Question for the case study below:

1) Is effective risk management possible without constructive dialogue?

Constructive Dialogue and ERM Lessons from the Financial Crisis (THOMAS H. STANTON)

The financial crisis caused immense harm. Millions of people lost their homes to foreclosure and many more lost employment and, as the stock market dropped, their retirement and investment savings. The financial and economic carnage caused by the crisis has led to increased emphasis on enterprise risk management (ERM), in the sense of identifying and addressing risks that can prevent accomplishment of a company's mission or objectives. ERM played little role in risk management of financial institutions before and during the financial crisis. In a 2005 report on the state of ERM, Anette Mikes found that "enterprise risk management remains a rather elusive and under-specified concept."1 Many large, complex financial firms, such as Citigroup and American International Group (AIG), lacked even an enterprise-wide view of risks, which is a precondition but different from ERM. Parts of those firms continued to build their exposures to subprime mortgages and other risky financial products while other parts tried to shed those risks before the crisis broke. To understand risk management at large, complex financial firms before the crisis, one must look for critical elements of ERM, but generally not for ERM itself. This chapter focuses on one critical element, constructive dialogue, which includes (1) processes for eliciting risk-related information that flows to the top of the organization where it can be addressed in decision making, and (2) full, candid, and respectful discussions of risk/reward tradeoffs. The financial crisis demonstrated how constructive dialogue was essential to promote sound decision making at a time when the expanding housing and credit bubbles had lulled many financial firms into complacency. As a staff member of the U.S. Financial Crisis Inquiry Commission (FCIC), I had the opportunity to interview CEOs, risk officers, traders, bankers, regulators, and policy makers to try to understand the difference between financial firms that successfully navigated the crisis and those that did not. FCIC interviews took place in 2010 while people, still in shock at the destruction caused by failures of financial firms and their regulators, were generally eager to tell their sides of the story. The FCIC also had access to thousands of internal documents that helped to inform our questions and establish patterns of prudent or imprudent decision making at various firms and regulators.2 When the FCIC published its final report,3 I built on its work and wrote a book, Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis (Oxford University Press, 2012). The book examines a dozen large financial firms, four that navigated the crisis successfully and eight that failed in the sense that they went out of business, were acquired on disadvantageous terms, or required government aid to stay afloat. The book asks a simple question: What were key differences in governance and management (including risk management) that distinguished the two groups of firms?

CONSTRUCTIVE DIALOGUE: THE ESSENTIAL DIFFERENCE BETWEEN FIRMS THAT NAVIGATED THE CRISIS AND THOSE THAT FAILED

One single factor distinguished the two groups: Firms that successfully navigated the crisis built a process of constructive dialogue into their decision making. When making major decisions, successful companies brought together proponents in the firm who favored a revenue-generating activity and those such as risk officers who worried about its possible disadvantages and downsides. The CEO or another senior manager encouraged a respectful exchange of views between these perspectives to gain a better understanding of the risk/reward trade-offs of the activity. These were the firms that successfully avoided exposure to unacceptable volumes of subprime mortgages and other risky products before the crisis or that shed or mitigated their exposures in a timely manner before taking majorlosses.

Successful firms had cultures that welcomed input from those concerned about risk. In the felicitous phrase of organizational development specialist, Jack Rosenblum, they recognized that "feedback is a gift." By encouraging constructive dialogue between those seeking increased profits and those concerned about risks, company leaders elicited information and obtained a more robust understanding of the contours of decisions than they otherwise would have had. Perhaps my favorite example comes from an official of a successful firm who told me, "The CEO often asks my opinion on major issues," and then added, "but he asks 200 other people their opinions, too." When he made a decision, that CEO had a strong sense of the risks and rewards that it entailed. When there was still time before the financial crisis finally broke in 2008, information flow and constructive dialogue were essential to allow a firm to avoid, shed, or hedge its exposure to toxic assets (i.e., those that looked to be safe but in fact contained major embedded risk). Classic toxic assets were AAA-rated private-label mortgage securities that appeared to give financial firms both safety and higher yield than the usual safe assets. While toxic assets were risky investments for any firm, they proved fatal for highly leveraged firms that lacked the balance sheet strength to absorb the losses.4

