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Tom Monahan

Tom Monahan

Thomas L. Monahan III is the Chairman and CEO of Corporate Executive Board, a leading provider of best-practices research, data, and tools to more than 120,000 executives and organizations, including 80% of the Fortune 500 and 70% of the FT 100.

'What Would Happen If...?'

I'm not sure I agree with the premise of the question. The first responsibility of financial sector leaders is not to improve the long-term health of the economy, it is to create value for the owners of their companies. In doing so, they will make a series of decisions that are good for the economy as a whole.

This is important, because the most obvious way to fail to create value is to go out of business, wiping out your shareholders' capital entirely. This happened to several large financial institutions, and others came perilously close to this fate; in some cases, needing to accept highly dilutive capital infusions to survive.

So what lessons should leaders at financial services companies (indeed companies in any industry) take away from these events as they develop future leaders?

First, it's very clear that some -- maybe even most -- major financial institutions had not been exhaustive enough in understanding how their portfolios and businesses would fare in a variety of scenarios. Scenario planning - relentlessly asking "what would happen if?" -- should be a vital part of leadership in any industry, but it is a particularly essential discipline in financial industry. Too often, leaders make the assumption that the future looks like the past and architect their business around assumptions that can suddenly look very incorrect. Leaders in the financial industry clearly didn't model out just how vulnerable their businesses were to some very plausible scenarios, and thus failed to curtail or reverse certain risks.

Second, they can do a better job measuring and understanding the velocity of risk. Financial leaders certainly don't have a monopoly on flawed assumptions, but conditions can change more quickly in their industry than any other. The ability to understand the rate at which key risks can develop and swamp the firm is as important as the ability to identify and size these risks. Understanding risk velocity helps ensure that your response systems kick into gear quickly. Several of the firms who are now distant memories might have been saved if boards and management teams had moved more quickly as the first definitive signs of trouble arose.

It's interesting to note that the phenomenon of increased risk velocity now affects leaders across industries, as information flows more quickly, often undirected fashion. Think about the sudden shifts in movie-going behavior demonstrated this past summer as consumers "tweeted" positive and negative reviews immediately and shaped next day box office receipts. Word of mouth always affected the ultimate popularity of movies, but typically took weeks, not hours to play out.

By Tom Monahan

 |  September 15, 2009; 6:29 AM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: A Question of Purpose | Next: Shareholders First

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