By Cenen Herrera
Writing From Chico, CA, USA
10 September 2009 - Thursday
I had a work assignment in the city of Chico, CA from 8 September, Tuesday to 10 September, Thursday, 2009. According to Wikipedia, Chico is the most populous in Butte County, California, United States, the population of which is close to 100,000. Chico is home to both Chico State University and Bidwell Park, one of the country's 25 largest municipal parks and the 13th largest municipally-owned park. Our non-office location was in downtown Chico at the corner of Broadway and Fourth Streets.
Chico is about a three-hour drive from San Francisco, and the view across the counties was typified by a series of barren lands and a number of two-way streets. I could vividly recall that not so long ago, i.e., less than 10 years, I used to travel in similar two-way streets to Sogod, Southern Leyte, Philippines and Bulusan, Sorsogon also in the Philippines. With a background of folk songs on our way to Chico, it made my day-dreaming complete while I quietly sat as a passenger in the front seat of the car we used for the trip. One striking observation I had during this trip to Chico was that while cows roamed around the barren lands, carabaos took their place in the Philippines.
Noted business strategies Philip Kotler and John Caslione, in their book Chaotic, present an argument that the troubled times that challenge business today are not an aberration, but the new face of the normal. In fact, they said that the economic downturn is part of the Age of Turbulence, where both risk and opportunity are quickly felt around the world, now inexorably linked by globalism and technology. Further, both argued that it’s a world that chews up the unprepared, but rewards the prepared – those robust companies or individuals that have the ability to quickly anticipate and effectively respond to potential threats.
Against the background of the chaotic paradigm described in the preceding paragraph, the strategic gambit that allowed us to complete our audit work in Chico was mainly brought about by the following: (i) the leadership experience of my Audit Guru in hastily planning our work assignment, i.e, we barely had an hour to discuss the work assignment; (ii) using technology to the fullest, i.e., making use of existing software available in storing the client’s database and creatively producing analytical frameworks, and (iii) the use of professional audit templates that we have painstakingly developed prior to the engagement.
The lessons learned from our business trip to Chico could be summed up in one sentence: “Speed combined with technical experience and professional outlook, i.e. a combination of professional patience, positive attitude, and willingness to learn and accept change, could spell out the desired outcome in any audit engagement.” The bottom-line is to adopt a strategic winning gambit at the fastest time possible.
Strategy & Stewardship Consultant in International Finance
Our Professional Mantra: Ethical Discipline, Theoretical Grounding, & Winning Values!
Friday, September 11, 2009
Tuesday, May 19, 2009
Chess and Linguistic Gambits in Finance
By Cenen Herrera
Writing from the City of Williams, Northern California
Linguistic gambits abound in the business world. They comprise of high-value sacrifices that produce the ultimate good for all stakeholders, i.e., tricky combination and winning lines. In the world of finance, a number of seemingly sophisticated financial planning tools exist and, in my view, they almost always carry a sense of linguistic gambit. For example, scenario planning and stress testing, simulation analysis and shock scenarios are common terms used in financial planning. These financial tools reveal that they are all based on assumptions about important variables that could have an impact on future results of operations. As such, the approach that an organization could adopt would vary widely in scope and breadth, e.g., use of simulation techniques. In addition, it could explore the use of simple smoothing techniques to multivariate statistics. The bottom-line in financial planning is to be able to adopt the appropriate combination and winning lines for the organization to maximize its stakeholders’ value.
Chess is my favored sport. I love to play chess because it improves my memory, and makes me better prepared to face the future. It is in playing chess that I was introduced to the word gambit. Webster defines gambit as a chess opening in which a player risks one or more pawns or a minor piece to gain a positional advantage. Playing chess makes me experience the rigors of how to plan best for the future, which I find very relevant to financial planning, accounting, and my new found love – auditing.
I find chess an indispensable tool for enhancing my financial planning, accounting and auditing skills.
