Among the December 2009 proxy rule changes approved by the SEC was a requirement that companies discuss and analyze risks that are reasonably likely to have adverse effect on the company’s reputation and/or sustainability.  This means companies must not only identify the risks facing them but also determine the probability and severity if realized and how that relates to the company’s compensation policies and programs.

But it is virtually impossible for a company to succeed without taking risk.  Success is not guaranteed.  And it is reasonable that CEOs and other executives should be rewarded for succeeding in spite of the risk.  But companies and more specifically the boards of directors have to know the severity and probability of risk.  What boards are learning is that it is not a smart business decision to take on a risk that could destroy the company even if the probability is low.  Paying excessively to executives to take on this risk makes it even worse.

SEVERITY & PROBABILITY OF RISK

A starting point would be to categorize severity of risk as: low (or none), reasonable or severe.  A severe risk would cause major damage to the company possibly sending it into bankruptcy, and/or rippling through the economy with disastrous results.   Reasonable risk is what companies are expected to include in their plans, whereas low risk targets would result in under-performing companies.

The probability of occurrence could similarly fall into three categories: low or (none), moderate and high.  Combining the severity of risk with the probability of occurrence results in nine combinations.

Severe risk with:

• High probability
• Moderate probability
• Low probability

All severe risk situations, regardless of probability should be avoided.  Some have argued that the securitization of loans was a low probability situation.  But we saw how that turned out.

Reasonable risk with:

• High probability
• Moderate probability
• Low probability

Reasonable risk situations are what companies should be considering and a major factor in designing the pay-for-performance plans.

Low risk with:

• High probability
• Moderate probability
• Low probability

Low risk situations should focus the emphasis on the salary plan not the incentive program.

EXECUTIVE PAY

With the backdrop of probability and severity of risk, it is possible to examine executive pay in terms of: low, reasonable and excessive.  The one receiving the most attention is of course excessive pay.  Given the five pay elements: salary, employee benefits, executive benefits, (or perquisites), short-term and long-term incentives, an overly generous payment of any could be excessive but the most likely candidates are the incentive plans, both short and long-term.

EXCESSIVE PAY

There are three scenarios for excessive pay.  It can be tied to severe risk, reasonable risk and little if any risk.  The first scenario is when the pay is appropriate given the level of risk, but the plan should never be designed to reward achievement that can severely damage the company, if not send it into bankruptcy.  One does not have to look further than the subordinated mortgage debacle.

The reasonable risk situation is when the pay is greater than justified in relation to the risk.  This is probably the most common situation.  And incentive payment of any amount is probably excessive when there is little if any risk.

REASONABLE PAY

The objective of any well-designed pay plan is reasonable pay for achieving reasonable performance targets based on an assessment and probability of risk.

Pay-for-performance should be focused on stretch targets but not high-risk targets.  No pay plan should be structured to pay for successfully meeting performance targets that could drive the company into bankruptcy.  However, if there is low to no risk, payments should be moderate.

LOW PAY

If performance is low, it is expected that pay will be low.  If not, it can be argued that pay is not reasonable maybe even excessive.  In fact, there probably should be no pay under the annual and long-term incentive plans.  The only pay should be in salary.

However, the low-paying scenario may also describe a situation where the executive has met the performance expectations but because of a poorly designed plan, the person is underpaid.  This is hypothetically possible but hard to find in the for-profit sector.

Low pay may also be the result of a draconian clawback because of an after-the-fact determination of the appropriate amount of pay for continued performance.  Careful analysis of risk before finalizing the pay plan should minimize such a draconian action.

BOARD OF DIRECTOR & COMPENSATION COMMITTEE RESPONSIBILITIES

When companies become too big for the owner to continue to control day-to-day operations, the owner looks to bring in professional managers to take on the responsibility.  To think like owners, these managers are given cash and stock incentives.  It is reasonable to expect the cash to meet current needs and the stock to be an asset for later needs.  Stock plans were created in the 19^th century to make professional managers think like owners.  Acquired stock was not to be sold until leaving the company, preferably at retirement age.

But today many boards and their compensation committees have lost their way.  They permit executives to cash out stock options and stock awards, thereby breaking the link with the shareholders.  And to make matters worse some companies have approved incentive plans that pay out lavishly in the presence of major risks, thereby threatening the sustainability of the company.

