Archive for category Uncategorized
The Management Meeting – Deconstructed
Posted by mbechara in Uncategorized on March 20, 2013
It was late spring in the Virginia suburbs of Washington, D.C.
All of the guys in the department had fought to get on this particular audit because of the time of year and the location. A young staff internal auditor named Mike Bechara waited in the “bullpen” with the other staff auditors to see who would be picked by the senior auditor for the job.
The “Senior” was a guy from Western Pennsylvania. I’ll call him Dave. As Dave came down the corridor of cubicles, the rest of the Staff crowded around him. Not yet 30 years old (and not used to being in a position of authority) he cockily eyed the crowd and with a gruff nod of his head he mumbled, “Bechara…lets go.”
In my early 20s (and not used being magnanimous) I smugly shouldered my way through the crowd and followed Dave into the Manager’s office for the pre audit briefing.
The assignment was for a pre-appointment audit. We worked for an insurance company and before the company would sign up a new agent they would perform a pre-appointment audit to evaluate the financial condition and integrity of the agent.
Later that week, upon arriving in the sunny Virginia office of the agent, we were ushered into a conference room to set up. As I unpacked my stuff I prepared to execute the hard work of financial analysis, examining reconciliations and evaluating systems.
Dave had other plans.
Mike, you’re coming with me to the management meeting. The boss said I have to “professionally develop you”, he informed me.
The management meeting! The Promised Land!
Long known amongst the staff as a fluff meeting designed to get the Seniors away from the hard detail work, I was ecstatic at being able to attend. As we were ushered into the executive office of the agency’s President, Dave warned me, “Don’t say anything stupid.”
As the meeting started, the President in a booming voice began to spin tales of how he was the mover and shaker about town; how he had closed insurance deals with celebrities and about how he met a Senator on the tarmac of the airport to sell him insurance. Interspersed between these tales of business prowess, he made mention of the luxury items he had accumulated personally (houses, boats, cars) during his time in business.
As I listened I forgot Dave’s admonition about speaking and asked, “Are there any areas of the business that you are concerned about?”
The agent looked at me like I had asked him if he wore deodorant.
“My concern is that I am here in the office teaching you about my business instead of out there getting more!” he growled back.
Dave remained stone-faced and just looked at the agency President.
Of the hundreds of risk assessments, internal audits and investigations I have performed over my career, I can consistently point to the meetings with management as the key arbiter, the pivotal point in making big decisions about whether to extend credit, consummate a merger or sign any agreement.
I recently read a great piece by ConvergEx’s Nick Colas where he supplies his own experiences in management meetings from an investor perspective. Here are some excerpts from this great article.
http://www.scribd.com/doc/130343558/Stuff-Managements-Have-Told-Me-ConvergEx
Meetings between public company managements and investors are the bedrock of the fundamental investment process. The reason for that, however, is often lost in translation. It is not, for example, because most investors or analysts are systematically better at reading “Body language” about the quarter or new products. Seriously – they aren’t. No – the reason that management meetings are useful is because, over time, managements let down their guards and act like regular people. And in those moments, truth – about character, about wisdom, about judgment – comes rolling out.
Even today many teams, whether they are audit teams, field exam teams or due diligence teams, underappreciate and undervalue the process of meeting with management.
Perhaps it’s our data driven driven society where we think we can financially engineer our way out of any problem, from a bad acquisition, an underwater debtor or perhaps even an economic slump…..
At any rate, let’s go back to our management meeting in sunny Virginia. The agency President went on and on describing how he would do anything to close a deal. When Dave asked him about his financials, his customer concentrations or his software systems he became agitated and dismissive. At one point he exclaimed “The back office people handle all that, and anyway, what’s important is that I can deliver the business!”
We ended the meeting and went back to doing our analysis work. I had a hard time concentrating as I thought I blew it in the management meeting. “Dave had basically told me to keep quiet and I asked a stupid question”, I thought to myself.
At the end of the review the financials looked fine and we had no major issues. I asked Dave if he thought we would sign the agent. He didn’t answer but just gave me a sort of half sad smile.
Back at the office later that week, I was shocked to find out that we did not sign up the intrepid Virginia agent. I got pretty nervous as I naively thought that the agent backed out and went with another underwriter. After all hadn’t the numbers and the analysis checked out? Wasn’t he a big time player in his area with a lot of contacts and business?