SUCCESSFUL FIRMS: JPMORGAN CHASE, GOLDMAN SACHS, WELLS FARGO, AND TD BANK

While ERM was not developed to the point that it is today, the elements of information flow and constructive dialogue were the essential distinguishing features between successful firms and those that failed. My book identifies four firms that successfully navigated the crisis: JPMorgan Chase, Goldman Sachs, Wells Fargo, and Toronto Dominion Bank (TD Bank). Each distinguished itself in operational competence and intelligent discipline, but with different approaches. JPMorgan Chase's story is of preparing the company to be strong enough to take advantage of long-term opportunities. Goldman's is of firmwide systems and capacity to react quickly to changes in the environment. Wells Fargo is a company with a strong culture of customer focus and restraint. And TD Bank provides the simple lesson: If you don't understand it, don't invest in it. Constructive dialogue was built into the cultures of these firms. The first important element was an emphasis on ensuring that information flowed to parts of the organization that needed it. As one JPMorgan Chase executive put it, "Jamie [Dimon] and I like to get the bad news out to where everybody can see it ... to get the dead cat on the table."5 Goldman Sachs maintained a "culture of over-communication; multiple formal and informal forums for risk discussions coupled with a constant flow of risk reports."6 Dan Sparks, formerly head of the Goldman mortgage desk, told FCIC staff that he reported bad news to the firm's top management because "Part of my job was to be sure people I reported to knew what they needed to know."7 The Wells Fargo Vision and Values Statement emphasizes risk awareness as a part of the company's culture: We want compliance and risk management to be part of our culture, an extension of our code of ethics. Everyone shapes the risk culture of our company. We encourage all team members to identify and bring risk forward. We should thank them for doing so, not penalize them. Ben Franklin was right: An ounce of prevention is worth a pound of cure.8

TD Bank's CEO, Edmund Clark, wanted to hear negative news fast:

I'm constantly saying to people: "Bring forward the bad news; the good news will surface soon enough. What I want to hear about is what's going wrong. Let's deal with it."... It's about no surprises. Any number of problems we've had to deal with could have been solved if the person had only let us know early on.... In fact [employees] joke that I'm only happy when the world's falling apart and that I'm a total pain when everything is going well.9 The second important part of effective constructive dialogue is that managers need to have a forum where they can conduct open and respectful but possibly intense debates about what the information actually means. This part of constructive dialogue has been a feature of well-run banks for a long time. Banks use a credit committee to deliberate about whether to make particular loans. Loan officers bring information about a proposed large loan to the committee. There, under the watchful eye of a senior manager, the loan officer presents the case to make the loan, followed by the underwriting department's presentation about risks that the loan involves. If the dialogue goes well, the result might be a synthesis between the two views. Instead of simply making a yes-or-no decision, the credit committee might decide to ask for more protection, such as an added guarantee or a shorter term, or more collateral, as a way to allow the transaction to go forward. The final result often can be a higher-quality decision than either the loan officer or the underwriter would make by themselves.