Bruce Ellig is the author of more than 100 articles and seven books including his most recent, the updated and revised edition of The Complete Guide to Executive Compensation. Much of the material in this paper has been taken from this book.  Ellig served as worldwide head of HR for Pfizer Inc. for the last 11 years of his 35 years with the company.

The survey, conducted by executive recruiters Korn/Ferry International, found that 59 percent of executives believe that the recent increase in awareness on corporate reputation risk “will affect their Board’s view of reputation management and crisis preparedness.”

Only 28 percent said that the shift will have no effect, while 13 percent were unsure of how the focus on corporate reputation would impact their company.

More than half of the executives (58 percent) believe that their company “has improved the quality and timeliness of information shared with the Board to assist in better risk planning and management,” the survey found.  Fifty-seven percent of senior executives surveyed said that directors and executives are currently spending more time dealing with risk management.

Fourteen percent revealed that their company is actually spending less time on risk management, while 26 percent said there has been no change at all.

While most respondents agreed that responsibility for managing risk belonged at the top of an organization, there was varied opinion as to where: 43 percent felt responsibility fell to the Chief Executive Officer, 19 percent to the Chief Operating Officer, 20 percent to the Chief Risk Officer and 8 percent to a company’s Lead Director.

Korn/Ferry said the survey included responses from several hundred executives in more than 65 countries “representing a wide spectrum of industries and functional areas."

Criticisms of business seeing value creation only in terms of achieving short-term, unsustainable results and how business schools prepare future leaders predate the financial meltdown. Warren Bennis and Jim O’Toole talked about the need to reform business education several years ago. The crisis simply made it more obvious that business as usual isn’t working, either in the classroom or boardroom.

The piece of management education reform that involves the role of ethics has added importance not only because trust in business has fallen so far, but also because it is tied to how leaders behave and the impact that has on a company culture as well as society.

When students return to campus in coming weeks, dialogue and debate on the purpose of management education and how ethics is handled will continue, impacted by initiatives that seek to help reinforce high ethical standards. Some examples are the MBA Oath project, and programs giving students experience practicing values and integrating ethics into other organizational risk considerations.

While well-regarded companies that have recently suffered reputation meltdown are real-world examples for the classroom, even more important is learning about other models for doing business, like Pepsico, a company that is intentionally setting high ethical standards for itself while still making significant profit.

For many companies ethics has a walk-on part—not much focus beyond the compliance function and website rhetoric about how a company describes its values. If integrating ethical considerations into strategic business decisions was the norm, we wouldn’t keep enduring debilitating crises where consequences of actions apparently aren’t clear to leaders until a regulator shows up or media headlines send stock prices lower.

Performance with Purpose

The reality is that crises at Toyota, Goldman Sachs and BP – to name a few -- involved ethical failures as potent as the business miscalculations and addiction to gaining ever-higher quarterly profits, where choices and shortcuts harmed stakeholders. Just as the ethical debacle of Enron was a wake up call met by additional regulation and beefed up ethics focus in companies, the corporate crises so far this year offer another kind of wake up call that companies and management education would do well to heed. How many more examples do we need of value creation only being about profit at the expense of society?

Indra Nooyi, Pepsico’s chairman and CEO, told students at Yale’s School of Management in May 2010 that “performance with purpose is how we run the company.”  She explained that “Performance with purpose is about how you can intimately link what a company can do with what the needs of society are and together deliver great performance.”

“Pepsico wants to be the model of the good company,’ she continued, “an example of how business should be done in the 21^st century.” This sets the bar very high at Pepsico. The business model requires integrating ethical considerations into the mix of business considerations, aligning decisions with purpose, and acting in a manner that inspires employees to do their best work. The result, if made a reality, establishes trust with stakeholders.

It is the inconsistencies that often trip a company up. Simon Webley, Research Director at the Institute of Business Ethics in London, makes a distinction between doing ethical things (like philanthropy and environmental activities) and doing things ethically. Doing the former is no substitute for doing things ethically, he says, mentioning a company in the U.K. known for the wonderful things it does for the community, but yet it doesn’t pay its suppliers on time. “It is easier to do CSR (corporate social reposnibility) than to integrate high ethical standards throughout the organization.”

