Preparing for the Economic Risks That Come Next

Well, are we all now suitably unnerved at the economic prospects bearing down on us?

At the time I am writing this column Monday afternoon, Wall Street was recovering from its flash crash earlier in the day of nearly 1,100 points, to a much more comfortable fall of “only” 200 points on the Dow Jones Industrial average. Not to be confused with the 531-point drop last Friday, or the 358-point drop the day before, or the 163-point drop the day before that. We won’t even bother looking at the meltdown on Chinese stock markets that started all this; the numbers there were surreal going up, and they are just the same coming down.

This is one of those rare moments when macro-economic forces causing headlines around the world do actually carry lessons for compliance and audit professionals trying to do your jobs every day. Since Washington remains on summer vacation for at least another two weeks anyway, let’s take a look.

Rules matter. I wrote about this several weeks ago when the Chinese stock markets first started to unravel, and nothing has changed. Today’s economic crisis is rooted in emerging markets having regulatory institutions too weak to oversee their markets effectively. That’s it.

In China, policy-makers concoct new rules for stock markets daily, and devalue the yuan for political purposes because the Bank of China lacks the independence any self-respecting central bank needs. In Brazil, corruption was ignored for years until Petrobras finally unraveled; now the country is in political paralysis because so many politicians are under investigation or indictment, they can’t even find a leader untainted by scandal. In Russia, Vladimir Putin has reshaped practically every part of the government to be a vehicle for his personal policies. In Nigeria, Mexico, Turkey, India, Venezuela, South Africa, Thailand—the list is depressingly long—we see governments unable to function well because they lack strong, independent institutions able to impose order on economic markets.

So as much as we want to complain in the United States that regulations are a burden that impede growth—so what? They also impede corruption and uncertainty, and given the consequences of weak rules that we’re seeing around the world, I’ll take that over excess corruption and uncertainty any time.

Rise of the strategic risks. Companies cannot find reliable paths to growth today. Fundamentally that’s why stock prices are falling right now: investors believe future earnings will be harder to achieve, and that drives down share price. We have too much money chasing too few business opportunities. One executive the other week even told me, “Our CEO has $100 million in the bank and it’s burning a hole in his pocket, we’re so desperate to find good companies to invest in.” That’s not good.

Pressure for growth means more strategic moves—some of them astute, some of them hare-brained, most of them somewhere in between. M&A deals will be proposed. New product ideas will be drawn up. New target audiences will be found. New markets will be tried. All of it will mean more work for compliance and audit professionals sooner or later, so you might as well argue to get involved sooner, before the latest new gambit explodes into a serious problem later.

Compliance Week has been writing about the proper role of compliance and audit executives in overseeing strategic risks for years—including the reasonable school of thought that strategic risks are not part of your job. I disagree. While much of your job deals with process-related challenges such as Sarbanes-Oxley compliance or data breach disclosure, strategic mistakes are what generates headlines. Strategic mistakes set boards and hedge fund activists or the warpath and get CEOs fired.

You absolutely want to be part of those conversations before the mistake is made, even if speaking up requires lots of courage. The good news is that boards seem to be more open to discussions of strategic and reputational risk today. Offer them help. They will need it.

Today’s economic crisis is rooted in emerging markets having regulatory institutions too weak to oversee their markets effectively. That’s it.

When the worst happens. Let us assume Corporate America soon enters some phase of “retrenchment”—perhaps a recession with shrinking GDP; perhaps just a period of flat growth, low interest rates, consolidation, and reorganization as corporations try to wring every penny of profit they can from existing operations. (Rather than trim profits and disappoint markets, which would cut into their stock compensation.) The bottom line is that in the near future, it’s quite possible that Corporate America will be a worse, less fun place to work than it is now. And it’s not exactly a fun house today as is.

That dour environment is going to hit your corporate culture.

Last week I wrote a column about Amazon.com’s approach to managing corporate culture, and the warped world it has created by focusing too much on data-driven performance and too little on trust and human interaction. It was the most popular and widely circulated column I’ve written in years—and if pointing out the misery of white-collard America strikes so deep a chord, we have a big problem.

I don’t know any easy solutions to insulate your workforce from the forces that may come, and make mistake; I hope I’m wrong about it. But if one lesson stands out above all, it’s that a strong culture should be prized above all, because that’s the key to getting through what’s coming next. After all, Wall Street was down 200 points when I started this column. It was down 460 when I finished.

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