. The Performance Incentive Plan (PIP), a share based compensation, closely linked senior management with the delivery of Credit Suisses strategy. The plans risk/reward structure allowed for significant upside and also total loss depending on the long-term performance of Credit Suisse. Giving away toxic assets as bonus! In 2008, Credit Suisse used an innovative bonus scheme that took $5 billion worth of illiquid assets off its balance sheet and used units in this asset pool to pay bonuses to Investment Bankers.[8] First bank to align with G-20 recommendations Credit Suisse was the first bank to align its reward system with the best compensation practise announced at the G-20 summit. Furthermore, in response to changes in the financial sector, Credit Suisse revised it Performance Incentive Plan (PIP) for 2009 and 2010. The new compensation policy for Managing Directors and Directors has been divided into two main components: SISU (Scaled Incentive Share Units) and APPA (Adjustable Performance Plan Awards) Scaled Incentive Share Units (SISU) is an equity-based instrument. Managing Directors and Directors will receive an amount of base shares on a four-year pro rata basis. Delivery of additional shares will be depending on average share price and return on equity over a 4 year period. Adjustable Performance Plan Awards (APPA) is a cash-based with a notional value that will be adjust upward annually based on Credit Suisse ROE over a period of 3 years and adjusts downwards should the business unit make losses. Fostering risk-awareness at all levels Credit Suisse has taken up several initiatives to improve the risk-awareness of employees at all levels within the bank. Asset Allocation Framework To provide clients and relationship manager with consistent long-, mid- and short-term investment opinion Credit Suisse harmonized its Asset Allocation Framework in 2009 with the three different time horizons: Benchmark, Strategic and Tactical Asset Allocation. The departments Global Research, Multi Asset Class Solutions (MACS), Investment Advisory Strategies and Global Investment Delivery are now involved in the Strategic Asset Allocation (SAA) process. Global Research and MACS share their views on market developments in the Investment Committee. Investment Advisory Strategies then calculates the SAA based on the data from the Investment Committee. Before the SAA publication, Investment Advisory Strategies and Global Investment Delivery make sure to have products available to map the recommended strategies. Legal and Compliance training To ensure that all employees are familiar with the current legal and compliance regulations, all Credit Suisse employees have to conduct and pass LCD related web based training session on a yearly base. Frontline Training initiative To win back client confidence Credit Suisse set up a frontline Training initiative to further improve its advisory capability by providing general and specific trainings to all relationship managers. Starting in spring 2010 all relationship managers (RMs) will be tested and certified. The new certificate-based quality standard being introduced aims to ensure that all relationship managers are able to provide their clients with comprehensive advice about products, investment risk and earnings potential. The certification of relationship manager not only serves the client, it also sets standards for the largely unregulated profession of relationship manager. Hence this certification increases the market value of the relationship manager. Credit Suisse Suitability Framework (Private Banking) Credit Suisse set up a product suitability framework within Private Banking and adjusted their client advisory procedure further. All actively sold product types sold by Credit Suisse have been categorized along two dimensions Suitable Investment Strategy (Downside Risk) and Suitable Investment Experience level (Complexity), so that they can be easily matched against the clients investment profiles. Private Banking Advisory Process To set new standards in partnering with their clients all over the world, Credit Suisse created the Credit Suisse Advisory Process. Main goal is to understand clients needs and demands and to be able to translate them into integrated, tailored solutions from across the whole bank. In providing a sophisticated advisory process, it will help to build a long-term trusted relationship with the client. Improving Internal Information Systems Investment Banking IT Strategy In the evolving regulatory environment and industry trends, the Credit Suisse IB IT management team have analysed the markets to identify emerging themes that would drive the IT strategy. The business aligned strategy of IB IT now incorporates the three themes identified multi-asset risk management, central clearing and electronic trading. Multi-asset risk management: The goal is to re-engineer our risk and enterprise data systems to cater to the increased inter-dependencies in risk management amongst the various asset classes. Central Clearing: As the industry moves away from bilateral trading and derivative commoditization is becoming ever more prevalent, technologically, the goal is to support higher flow, standardize product offerings and provide clients with better tools and services. Electronic trading: With large volumes and central clearing new market realities, companies will need to improve their electronic trading systems. Credit Suisse is introducing a holistic single-dealer portal to rival competitors offerings and increase its share in e-trading. SDII Program in Credit Suisse Credit Suisses Strategic Derivatives Infrastructure Initiative (SDII) was established in 2002 with an overall objective to reduce Operational Risk and increase the processing capacity of the derivatives infrastructure. SDII is scheduled for completion by the end of 2010. The initiative aims to set up a standard front to back architecture with a consistent set of processes across all relevant entities. In order to value all Over-the-Counter (OTC) transaction during their entire lifecycle and to predict future cash flow, the bank wants to build a single data source. Furthermore all risk management will be processed on robust, scalable and controlled Risk Management Systems, hence excel spreadsheets solutions will be replaced. The key to having the initiative though is the ability to add and integrate new products quickly and efficiently, allowing front to back reporting and monitoring of exposures. This ability will enhance Credit Suisses ability to ensure timely reporting of risk exposures into the next financial crisis. Results achieved so far The results of Credit Suisses consistent efforts to reduce risk and to build a capital efficient business model can be seen in the following graph. Source: Credit Suisse AG
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