Adhering to high ethical standards is at the heart of the Oath Project started at Harvard Business School last year as a grassroots movement of students and faculty. The voluntary pledge to “create value responsibly and ethically” seeks to create a community of MBAs (signers are from more than 250 schools) who share a high standard for ethical and professional behavior. Nitin Nohria, who became Dean of Harvard Business School this month, has been a strong supporter of the project.

Role of Values

Will signing a piece of paper change anything? It depends. We should consider how change occurs; it starts with a personal act of intention, followed by action, gaining reality through repetition and reinforcement until it becomes how things are done by an individual, and a collection of individuals. It is too soon to know the success of the movement or its influence on the companies graduates join. However, it is a start. The Oath Project is supported by many organizations, including Aspen Institute’s Business and Society Program (BSP).

Part of expressing high ethical standards is the ability to speak up in support of those values. Over 100 business schools globally are participating in an innovative, cross-disciplinary business curriculum called Giving Voice to Values (GVV) created by Mary Gentile. The program raises different kinds of questions than the case study approach: “Rather than asking ‘what is the right thing to do?’ she says, “we ask ‘how can I get the ‘right thing’ done?’” In GVV, students go on to answer other questions raised including: “What do I say to whom, what will they say back, and then what do I say? What data do I need? What allies do I need, etc.”

In GVV, Gentile says, “we ask students to create and practice literal scripts and action plans so that the program goes beyond awareness building and analysis to action.” The relatively new program was incubated at the Aspen’s BSP and also sponsored by Yale School of Management before moving to Babson College last year.

To help students practice integrating ethics into the decision-making mix, Loyola Marymount University (LMU) has developed an invitational intercollegiate business ethics case competition which attracts international participation. It is also sponsored by the Ethics and Compliance Officer Association, a professional group for corporate compliance officers, whose members serve as judges. MBA and undergraduate teams make presentations showing their understanding of the legal, ethical and financial dimensions of problems.

“Every decision you make in business generally occurs when you are under pressure, without all the information or time you’d like, and in the midst of competing factors – usually financial, legal or ethical issues,” says Thomas White, professor and director of the Center for Ethics and Business, who created the competition. “There needs to be more emphasis on ethics education in MBA programs (however it is done) because individuals need more technical ability in recognizing and resolving ethical issues, which are as sophisticated and complex as any financial problem, and getting more so.”

The success of business education reform has many champions, and is coming up again at a time when there is crisis fatigue as well as examples of successful companies with a value proposition that puts a priority on social good. Will current business leaders support training new leaders in skills and competencies that support new models of business or will we need to endure more business as usual?

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics, a weekly column at http://theweekinethics.wordpr

Poorly managed corporate risk all too often becomes risk that stakeholders unwittingly end up assuming. The consequences can be dire: Think deaths and accidents from unintended acceleration in now-recalled Toyota vehicles, the shocking demise of Lehman Bros. that fueled the global economic meltdown, or the deaths of oil platform workers in the explosion that started BP’s environmental catastrophe in the Gulf of Mexico.

Scandal affecting public figures also continually demonstrates the high costs of poorly managed risk. Estimates are, for example, that Tiger Woods lost between $23 to $30 million in endorsement deals last year, even though according to Forbes, he still topped other sports icons’ endorsements.  Finance professors at University of California at Davis estimated that shareholders of companies sponsoring Woods lost between $5 billion to $12 billion  in market value from November 17, 2009, when the scandals around his private life broke, to December 17, 2009.

Especially troubling here is that no matter how many examples establish irrevocably the very high human and financial consequences of reputation damage, and no matter how often leaders talk about the importance of having or regaining trust and reputation, the examples keep happening in different companies, with different leaders, with harm inflicted in different ways. It is almost a perverse corporate version of the movie “Groundhog Day” in which a calamitous day keeps repeating itself until the hero figures out what he has to do differently to find a way out.

Risk Management and Ethics

When will it be the right time for corporate leaders to do things differently? Mediator extraordinaire Kenneth Feinberg can’t be everywhere. His newest assignment is administering BP’s $20 billion oil damages fund; his intervention deemed necessary because there was little trust in BP’s handling of the claims.

A recent supplemental research report by the Ethics Resource Center observes that companies are put at risk when leaders fail to see that ethical leadership  is a vital component of effective and responsible management.