JPMORGAN CHASE

At JPMorgan Chase, constructive dialogue at the top management level helped protect the company from taking major losses in the financial crisis. The 15-member operating committee is a diverse group "of longtime loyalists, J.P. Morgan veterans, and outside hires." They meet monthly for intense debate about developments in the company and in the markets it serves. T The group is generally loud and unsubtle..., the atmosphere is variously described by the participants as "Italian family dinners" or "the Roman forumall that's missing is the togas." Dimon will throw out a comment like "Who had that dumb idea?" and be greeted with a chorus of "That was your dumb idea, Jamie!" "At my first meeting, I was shocked," says Bill Daley, 60, the head of corporate responsibility and a former Secretary of Commerce. "People were challenging Jamie, debating him, telling him he was wrong. It was like nothing I'd seen in a Bill Clinton cabinet meeting, or anything I'd ever seen in business."10 A similar atmosphere prevailed at monthly meetings of top management of each of JPMorgan Chase's major operating units: To make it on Dimon's team you must be able to withstand the boss's withering interrogations and defend your positions just as vigorously. And you have to live with a free-form management style in which Dimon often ignores the formal chain of command and calls managers up and down the line to gather information.11 As one participant told Fortune in 2008, Dimon was tough but open to feedback. "He understands the details completely, he loves to debate and disagree, yet he'll let you do it ... [a]s long as you know what's in Appendix 3 of your report as well as he does." In October 2006 at one of the monthly reviews, the part of JPMorgan Chase's retail operations that serviced mortgages reported a significant increase in delinquencies by subprime mortgage borrowers. Data confirmed that the trend was widespread in the subprime market and that competitors' subprime holdings were performing even worse. Other parts of the company also reported indicators that mortgage securities were increasingly troubled. Putting all of this together, Dimon issued an order to all parts of the company to shed its exposure to subprime mortgages. JPMorgan Chase took losses that were modest compared to its major competitors. As Northwestern University Professor Russell Walker concludes: In the case of JPMorgan, it was the retail banking division that shared data with the investment bank on the escalations in mortgage delinquencies. This sharing of data across business lines allowed Mr. Dimon and his corporate team to change strategy on the investment side. For many organizations, sharing information that challenges accepted norms or questions conventional wisdom is not welcomed. Other banks could have done the same as JPMorgan, but the practice of communicating risks and data across business lines was absent. The lesson, of course, is that an enterprise must be willing to communicate about risk, especially when things are going well and the risk has yet to be realized.12

GOLDMAN SACHS

Goldman Sachs has built constructive dialogue into the firm's daily processes. The firm uses mark-to-market accounting to assess the value of each trader's positions. The firm maintains a parallel structure so that a controller supervises each trader's position and marks it to market each evening. This information helps manage trading positions through devices such as internal pricing to ensure that assets do not remain on the balance sheet for too long. The information from each position is rolled up through the organization to the CFO, who obtains a timely firmwide view of positions and exposures. Goldman CFO David Viniar told the FCIC that there may be disagreements between a controller and a trader, and in such cases the controller's view is likely to prevail. The firm reported that "Dan Sparks, then head of the mortgage department, [told] senior members of the firm in an email on December 5, 2006, that the 'Subprime market [was] getting hit hard.... At this point we are down $20mm today.' For senior management, the emergence of a pattern of losses, even relatively modest losses, in a business of the firm will typically raise a red flag."13 The immediate result, Sparks explained to the FCIC, was that he suddenly received visits from senior Goldman officials who before had never bothered to learn the details of his operations. CFO Viniar convened a meeting to try to understand what was happening. Goldman's senior management decided, in Viniar's phrasing, "[t]o get closer to home" with respect to the mortgage market. In other words, in its combination of long and short positions, the firm would begin taking a more cautious and more neutral stance. It would reduce its holdings of mortgages and mortgage-related securities and buy expensive insurance protection against further losses, even at the cost of profits forgone on what had looked like an attractive position in mortgages.14 In January and February 2007 Goldman hedged its exposure to the mortgage market. The firm then closed down mortgage warehouse facilities, moved its mortgage inventory more quickly, and reduced its exposure yet further by taking on more hedges and laying off its mortgage positions. The end result was that Goldman avoided taking the substantial losses it would have suffered if it had not reacted so promptly to signs of problems. In one area, Goldman was slow to recognize emerging risk: This concerned the firm's reputation. When FCIC staff asked a Goldman risk officer who was responsible for reputational risk, the answer came back that everyone was responsible; the company had not organized to deal with reputational risk. In early 2011 the firm published a response to its problems with reputational risk, including a new committee structure for reporting potential conflicts and a code of conduct. Goldman stated that this would be integrated not only into processes of the firm, but also into its culture: The firm's culture has been the cornerstone of our performance for decades.... We must renew our commitment to our Business Principlesand above all, to client service and a constant focus on the reputational consequences of every action we take. In particular, our approach must be: not just "can we" undertake a given business activity, but "should we."15 In 2011, Goldman separated its reporting of business segments so as to distinguish investing on behalf of clients from the firm's proprietary trading on its own account, an area of public controversy that had been subject to some reputational risk in the aftermath of the financial crisis.