Before lunch I saw the Manager of Internal Audit coming down the corridor towards the bullpen. The Manager?….coming to the bullpen?
I looked around for a box to use in cleaning out my desk, but before I knew it the Manager was in front of me speaking rapidly:
“Dave just updated me….Good question…Next time don’t be intimidated…ask a follow up question.”
It was not until years later that the agent was involved in some questionable practices with another underwriter.
Have a great week,
Michael Bechara, CPA, CRMA
Managing Director
Granite Consulting Group Inc.
Does This Risk Make Me Look Fat?
Posted by mbechara in Uncategorized on December 10, 2012
I sat on the couch staring blankly ahead, keenly aware of my impending doom. The bags from the department stores lay strewn about the room overlapping one another and forming mosaic patterns before my glazed eyes.
Starting to sweat a little, I took a couple of deep breaths to relieve the tension and stress. As my wife emerged from the other room, I mentally scrambled for an answer, for a response, one that would satisfy the question that has plagued man for millennia.
Finally the moment arrived. As my wife turned back and forth in front of the mirror she delicately unfurled the infamous question:
“How do I look in this dress?”,
As my mouth went dry, the garage door burst open and in came my son from outside. Like a defending angel he swooped through the kitchen and into the living room, giving his mother a hug as he flew by.
“Nice dress Mom, you look so pretty”, he said nonchalantly as he passed.
“Oh thank you son,” my wife responded, clearly proud of her boy.
Seeing my window of opportunity I took flight behind my son as he rocketed into the next room and back out the garage door.
For some reason wives insist on torturing their husbands with the clothing opinion ritual. No matter the answer, positive or negative, the reaction is the same; an extended discussion about color, fit and style. For the woman already knows how she looks in the dress, she merely is looking for someone to challenge her conclusions.
It’s ironic that corporations behave in similar ways. In many respects, an enterprise risk assessment is a corporate version of “How do I look in this dress?” Most of the corporate executives and managers believe they have a good handle on the risks facing the company.
This is not strange, and in fact, is not a bad thing at all. We would expect those in charge of managing risk to have some pretty strong ideas about the challenges they are dealing with. The problem arises when they do not seek to confirm or challenge their views of risks.
In our risk work we typically run into three types of management teams. In describing them I found it helpful to point out the ancient Greek philosophical terms that management typically uses to justify their position; the ethos, pathos or logos.
We know it all.
The most myopic management teams do not accept any challenge to their views. They rely heavily on the ethos or the appeal to authority to convince themselves and their employees of the right answer. “I am an executive therefore I know”, is the mantra.
This type of management team typically only wants us to interview a very small number of executives. They do not have an economic worldview and dismiss it as big picture “speculation.” The results are predictable, the “groupthink” is confirmed and the dogmatic view of the business eventually reaches its predictable conclusion.
Let’s explore possibilities…but there is no way we could be wrong!
The second type of management team is willing to entertain other views; but only deems as valid those that support the current belief system. In this scenario the pathos or appeal to emotion is used. Management has developed a core set of beliefs about the business typically expressed in lofty emotional terms. Any information that challenges the underlying assumptions is seen as questioning “motherhood and apple pie.”
In the investment world we call this confirmation bias. Information and analyses are sought that support a predetermined conclusion. Any dis-confirmatory information is derided as not credible, irrelevant or just the uninformed opinion of the rank and file and is quickly suppressed.
We are a strong confident team…but we can always improve or adjust.
Like a good investor, the third type of management team has a view of the economy, their industry and competitors. All views are welcome, openly examined and either adopted or discarded. The logos or appeal to logic is the guiding light here.
This management team actively looks for dis-confirmatory information and seeks to challenge their own assumptions. This process accomplishes two important functions 1) It opens new discussions that may yield an adjustment in their approach to managing risks 2) It increases their confidence in the current approach by forcing a critical discussion.
The moral of the story or ..in Greek the NOIMA or MATHIMA
Ultimately in business, and in life for that matter, those that are able to critically examine their worldview, assumptions and approach tend to have a greater number of positive outcomes.
But back to our little fashion show…..
Later that evening, I was waiting downstairs to go to the social function my wife was preparing for earlier. I began to wonder what she would be wearing. My thoughts were interrupted by the click of high heels on the hardwood floor of the stairs.