Companies that put themselves at risk and whose behavior is also considered to have contributed to the financial meltdown have been required to appear at so many hearings, they’ve worn a virtual path to Washington DC. On June 30 and July 1, 2010, Goldman Sachs and AIG face questions from the Financial Crisis Inquiry Commission on The Role of Derivatives in the Financial Crisis.  In that venue, companies are seen as the problem, not part of the solution; so the public relations hits to reputation are high.

The jury is out on what it will take to convince corporate leaders to build into their risk management strategies the capacity to ask crucial questions about ethical liability, as is done with legal liability. Such a step, hardly radical, would have the objective of putting ethical conduct on the table as a deliberate outcome; evaluating business strategies and actions to assess the potential for unintended consequences that could harm credibility, trust, reputation, and their stakeholders.

Getting on the Bandwagon

An easier way to court public favor seems to be on the sustainability bandwagon. A recently-released UN Global Compact/Accenture Survey (PDF) states, “Demonstrating a visible and authentic commitment to sustainability is especially important to CEOs because it is part of an urgent need to regain and rebuild trust from the public and key stakeholders...trust that was shaken by the recent global financial crisis.” Of the 766 global CEOs surveyed, 72 percent say “strengthening brand, trust and reputation is the strongest motivator for taking action on sustainability issues.”

One of the disconnects pointed out in the survey is that CEOs often assume their own company is more respected and trusted than their industry. This can fuel arrogance and lead to miscalculations. However, even having more trust and respect than accorded others in your industry can evaporate fast as we saw when Toyota’s gold standard of quality fell like a house of cards. Another disconnect is that while 92 percent of CEOs say sustainability should be embedded throughout the organization, only 59 percent are actually doing that. So, how much weight do we give here for intentions?

While 54 percent of CEOs say sustainability will be fully integrated in core business in another 10 years, the qualifiers are based on a number of factors coming into play, including creating a viable market for sustainable products and services. So bets are hedged. Also problematic is the 72 percent of CEOs who say brand, trust and reputation (essentially intangibles) are their biggest motivators for sustainability; standard drivers for business decisions like revenue growth, cost reduction, personal motivation and customer demand are motivators for less than half the CEOs.

This begs the question: Will CEO commitment for sustainability have the enduring motivation to do the hard work of building ethical and responsible corporate policies and practices? Or is it a public relations placeholder until something else comes along?  Commitment to making sustainability real would be a big step forward in ethical leadership. So too would consciously looking at potential ethical liabilities, before taking a course of action. Continuing with business as usual and expecting different outcomes is my definition of insanity. The lessons of the past several months offer ample reason to ensure that ethical considerations are paramount in corporate risk assessment.

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics, a weekly column at http://theweekinethics.wordpress.com

The survey found that more than half of approximately 2,100 business professionals (56 percent) surveyed think more financial statement fraud will be uncovered this year and in 2011, as compared to the last three years.

Other findings of the survey:

• More than one-third (38 percent) of respondents stated that in the current economic environment, “revenue recognition manipulation” is the type of financial statement fraud of greatest concern. Meanwhile, 18 percent of respondents cited “big bath” write-offs while expectations are low and 14 percent cited “manipulation for debt covenant compliance purposes.”
• One half (50 percent) of respondents said the financial services industry will have the greatest percentage increase in financial statement fraud alleged by the SEC during 2010, as compared to 2009. This was followed by technology, media and telecommunications (14 percent), consumer business (12 percent), life science and healthcare (10 percent) and manufacturing (6 percent).
• One-quarter (25 percent) of respondents believed that the action most useful to their organization for mitigating the risk of financial statement fraud would be training staff to recognize financial statement fraud. Furthermore, 22 percent believed that improving the 'tone at the top' would mitigate the risk of financial statement fraud, while 22 percent believed that improving fraud risk assessments would be most useful to their organizations in this effort.

The survey drew on responses from business executives who participated in a February 2010 Deloitte webcast.

Corporate advisory firm RiskMetrics Group Inc. this week rolls out a scorekeeping tool that will provide a new benchmark for measuring a firm’s attention to governance issues of interest to institutional and other investors.

The new GRId, or Governance Risk Indicators, will score companies against best practices in four areas: board, compensation/remuneration, shareholder rights and audit.

Companies will be ranked with a low, medium or high “absolute level of concern” on performance in those areas, based on 60 to 80 questions.  The initial GRId assessments will cover about 8,000 companies in the U.S., Canada, U.K., France, Germany, the Netherlands and Sweden.