WELLS FARGO

Wells Fargo protected itself in the financial crisis because of a strong company culture with several important elements: (1) a general conservatism that precluded simply following the market with new products and services, or even acquisitions, until these had been tested within the firm for consistency with the company's culture and values; (2) an emphasis on developing relationships with customers rather than simply viewing sales of products and services as transactions; and (3) a decentralized structure that made heads of business units responsible for the risks of their activities. These cultural attributes helped Wells Fargo to weather the crisis more successfully than many of its peers. The focus on the customer meant that it refrained from offering the most risky mortgage products. Richard Kovacevich, then chairman of the Wells Fargo board and past CEO, told the Stanford Graduate School of Business in 2009 that the bank "did not offer any no-doc option, negative-amortization loans, to subprime borrowers. These exotic subprime mortgage loans were not only economically unsound, they were not appropriate for many borrowers. We lost 4 percent market share in our mortgage business for three years between 2005 and 2007, $160 billion in originations in 2006 alone."16 Wells Fargo supported this customer-centric approach with its core business strategy, which was to be able to cross-sell financial products to its existing customers. Again Richard Kovacevich: Consistent, organic revenue growth through cross-selling is probably Wells Fargo's most distinctive skill. Our average retail household has 5.9 products, and over one in four has over eight products. These are, by far, the highest cross-sell ratios in the industry and about twice the industry average. The logic was that if customers lost money on a risky financial product, then they would not turn to Wells Fargo for the many other financial products and services they would purchase from a trusted source. Wells Fargo also had a management style that sought to promote constructive dialogue. Kovacevich rejected hierarchical control as an effective means to promote performance. Instead, as CEO he had seen his job as: to select the best people to run [individual Wells business lines] and ... groups, let them do it, coach them so they learn even faster, and assure we have a strong internal check-and-balance audit process that verifies that they are adhering to the principles and the policies that we've agreed upon. People at the top should, above all, be leaders.... At Wells Fargo, we believe personal leadership is the key to success. We believe the answer to every problem, issue, or opportunity in our company is already known by some person or team in the company. The leader only has to find that person, listen, and help effect the change. By the way, the people with the best answers are not always the people with the most stripes. True leaders do not demand loyalty; they create it. They use conflict among diverse points of view to enable the team to reach new insights. They exert influence by reinforcing values. John Stumpf, Richard Kovacevich's successor as CEO, told the FCIC, "We believe at the company that risk is best managed as close to the customer as possible with strong oversight from independent bodies within the company."17 Part of the process of checks and balances was what Michael Loughlin, the Wells Fargo chief risk officer (CRO), called "[providing] effective challenge." He offered the FCIC several examples of how oversight from his office helped detect risk shortcomings in major business units and led to remediation and, in some cases, changes in business unit management.18 The result of the Wells Fargo culture and processes was that the company refrained from taking major losses and came through the financial crisis with greater strength than before. Wells Fargo doubled in size and, through its acquisition of Wachovia, which had failed in the crisis, became a national company.

