D.Murali

Chennai: Despite the widespread attention given to risk management, we get jolted by one major business failure or the other, almost routinely, with news reports that speak of bigger frauds (as in the case of SocGen), and massive losses, as for example of CitiGroup and Merrill Lynch.

Are we learning newer lessons in risk management in the process? Is the risk appetite of businesses soaring dangerously and unsustainably high?

“Trade is taking the risk in order either to compete or merely establish some form of top line performance,” says Professor Patrick O. Connelly of the University of South Florida. The issue is that most are not properly staffed with the necessary experience, or not properly hedged to mitigate the growing pressure of risk they face in their markets, he adds.

Regarding the events of fraud and the big losses at Citi and so on, regardless of whether a certain economy is principles-based or rules-based, if traders and companies expend enough energy, they will find a manner of bypassing or avoiding the mechanisms put into place to protect the economy, observes the professor, on a sombre note in the course of an e-mail exchange with Business Line a few days ago.

Greed, or ‘bragging rights’ represent significant influences over some of our most highly creative and motivated individuals, bemoans Connelly. “Systems of control are subject to the same creative ‘responses’ from these individuals as the programmes they execute on a day-to-day basis for their employers, and which makes them so successful in the ordinary course.”

Later this month, he is scheduled to address a seminar on ‘credit risk management’ organised by PRMIA (Professional Risk Managers’ International Association), Hyderabad.

“Trade credit risk management as a discipline that I promote and teach was conceived in response to a corporate need to select, retain and develop trading partners. I have extended it following over three decades of work with stakeholders, all of whom tend to interact, and form the basis for value stream that extends to multiple levels,” says Connelly. “It is this process that brings me to consult with financial institutions, third party financial intermediaries, insurance companies and other members of the market stakeholder network.”

Excerpts from the interview.

Central bankers, the world over, are attracting attention, in the light of the colossal liquidity problems in many countries, including the US. What is your take on the issue, as a credit risk management professional? Do the developing economies have to adopt smarter practices in this regard to avert some of the worries that plague the developed world?

The functioning and value of a credit culture, and instruction in risk mitigation techniques should be provided for every entity: individual, small business proprietor, company financial executive and so on, on a regular basis, to establish a basic understanding of how the business cycle functions in all of its dimensions: top-line and bottom-line orientation; yes, but also dimensions of business discipline in training, customer interaction, conversion of invoices to cash, debt and supplier repayment, etc.

Fundamental? Certainly! But seriously lacking, even in the most well-developed programmes.

For instance, when small business aspirants wish to access funding, they should be required to take a two-day course to enable them to understand (some for the first time) the business and cash flow cycle, and the absolute need for their PERFORMANCE. And that they respect the need to maintain discipline and integrity in their business interactions.

Performance-based thinking is key to their successful initial acquisition of working capital, and the maintenance of sufficient cash flow and well-disciplined and engaged customers to survive and thrive in a competitive marketplace.

Can you tell us more about your work in cash flow program implementation? Is that for individuals too?

Whether you are driven by common sense or focus on time-value of money and opportunity-cost of capital models, you arrive at the same conclusion.

The need for the establishment of a regimen, a business discipline which promotes the timely performance of your customers and, frankly, of your company is essential to a successful conduct of individual person (consumer), commercial or for that matter, public entity.

Credibility promotes further, greater risk acceptance, hence access to the value that enables each of these elements to thrive. Business discipline drives growth!

So long as the process defines a discipline that the individual or the firm associates may maintain in a regular, metered approach to the business process, there is ordinarily a better performance for both trader and stakeholder, or banker and client, or supplier and customer.

Does mentoring play a significant role in effective risk management?

Mentoring is critical to the future and development of any resource. It is important that associates receive the best possible foundation in preparation for their chosen life direction. However, there is no substitute for the value of an experienced resource to guide the person inside the company, industry, market etc in which they are operating.

This transfer of corporate memory and experience, promotes better decisioning, reduction of risk, stimulation of contribution and creation and execution of earlier value for both the environment promoted by the mentor, and the associate being mentored. This applies at every possible level of human interaction, without exception, in my experience.

Your insights on the cross-cultural differences in risk management, with a special focus on India.

Cultural diversity AND its direct and personal experience and UNDERSTANDING are critical to successful risk appetite determination, and mitigation for any entity. This – in addition to comprehension and understanding also of: Market attitude towards mutual stakeholder performance, commercial code, rule of law, civil procedure, securitisation and collateralisation process, debt legitimisation, bankruptcy regime – provide the structure in which a business relationship may be established, and provide for mutual profitable growth of the parties.

Exclude cross-cultural awareness and integration into the business model and it will evolve with devastating results.

You have been a teacher on the subject of risk management and also an author of texts used in China, Romania and other tranisitioning economies. Do you feel that we are giving enough attention to risk management, as a subject in education? Is there a greater need for case studies, and practical project experience in risk management courses? Also, with a good grounding in risk management, do you think that graduating students are more likely to take the entrepreneurial route rather than opt for employment?

Business have generally tried to avoid failing. In that respect, they have recognised that risks exist. However, the general attitude avoids thinking about risk in favour of finding new customers to grow trade. And it is in this exercise that they embrace the very risk they hope to ignore.