The indicators will replace RiskMetrics’ current CGQ, or Corporate Governance Quotient, ratings, at the end of June.  RiskMetrics said the new indicators take into account practices in local markets, as well as tie-in the proxy voting policies of its Institutional Shareholder Services proxy advisory group.

RiskMetrics stressed the ratings would reflect a company’s individual policies measured against best practices rather than “a relative score tied to peer practices.”   In a sample report, RiskMetrics graded a hypothetical Smith Co. as raising “medium” concern over its board structure, low concern over compensation and audit, but high concern over shareholder rights because directors aren’t elected annually, the board can issue blank check preferred stock, and other hot-button practices.

RiskMetrics said “high-level” ratings will be available on the Yahoo Finance!  website starting in April.  Companies don’t pay to be rated, and also have free access to a site to verify their data.  Institutional investors pay for access to underlying data factors on which the high-level ratings are based

RickMetrics on March 1, 2010, announced a $1.5 billion agreement to be acquired by MSCI Inc., a major provider of market indexes and portfolio analysis.

An explanation of the new approach is available here.

Toyota’s announcement of a technical fix for its sticky gas pedals – which can lead to sudden acceleration problems - is not likely to bring a quick end to the company’s current recall nightmare.

Having already halted sales and production of eight of its top-selling cars in the U.S. - and recalled more than 9 million cars worldwide, in two separate recalls – Toyota faces the prospect of billions of dollars in charges and operating losses. The Toyota brand, once almost synonymous with top quality, has taken a heavy hit.

While all the facts are not yet in, it’s clear that Toyota’s crisis didn’t emerge full-blown overnight.   Fixing the problem and ensuring that something like it doesn’t happen again will require an all-out effort, from assembly line to the boardroom.  Even then, there are no guarantees. Maintaining a good corporate reputation in the 21^st century is tricky business indeed.

Toyota’s case offers a number of valuable lessons for other business people and companies to consider.  Here, for starters, are five:

Aggressive growth can create unmanageable risk. Toyota’s desire to supplant General Motors as the world’s number-one car-maker pushed it to the outer limits of quality control.

“The evidence that Toyota was expanding too much and too quickly started surfacing a couple of years ago.  Not on the company's bottom line, but on its car-quality ratings,”  writes Paul Ingrassia, a Pulitzer Prize-winning former Detroit bureau chief for The Wall Street Journal.

Ingrassia, who has just authored a new book on the auto industry, notes that in 2005 Toyota recalled more cars and trucks than it sold; by 2007, Consumer Reports magazine stopped automatically recommending all Toyota models because of quality declines on three models.

One wonders if, when accepting management’s plan for aggressive growth, Toyota’s board of directors exercised appropriate diligence to ensure that growth could be achieved without betting the entire franchise.  Were quality control and safety part of the discussion?  Maybe gaining market share wasn’t worth the trade-off.  Quick tip to directors of other high-growth-oriented companies: read up on Merrill Lynch’s experience with dominating the sub-prime mortgage market.

Get the facts quickly and manage your risks aggressively. One of the more troubling aspects of Toyota’s recalls (there have been two) has been the company’s differing accounts of the source of the problem.  The current recall, covering 4.1 million cars, involves potentially sticky gas pedals.  Late in 2009, Toyota also recalled 5.4 million cars whose gas pedals could get stuck on floor mats.  Plus, Toyota says there are some cars affected by both problems.  (For an interesting technical analysis of some of the issues involved, go here.)

Uncertainty is not an asset, especially when lives could be at stake.  A Los Angeles Times investigation, for example, casts doubt on Toyota’s explanation, quoting one auto safety consulting group as saying, "We know this recall is a red herring."  (Read Toyota’s position here.)

And the questioning is just beginning.  A U.S. Congressional committee headed by Rep. Henry Waxman has already requested copies of emails and other documents from both Toyota and the National Highway Traffic Safety Administration, which regulates Toyota with regard to the recalls.   Congressional hearings are scheduled for Feb. 25.

In cases such as this, investigators almost always start with two time-worn questions.  What did you know?  And when did you know it? Answers to those questions provide the groundwork for analysis of a company’s response and handling of a problem.  Were employees encouraged to flag safety issues to senior management?  Were sufficient resources devoted to investigating the problems?   When did the board become aware of the situation and what did it do about it?