TORONTO DOMINION BANK (TD BANK)

TD Bank is the only bank in our sample that appears to have maintained a working ERM framework before the crisis. The 2007 TD Annual Report presents the Enterprise Risk Framework and "the major categories of risk to which we are exposed, and how they are interrelated." The report defines ERM in appropriate terms: This framework outlines appropriate risk oversight processes and the consistent communication and reporting of key risks that could hinder the achievement of our business objectives and strategies.19 Among other elements of the framework, The corporate Risk Management function, headed by the Chief Risk Officer, is responsible for setting enterprise-level policies and practices that reflect the risk tolerance of the Bank, including clear protocols for the escalation of risk events and issues. The Risk Management Department monitors and reports on discrete business and enterprise-level risks that could have a significant impact.20 TD Bank provides a useful lesson about the need to surface anomalous facts, investigate them, and make a disciplined decision. While the FCIC did not interview people from TD Bank, the company's annual reports and other public information tell the story. In the early 2000s, Toronto Dominion Bank had had an active international business in structured products. Then, with little explanation, CEO Edmund Clark announced in the company's 2005 annual report, "We ... made the difficult business decision to exit our global structured products business.... While the short- term economic cost to the Bank is regrettable, I am pleased that we have taken the steps we have and that we can continue to focus on growing our businesses for the future to deliver longterm shareholder value."21 The company reported taking significant losses as it unwound its positions in 2005 and 2006. How did CEO Clark make the decision both to avoid exposure to the U.S. subprime market and to shed the firm's exposure to structured mortgage products and derivatives? ''I'm an old-school banker,'' Clark told a reporter in May 2008. ''I don't think you should do something you don't understand, hoping there's somebody at the bottom of the organization who does.''22 Clark said he spent several hours a week meeting with experts to understand the financial products being traded by the bank's wholesale banking unit. ''The whole thing didn't make common sense to me,'' Clark said. ''You're going to get all your money back, or you're going to get none of your money back. I said, 'Wow! if this ever went against us, we could take some serious losses here.'"23 Clark recalled that stock analysts at the time wrote that he was an "idiot" for taking his long-term perspective.24 Yet, as the crisis hit, the company could report that it held no exposure to U.S. subprime mortgages, no direct exposure to third-party assetbacked commercial paper except for exposure of its mutual funds and asset management group, and no direct lending exposure to hedge funds, with only nominal trading exposure.25 Because TD Bank came through the crisis intact, it was able to begin systematic expansion from its Canadian base into the U.S. market. By 2013, through a series of acquisitions, TD Bank had become one of the 10 largest U.S. banks, with branches extending along the East Coast from Maine to Florida.