Some have the economic capacity to weather the shocks, and others do not. It has only been over the last few decades that chambers, associations, companies, have spoken openly about the types and characteristics of risk, the extent of effect, the alternatives to enabling a hedge of the risk, and results of properly executed (or failed) risk strategies.

So, as the market demands the content, the academic community begins to rise in response and to integrate the necessary subjects and topics into established curricula.

The text I have written supports this integration of trade practice within the broader market education process. There is a body of knowledge that must be established in order to optimise risk in the business development cycle. Further, using process review and results from market, we are able to integrate the body of knowledge currently resident in academic courses with actual business process requirements (or omissions) to better prepare the next generation of “performer” for his contribution to the economy.

Many of us, tradesmen, executives and educators, have already spent a lifetime promoting the value and process of risk management to our clients and markets in general. The recognition, mitigation and promotion of risk management techniques will result in a capacity to promote better economic performance of entities, be they individual assets or collective assets of society.

Frankly, student motivation and direction seems more a function of the extent of opportunity that the world of entrepreneurship, or as team associate, presents at the time they enter the market. It does seem to correlate that those individuals that have received mentoring from either parent, relative or similar person of influence, will follow a path that is consistent with the success of the mentor.

Imitation is indeed the highest form of flattery. Thank goodness.

Can changes to laws and policies facilitate better risk management? Examples.

Changes to laws and regulations are integrated into the very fabric of trade within an economy. For instance, how easily and with what level of integrity, cost, time and efficiency a specific bankruptcy law, or debt legitimisation process may be followed, directly effects the perceived and actual risk in the market, as well as the cost and time necessary to implement a strategy to trade in that venue.

Once these are established, it follows that establishing a strong foundation of basic business, risk management skills, and corporate discipline will enable an aspiring trading partner to move forward with managed risk. Certainly this is encouraging since an element of risk improves the return of the investment.

What have been the significant developments in human and process capital optimisation, over the recent past? And what do you foresee as major trends?

The most significant development has been a more widely RECOGNISED true value of the human capital asset. Its optimisation is on the rise. ERM and other such systems promote the value of a high integrity associate selection, development, challenge and performance-based compensation system, integrated to promote the maximum value for both the associate and the firm. These concepts have been applied also to stakeholders, enabling an extension of the model.

This value system is integral to the consulting that I have provided to stakeholders of the companies that I have served, and our customers in markets around the world. Associates generally respond well to the requirement for them to perform, differentiate themselves from “competitor associates”, be they individuals or stakeholder assets of the firm…providing the rewards matrix gives them the opportunity to economically or professionally gain from the exertion of the effort.

Stakeholders in the various firms respond logically as they are exposed to approaches to interaction which result in stronger engagement, loyalty and opportunities for their growth and increased sales and profitability. Win/Win across trading environment.

Human capital assets and process capital assets, both improved towards optimum will drive the entity or an entire economy to consistently higher levels of performance. The key is simultaneously recognising, encouraging, and optimising the value of both assets, human capital and process capital.

On a personal note, what takeaways from your 8-year stint in military help you in your current work?

Fundamentally, if a strong foundation is followed by a solid experience stream and MENTORING, the probability of survival and even the ability to thrive are substantially improved.

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Bio:

Patrick O. Connelly, Ph.D. CCE, FICM, CGBP is the President of Entelyx International Inc, a consulting company based in St Petersburg, Florida and Chief Executive Officer of ManO’Co International, a manufacturer based in Bucharest, Romania.

Dr Connelly has extensive experience in domestic and international, human and process capital optimisation; and as well in credit services and related risk management and cash flow program implementation and consulting. He mentors throughout the globe and instructs at the University of South Florida as a member of the adjunct faculty at the graduate and undergraduate level in International Trade subjects including management, marketing, finance, and risk.

Prior to establishing Entelyx International Inc. and the Institute for Credit/Risk Management, he held executive positions with Tech Data Corporation, Sperry Corporation (later Unisys), and Wang Laboratories. He began his corporate management career in 1975 with Porteous, Mitchell and Braun, a Maine-based regional retailer operating from Portland, Maine.

Military service from 1964-1972 exposed Dr. Connelly to much of the world and this sparked a continuing, intense interest in the multicultural experience. He maintains this passion to this day.

Prof. Connelly holds a Doctorate in Global Trade Strategy, an MBA and an honors degree in History and French. In addition, he holds Charter Certification as a Global Business Professional, the International Executive Award from the FCIB Global Management Program held at Georgetown University and the Executive Award from the NACM Graduate School of Credit and Financial Management held at Dartmouth College.

He has lectured extensively for three decades and provided worldwide seminars and courses on a myriad of business and international business, credit and management- related topics. Dr. Connelly holds adjunct faculty status and consults with companies and institutions in over a dozen countries and is the author of Trade Credit Risk Management, a Fundamental Overview of the Craft in Theory and Practice. This text supports his teaching in China, Romania and other transitioning economies.

Dr. Connelly has been recognised as a Fellow of the British International Credit Management Association, and is the recipient of the prestigious Centurion Award for Leadership in International Trade.