Turning my head, I saw my wife glide down the stairs in an absolutely stunning outfit.
As she carelessly walked by me on her way into the kitchen, I stammered “Wow, you look fabulous.”
“I know”, she coolly replied as she gathered her purse.
Not able to restrain my thoughts, I asked the obvious question, “Then why did you ask me what I thought earlier?”
“Just looking for some dis-confirmatory information”, she smiled back while shaking her head.
Have a great week,
Michael Bechara, CPA, CRMA
Managing Director
Granite Consulting Group Inc.
Going Whole Hog
Posted by mbechara in Uncategorized on October 9, 2012
The air was stifling in the metal trader’s small office as I got up to pace back and forth. Walking was the only way I could think of to get some of the air to circulate around me.
“So if someone gets caught short on metal, why can’t you just raise the price to the moon?”, I asked the obvious question. The trader merely looked back me with a half sad smile…..the kind a teacher gives to a stubborn pupil.
His office was like a bunker…..like some kind of war room. Shards of metal littered the book case and a big map of the continental USA dominated the wall in front of him.
We were performing a hedging project and the trader had been stressing to me repeatedly the dangers of being “a lazy buyer” or being “out of touch” with the market. He relayed story after story of how, in his world, it was survival of the fittest and those who were not good negotiators, were not market savvy or had some event that forced them to make a quick buy/sell would be turned into hamburger by the metals marketplace.
The trader shifted in his chair and leaned forward towards me. “You wanna know why that’s a bad move?” he said pointing his finger at me.”
“Yea, I wanna know why”, I challenged him as I stopped mid pace. “You’ve been filling my head with these tales of the “dog eat dog” metals market and now when you finally get a leg up on someone you have to go easy all of the sudden?”
“Pigs get fed and Hogs get slaughtered!….that’s why”, the Detroit native retorted.
“Pigs, hogs…is he trading pork bellies on the side?”, I wondered in my head, as I finally stopped pacing and sat down half exhausted.
“Explain…please”, I wearily replied while expecting another long, marginally relevant, detour type answer from our intrepid trader.
“It means don’t get greedy”, came the shockingly simply reply. “When you’re ahead, you can be a pig and take advantage of the market being on your side but don’t be a hog and totally gouge the other guy.”
“Remember”, he continued, “Relationships play a big part in this. If you’re a hog eventually the market will turn against you and will get slaughtered by those you gouged.”
Also, great advice for those in charge of monetary policy.
For those just arriving from the galaxy’s outer rim, since the financial crisis in 2008 the Fed has responded by trying to counter the effects of deflation with monetary interventions designed to stimulate consumer spending and lending by banks.
In English….We have been printing money to create inflation so people and banks will spend and lend money. The official name is Quantitative Easing or QE.
First there was QE1, then QE2 and now the recently announced QE3. Before those in the peanut gallery ask…..yes you are correct they keep trying and it doesn’t work, as intimated by the following chart courtesy of bank of America and the NY Fed.
But wait, this time there is a twist! QE3 or not just QE3, its QE…Forever. That right my friends the Fed has gone “whole hog” and will now not stop printing money until they see unemployment come down to an “acceptable” level.
But as our friend the metal trader says, “Pigs get fed and Hogs get slaughtered.”
Maybe you can print a little bit of money and get away with it..but print a whole lot of money and you get….bad things.
“Bechara is such an alarmist” sighs the peanut gallery, “What could be possibly be harmful about the Fed increasing the monetary base indefinitely?”
At the risk of sounding like a simpleton, I have the following basic questions at this point:
- How does diluting the currency create wealth?
- If one of the primary functions of money is a store of value, are we not taking value away from those who hold money (Savers)?
- Isn’t this just a new spin on the medieval dream of boiling lead into gold?
- If the Fed buys bonds & mortgages that no one else wants…who takes the losses?
But hey, things are getting a little too uncomfortable with all these questions so let’s return to our metal trader’s small , nearly airless office.
” Ok, ok I get it”, I told him “Relationships are key and you can take advantage of the market but you can’t press someone to the limit.”
“Exactly”, he replied. “You see… I’m here to make you successful” he added sarcastically.
As I turned to leave, I asked him one more question, “How do metal buyers know they are getting pure stuff…what if someone put some other metal in as filler?”