FIRMS THAT FAILED TO NAVIGATE THE CRISIS

By contrast to the examples of financial firms that successfully navigated the crisis, those that failed lacked constructive dialogue in their cultures. I met with one CRO who explained her dilemma: If she kept raising concerns with management, she would become a pain in management's neck; but if she didn't raise concerns, she would be known as the CRO at an institution that blew itself up. She left the firm in 2006 and the firm failed in 2008. A distinguishing characteristic of unsuccessful firms was their pursuit of short-term growth without appropriate regard for the risks involved. In 2005-2007 both Fannie Mae and Freddie Mac decided to take on more risk and increase exposure to the subprime mortgage market just as home prices were peaking. Other firms that decided similarly around the same time included Lehman Brothers, Washington Mutual (WaMu), and Countrywide. Many of the firms that took excessive risk at the wrong time did have chief risk officers (CROs). Sometimes, the chief risk officer reported to the head of a business unit rather than to a committee of the board of directors or at least to the CEO. This muted the CRO's ability to assess risk or make recommendations that top management would hear. Some of the firms that failed either fired the CRO (Freddie Mac) or moved the CRO to a less important position at the company (Lehman) or layered the CRO far down in the company and ignored his input (Countrywide). In one major case, the corporate CRO simply lacked access to information at a part of the firm that was taking excessive risk (AIG). At many firms, ERM specialist Stephen Hiemstra explains, risk management was a compliance exercise rather than a rigorous undertaking.26 Firms that came to grief in the crisis lacked both (1) a proper flow of information from inside the organization to the top, and (2) forums for constructive dialogue, so that sound decisions could include consideration of risks as well as potential rewards.27 Classic was the experience of a Fannie Mae official who told the FCIC that his unit produced pricing models showing that Fannie Mae was not appropriately pricing the mortgages that it purchased. The official recounted that the executive vice president to whom he reported asked, "Can you show me why you think you're right and everyone else is wrong?"28 Citigroup CEO Charles Prince, only partly in jest, characterized Citigroup as not having one good culture but five or six good cultures. Prince told the FCIC about his frustration at the inability of Citigroup's business lines to communicate with one another. In an e-mail in October 2007, he wrote about Citi's "[i]ncredible lack of coordination. We really need to break down the silos!"29 An inability to communicate effectively across organizational lines meant that a firm lacked an enterprise-wide view of risks. A 2008 UBS report to shareholders on the firm's losses similarly notes the absence of strategic coordination at that institution. While the various risk functions relating to market risk, credit risk, and financial risk came together to assess individual transactions, "[i]t does not appear that these functions sought systematically to operate in a strategically connected manner."30 The CEOs of both Citigroup and AIG told the FCIC that until sometime in 2007 they were completely unaware of the financial products that almost took their firms down.31 In part this resulted from the immense size and organizational complexity of these firms. Citigroup had 350,000 employees and nearly 2,500 subsidiaries, and AIG, much smaller than other large, complex financial institutions,32consisted of 223 companies that operated in 130 countries with a total of 116,000 employees.33 Another problem was the CEO or other powerful top manager who simply refused to take feedback. The FCIC heard repeated statements that pressure from chief officers to increase market share was a problem, for example at Moody's Investors Service, which came under pressure to please issuers with its ratings, and numerous financial institutions, including AIG Financial Products, Lehman, Countrywide, and WaMu. As a European supervisor told staff in an interview, "The best guys in the banks are often the arrogant ones." The financial crisis was not the first time that executives followed success with serious lapses in judgment. Some years before the crisis, Professor Sydney Finkelstein of Dartmouth College's Tuck School of Business pointed to a pattern: Want to know one of the best generic warning signs you can look for? How about success, lots of it! . . . Few companies evaluate why business is working (often defaulting the credit to "the CEO is a genius"). But without really understanding why success is happening, it's difficult to see why it might not. You have to be able to identify when things need adjustments. Otherwise you wake up one morning, and it looks like everything went bad overnight. But it didn'tit's a slow process that can often be seen if you look.34 This observation helps to relate the credit bubble to governance and risk management: In years when house prices were appreciating and the economy displayed apparent moderation, financial firms grew and reaped generous returns, regardless of whether they had the people and systems and processes in place to ensure effective risk management. The problem was exacerbated as financial firms consolidated and became larger and more complex. CEOs of firms that made substantial profits during the credit bubble too frequently came to believe in their ability to make decisions without soliciting constructive dialogue to inform themselves. One consequence of this attitude was the diminished role of the risk function at many firms. The FCIC placed on the public record an Oliver Wyman report from early 2008 that describes "Gaps in Risk Management" at Bear Stearns, which failed shortly thereafter. Of relevance here in a long list of shortcomings was the observation that Bear Stearns had a "[l]ack of mandate for the Risk Policy Committee" and a "[l]ack of institutional stature for [the] Risk Management Group." The report bolsters the latter observation by stating, "Risk managers [are] not positioned to challenge front-office decisions."35 Clifford Rossi, who held senior risk management and credit positions at Citigroup, Washington Mutual (WaMu), Countrywide, Freddie Mac, and Fannie Mae, observed what he calls "risk dysfunction" at a number of firms. Each of these symptoms relates to the inability of risk managers to bring information to top levels of the company and to engage in a process of constructive dialogue when the company makes major decisions: Low morale and self-esteem among risk managers; Openly derisive comments and attitudes toward risk staff; High turnover in risk functions: voluntary and involuntary; Increasingly combative and aggressive posture toward risk management; Lack of stature of risk management; and Risk management viewed as a cost center.36 Based on his experience, Mr. Rossi contends that, to do their work, risk officers need "air cover" from senior officers and the board of a company (and, I would add, from regulators).