Companies generally can’t predict when crises might occur.  However, good internal risk assessment programs can help identify those areas of the business where management should be on the alert.   Robust risk management programs help a company address problems as they pop up on the internal corporate radar screen – and before they explode in public.

Your supply chain is only as strong as your weakest link. The reality is that auto companies make hardly any of their parts.  They assemble cars from parts made by others.  In this case, the offending gas pedal assembly was made for Toyota by a company called CTS of Elkhardt, Indiana.

It’s far from certain how much blame the parts supplier deserves.  In fact, CTS says Toyota’s acceleration problems date back to 1999, years before CTS began supplying parts to Toyota. (And the replacement gas pedal parts Toyota has announced as a fix for the problem will be made by CTS, suggesting a degree of confidence in the supplier.)

Nonetheless, “(if) you are outsourcing for your entire vehicle line, [and] the outsourced component is defective, the recall and the embarrassment is much greater,” iconic car company critic Ralph Nader told Toronto’s Globe and Mail last week. “The overall message is that quality control [means] daily vigilance,” Nader said. “You can't coast on your reputation because it can fail very quickly.”

Supply chain monitoring is a critical factor for companies that rely on third-party suppliers. That’s increasingly true for a broad variety of industries, not just automobiles, as business grows ever more global.  Smart companies will know their suppliers and their respective strengths and weaknesses.

Accept Responsibility.  This is one area where Toyota seems to be doing a good job, albeit maybe a year or more too late.

Toyota's National Ad on Recall - January 31, 2010

Two decades ago, when Audi encountered a safety issue similar to Toyota’s, Audi took the position that “it was the driver’s fault,” David Cole, Director of the Center for Automotive Research, told Design News.  Coles says that reaction ultimately hurt Audi’s reputation.

Toyota seems to be avoiding the appearance of passing the buck.  When pressed by the New York Times about problems that might have been caused by supplier CTS, for example, Toyota spokesman Mike Michels said: “I don’t want to get into any kind of a disagreement with CTS. Our position on suppliers has always been that Toyota is responsible for the cars.”

Accountability matters enormously.   Johnson & Johnson’s 1982 recall of its painkiller Tylenol, following the deaths of seven people in the Chicago area, has earned it a permanent place in the annals of crisis management.  But that recall stemmed from the deadly act of an outsider (who has never been caught), not any problem with the product itself, as is the case with Toyota.

Take the Long View. The three leading factors burnishing corporate reputation these days are "quality products and services, a company I can trust and transparency of business practices,” writes public relations executive Richard Edelman, who last week released his corporate “Trust Barometer” survey for 2010.

That’s unfortunate news for Toyota, given the hand that it’s currently playing.  But the company doesn’t have much choice.  By one estimate, auto industry recalls conservatively cost an average of $100 per car - suggesting that Toyota might be on the hook for at least a one billion dollar charge.   That doesn’t include lost revenue to Toyota and its dealers from the production shutdown.  And competitors are already trying to woo customers away and capitalize on Toyota’s misfortune.  Disgruntled investors and Wall Street analysts will make the company aware of their feelings; class action lawsuits are almost a certainty (one lawyer is already searching for Toyota customers as clients).

Reputation can be easily lost – and Toyota’s reputation is indeed threatened – but it’s highly unlikely the company will collapse completely.  And that may be one of the one of the biggest lessons for other companies as they study how Toyota emerges from this recall crisis.  The reality is that Toyota is positioned for recovery about as well as it could be – owing, in large measure, to the reputation for quality products and corporate responsibility it has developed over the last two decades.  That reputation is a valuable asset, and one that Toyota will undoubtedly be citing and calling upon, in the weeks and months ahead.

John Mack, Chairman of investment bank Morgan Stanley, says that in the wake of the global financial crisis of 2008-09, the number one issue for the financial industry is regulation.

"We need to find some link to bring regulators around the world together, and a more systematized way of communicating and understanding risk," Mack says. “We need to figure out a way that we have a systemic risk manager and make sure they have the resources to understand, monitor and help regulate our industry.”

In monitoring risk, Mack says, regulators should be able to see the big picture - "our regulators should see it all" - so they can give guidance "and, in come cases, orders" to global banks and financial institutions.

You can watch the video here.