For the first time the traders eyes widened, as if I had spoken blasphemy, he shook his head slowly from side to side as he replied.
“In this business, you don’t dilute the metal….Geez man, do not dilute the metal”, he repeated slowly.
Have a great week,
Michael Bechara, CPA, CRMA
Managing Director
Granite Consulting Group Inc.
mbechara@consultgranite.com
www.consultgranite.com
Kentucky Fried Risk Assessment
Posted by mbechara in Uncategorized on August 28, 2012
Coming home from work one night during this late summer I encountered something unusual; an empty house. After walking around looking for, and calling for, the rest of my family, I accepted the fact that no one was home and opened the refrigerator to see what I could find.
About 5 minutes later the garage door was flung open and three wet kids in bathing suits raced into the kitchen and started talking to me loudly, quickly and at the same time.
“Great time..an amazing dive..bought me potato chips..I’m super fast..45 seconds underwater..Roxanne’s a snob”, I caught bits and pieces of the combined cacophony of the kids voices as they excitedly relayed to me their afternoon activities.
My wife trailed the kids into the kitchen smiling at my pathetic attempt to absorb the three streams of conversation simultaneously. “I see you spent the afternoon at the lake”, I relayed to her, secretly proud that I was able to decode the afternoon’s events.
That was when she shocked us.
“I didn’t make dinner today”, my wife said softly.
All conversations froze midstream and you could hear a pin drop in the Bechara kitchen. I already knew what was on my wife’s mind but I decided to tease the kids a little bit.
“We’ll just eat leftovers”, I said.
“There are none”, she replied.
“Maybe we’ll just make something quick”, I responded.
“I didn’t get a chance to go food shopping yet”, she shook her head.
Looking over at the kids they were watching us intently, my son in particular was open mouthed in suspense. Bringing the act to an end, I simply deadpanned, “Well, I guess we’re gonna to have to go out.”
“We’re going out!!”, my oldest daughter yelled while assuming a Richard Nixon like pose with her hands extended above her head in a double victory sign.
After arriving at the local family place, we were seated in a booth and handed the menus. Of course the children were handed the kids menus.
I generally don’t like the kids menus. They typically feature a selection of the poorest quality, and least healthy, food imaginable.
What’s more, the kids menu is the same wherever you go: chicken fingers, fries, mac & cheese and pizza. All the salt, fat and sugar that a growing child needs.
Actually the kids menu is not that hard to understand. The concept is not based on nutrition, or even foods that kids like for that matter, but it is based on sameness and familiarity.
Sort of like company risk assessments.
Many companies approach assessing risk in the same manner. The approach of interviewing management, sending out a survey and tabulating results linearly by ranking likelihood and impact has gained wide acceptance.
The attractiveness of this approach stems from its inherent ease of implementation, its reproducibility and its familiarity. Much the same as the kids menus mentioned above.
This approach is not inherently bad and certainly has its merits, but it does need to be balanced with a diet of more comprehensive and value driven approaches. If we use the metaphor of the 4 food groups we all learned about in elementary school, a linear risk assessment of likelihood and impact is like the bread/grain group. It’s simple, satisfying and provides some basic nutrition.
Introducing strategic company objectives into the risk assessment, provides protein and depth. A risk pattern analysis takes the established risks and links them to company objectives to ensure we don’t become overly focused on 1 or 2 risks and we stay focused on risks that threaten our objectives.
In the fruit and vegetable category, a macroeconomic risk analysis should be introduced to provide some immune system strength. We may have identified the internal risks that threaten our company but we need to understand the risks presented by an increasingly complex and erratic economic environment to ensure we are prepared for these externalities.
For example, the US economy has been heavily dependent on consumer spending over the past few years. How is the consumer feeling right now?
In short, if you are going to swim in an infected pool you better have a very strong immune system.
As with food, it is a balanced diet of all of these elements that creates the most effective risk assessment. By using each one of these analyses one can craft a very holistic, useful and reality based view of risks…one that actually can be acted upon.
But back to our little restaurant vignette…
As we all finished our food and then began the check and tip ritual, the kids continued to pick at their food ever more slowly until finally we got up to leave.
As we piled into the van for the short ride home, all of the kids seemed to lack the pep and vigor they possessed going in. My wife having that “total information radar” that all moms seem to possess noticed right away.
