Difference between revisions of "Conduct Risk"

Revision as of 17:50, 16 February 2019

Full Title or Meme

Conduct Risk is a recent addition to the public auditors repertoire in response to the huge loss that has recently impacted companies that do not conduct their business in an ethical manner.

Context

Arthur Anderson, Wells Fargo, Equifax, all bring one thought immediately to mind, "what were they thinking when they conducted themselves in such an unethical manner?". McKinsey was a highly respected consulting firm^[1]

Problems

Since executive compensation is often predicated on shareholder value, any risk must be measured strictly in that metric to become an important consideration for executive action by the bulk of public companies. A similar calculus will apply to public enterprises because of pressures from the population at large and thanks to the investigations of a free press where it still exists. In both cases Conduct Risk is a growing discipline that Enterprises have learned to fear through the experiences with general business cases describe on the page Conduct Risk as well as those cases that are specific to service providers.

Technology

Many of the risk factors arise because management is not equipped to deal with the rapid changes in technology and the impact that can have on business operations and customer expectations. For example both Google and Microsoft issued warnings in their recent filings on the risk that bad outcomes are highly likely as Artificial Intelligence becomes an increasingly large component of their operations.^[2]

Privacy

For example, since the 2016 US presidential election Facebook has been called on the carpet in several countries for numerous privacy lapses that continue to grow.^[3][4] When Facebook reported that 3 million users in Europe had abandoned them it lost $120 Billion in market value and the stock has continued to lose value throughout 2018.^[5] The loss to Equifax market cap after their privacy breach is more that 30% with some experts doubting that the company can continue in existence after all the legal cases are settled.^[6]

Financial Innovation

The major culprit of the recent Great Recession has been blamed on new financial instruments. Even before that occurrence both Arthur Anderson and Enron were eliminated from their place as admired companies and ceased operation after discoveries of how the manipulated energy futures. This was an existential legal risk in their case, but there was substantial cost to their reputation even before they ceased operations.

Solutions

References

1. ↑ Walt Bogdanich +1, How McKinsey Lost Its Way in South Africa 2018-06-26 New York Times https://www.nytimes.com/2018/06/26/world/africa/mckinsey-south-africa-eskom.html
2. ↑ Tom Simonite, Google and Microsoft Warn That AI May Do Dumb Things. (2019-02-19) Wired Magazine https://www.wired.com/story/google-microsoft-warn-ai-may-do-dumb-things
3. ↑ Kevin Roose, No gentile Giant, But a Juggernaut Playing Hardball. (2018-12-06) p. B1 New York Times
4. ↑ Adam Satariano +1, Leveraging User Data To Show Favoritism Among Its partners. (2018-12-06) p. B1 New York Times
5. ↑ Over $119bn wiped off Facebook's market cap after growth shock. The Guardian https://www.theguardian.com/technology/2018/jul/26/facebook-market-cap-falls-109bn-dollars-after-growth-shock
6. ↑ Equifax’s stock has fallen 31% since breach disclosure, erasing $5 billion in market cap. (2017-09-14) Market Watch https://www.marketwatch.com/story/equifaxs-stock-has-fallen-31-since-breach-disclosure-erasing-5-billion-in-market-cap-2017-09-14

Other Material

The wiki page on Privacy Risk share much conduct with this page as privacy risk is becoming a significant factor in [[Conduct Risk].