JPMORGAN CHASE AFTER THE CRISIS: THE PERILS OF HUBRIS

The problem of too much success also beset JPMorgan Chase, despite (or perhaps because of) its emergence from the financial crisis as a complex financial institution with $2.3 trillion in assets. In 2012, JPMorgan Chase unexpectedly lost $6.2 billion on operations of its London office. When news accounts broke, CEO Dimon dismissed them on an analysts call as "a tempest in a teapot." Two weeks later losses accelerated significantly, and only then did top management request an independent review of positions of the London office. In early 2013 the company published findings of the internal task force investigating the losses. Of relevance here, the task force found that the company failed to allow negative messages to rise to top management and failed to engage in timely constructive dialogue to understand the contours of the problem: "A number of ... employees ... became aware of concerns about aspects of the trading strategies at various points throughout the first quarter. However, those concerns failed to be properly considered or escalated, and as a result, opportunities to more closely examine the flawed trading strategies and risks ... were missed.... "These concerns were not fully explored. At best, insufficient inquiry was made into them and, at worst, certain of them were deliberately obscured from or not disclosed to [London] management or senior Firm management. Although in some instances, limited steps were taken to raise these issues, as noted above, no one pressed to ensure that the concerns were fully considered and satisfactorily resolved.... "[The London office's] Risk Management lacked the personnel and structure necessary to properly risk-manage the Synthetic Credit Portfolio, and as a result, it failed to serve as a meaningful check on the activities of the [office's] management and traders. This occurred through failures of risk managers (and others) both within and outside of [the office].... "As Chief Executive Officer, Mr. Dimon could appropriately rely upon senior managers who directly reported to him to escalate significant issues and concerns. However, he could have better tested his reliance on what he was told. This Report demonstrates that more should have been done regarding the risks, risk controls and personnel associated with [the London office's] activities, and Mr. Dimon bears some responsibility for that."37 The JPMorgan Chase board of directors issued its own report, emphasizing that it could not make sound decisions without access to good information: The ability of the Board or its committees to perform their oversight responsibilities depends to a substantial extent on the relevant information being provided to them on a timely basis.... Because the risks posed by the positions in the [London office] were not timely elevated to the Risk Policy Committee as they should have been or to the Board, the Board and the Risk Policy Committee were not provided the opportunity to directly address them.38 The company responded to these losses in a way that would seem to banish current hubris from its risk management and decision making processes. Top management accepted resignations from several high-ranking officers, including the chief investment officer to whom the London office reported and the firmwide chief risk officer, and terminated or accepted resignations from a number of employees of the London office. The board of directors, while expressing confidence in how he ultimately responded to the crisis, cut Mr. Dimon's 2012 compensation by 50 percent.

CONCLUSION

The JPMorgan Chase example is instructive. Past success doesn't always predict success in the future. Not only is constructive dialogue an essential part of a company's culture, but it also must be continually nurtured by top management to ensure that it endures. If it is not embedded in the company's culture, constructive dialogue tends to be displaced by the drive for revenues, profits, market share, and the substantial personal remuneration that these bring for top officials of large, complex financial institutions and their most profitable units. This leads to one final conclusion with respect to large, complex financial institutions, or other large, complex firms that require high-quality decision making to protect the public from major harm: Better decision making is essential in today's increasingly complicated world. Ultimately, if constructive dialogue is not part of a company's culture, then the company's regulators will need to insist on it. The crisis and its immense costs suggest that companies should change their approach and try to listen to their supervisors and consider the merits of supervisory feedback. While regulators may not have the depth of expertise or access to detailed information available to managers in a large financial institution, feedback from supervisors can sometimes help to improve decisions merely by posing the right questions and pursuing the answers. In the end, constructive dialogue from a regulator may be the only way for overbearing top company managers to receive the feedback that they need in order to make better decisions and to protect the public's health, safety, and economic well-being.39