Perhaps it was the afternoon at the lake, perhaps it was the later bedtime of summer or perhaps it was…
At any rate, as we arrived home and realized what time it was, we thought we should start the process of showering and settling the children for the evening.
“Kids!”, I called, “Let get ready for be..”
“Not tired..Aww Dad..just ate..too early..Jessica’s bedtime is..”, came the simultaneous reply from the kids.
Have a great week,
Michael Bechara, CPA, CRMA
Managing Director
Granite Consulting Group Inc.
mbechara@consultgranite.com
www.consultgranite.com
Less Than Zero
Posted by mbechara in Uncategorized on July 24, 2012
“Whom the gods would destroy, they first make crazy” – Roman proverb
Friends and colleagues know that I am a big fan of the Eighties. See this post for more color: The Eighties
One of the more memorable films from that era was Less Than Zero featuring a young Robert Downey, Jr. Downey plays Julian, a young man in Los Angeles addicted to drugs and deep in debt to his dealer. The movie’s hero Clay, played by Andrew McCarthy, is a college student who returns home to LA to help his high school friend.
The climax of the film occurs when Julian decides to clean himself up. After a violent confrontation with his dealer, Julian escapes with Clay in his car.
“Here we go again!”, whines the peanut gallery, “Bechara is once more reminiscing about degenerate movies from a awful decade!”
Actually, I wish it was just reminiscing because as we survey today’s economic news, I half expect the President of the European Central Bank to start singing the movie’s theme song, “Going back to Cali.”
Yes folks, ECB President Mario Draghi, is considering cutting interest rates into negative territory…..yes…less than zero. As Bloomberg reports:
It took us awhile to digest the Fed’s Zero Interest Rate Policy, or ZIRP, in place here in the USA for many months, but now we are scared to death the Fed may imitate the ECB and institute the NIRP, Negative Interest Rate Policy!
Some readers may be asking the following questions at this point:
- Are people who save money that bad that they should now be forced to pay banks for holding onto their deposits?
- Why do we continue to heavily incentivize spending, debt and consumption over savings, equity and capital accumulation?
- Are the central plann…I mean policy makers, that wrapped up in their steroid infused Keynesian policies that they are willing to destroy what is left of the capital base in a final attempt to prove their economic models correct?
Actually, incentivizing debt did not start recently. We have been doing this for the past 30 years or so and like our hapless character Julian, we have become addicted to debt.
Households used debt to make up for declining incomes, governments used debt to bestow lavish benefits on politically favored groups and corporations used debt to lever up, make acquisitions and raise top line revenue at the expense of stability and long term growth.
And because corporations are our beat, lets discuss what the NIRP policy would mean for businesses. What are the risks? Well off the top of our heads:
- The time value of money would be destroyed…inverted..turned on its head. The old saying, “A dollar today is worth more than a dollar in the future” now reads “Get rid of money today because money ..now has an expiration date!”
- As corporate capital chases return we may see more speculative investment risk in corporate balance sheets as Treasurers attempt to chase return.
What about the people side of this story?
One upon a time, a dear friend gave me a book called “When Money Dies” that chronicled the German hyperinflation of the 1920s. One of the main takeaways from the book was what happens to a society when money is no longer seen as valuable.
Values and traditions are reorganized away from saving, investment and productive work towards spending, consumption and speculation. In essence the future dies along with money because of the incessant focus on getting rid of money, spending it now and making the quick buck to start they cycle over again.
Ever hear the phrase, “Living like there is no tomorrow?
In this environment, relationships suffer as people are valued only for what they can do for you right now. Relationships are for temporary convenience and people themselves are seen as disposable commodities.
Sort of like a drug addict…sort of like…Julian.
We are hopeful that ZIRP will not turn into NIRP here in the USA. The punishment of savers is bad enough under ZIRP.
Until then we continue to monitor the news, looking for signs of hope, looking for the interventions to end and for interest rates to normalize. Some say we have reached the point of no return and a final meltdown looms.
For those that remember the ending of the movie, even after finally getting away from his dealer….Julian died in the car.
Have a great week,
Michael Bechara, CPA
Managing Director
Granite Consulting Group Inc.
mbechara@consultgranite.com
www.consultgranite.com
-
You are currently browsing the archives for the Uncategorized category.
Loading...