Member:
DLS71, LSGH75 and DLSU79 NCAA Chess Team - Animo La Salle !!!
Writing from the City of Williams, Northern California
Linguistic gambits abound in the business world. They comprise of high-value sacrifices that produce the ultimate good for all stakeholders, i.e., tricky combination and winning lines. In the world of finance, a number of seemingly sophisticated financial planning tools exist and, in my view, they almost always carry a sense of linguistic gambit. For example, scenario planning and stress testing, simulation analysis and shock scenarios are common terms used in financial planning. These financial tools reveal that they are all based on assumptions about important variables that could have an impact on future results of operations. As such, the approach that an organization could adopt would vary widely in scope and breadth, e.g., use of simulation techniques. In addition, it could explore the use of simple smoothing techniques to multivariate statistics. The bottom-line in financial planning is to be able to adopt the appropriate combination and winning lines for the organization to maximize its stakeholders’ value.
Chess is my favored sport. I love to play chess because it improves my memory, and makes me better prepared to face the future. It is in playing chess that I was introduced to the word gambit. Webster defines gambit as a chess opening in which a player risks one or more pawns or a minor piece to gain a positional advantage. Playing chess makes me experience the rigors of how to plan best for the future, which I find very relevant to financial planning, accounting, and my new found love – auditing.
I find chess an indispensable tool for enhancing my financial planning, accounting and auditing skills.
Member:
DLS71, LSGH75 and DLSU79 NCAA Chess Team - Animo La Salle !!!
Friday, November 21, 2008
Sunday, September 28, 2008
Simple Analytics of the Financial Crisis
28 September 2008
by Cenen Herrera
Writing from Bracknell, Berkshire, United Kingdom
Understanding a bank’s operation starts with a simple balance sheet analysis. The typical balance sheet of a bank, i.e., large or small, would normally comprise of four main components:
Earning assets (loans and liquid) and non-earning assets (property, plant and equipment and others) on its left side, while liabilities and equity will be on its right side. Asset mix will be typically different when compared with its liability-equity mix. For example, a liability-equity mix of 80/20 would be compared to a 90/10 earning/non-earning asset mix. This means that the pre-shock financial scenario (before the sub-prime lending contagion) would typically have a large proportion of earning assets when compared to the total asset portfolio. An example is provided below.
Simplified Balance Sheet (pre-shock scenario)
[Rounded to the nearest billion of currency]
Earning Assets -------90-----Liabilities -------------------80
Non-Earning Assets --10-----Equity ----------------------20
Total Assets --------100-----Total Liabilities & Equity----100
The sub-prime lending financial shock gave rise to massive loan defaults arising mainly from the inability of bank clients to pay the debt service payments due on their housing loans. The corresponding market decline of housing prices led to borrowers defaulting on their loans instead of holding to their properties which were mortgaged to banks at much higher-than-market price. In the post-shock scenario, earning assets had been substantially reduced as a result of massive loan defaults giving rise to a “debt-overhang scenario” (where liabilities had no matching earning assets). Thus, bank failure was a result mainly of the inability of the institution to meet its maturing obligations, i.e., liability exceeding by large amounts the bank’s earning assets. Using the example presented earlier, a possible view of the balance sheet accounts after the post-shock scenario is provided below:
Simplified Balance Sheet (post-shock scenario)
[Rounded to the nearest billion of currency]
Earning Assets--------- 90--Liabilities----------------- -80
Loan Losses
from Sub-prime*------ (70)
Non-Earning Assets-- - 10 --Equity Beginning – Loan--- 20
----------------------------Losses from Sub-prime* --(70)
Total Assets----------- 30--Total Liabilities & Equity----30
*Note that earning assets were reduced by 70 as a result of loan losses, but liability remains at 80. Thus, negative equity stood at 50 [the amount of deficit that must be considered in business recovery].
In my view, it is expected that very few market participants would have avoided the current financial difficulties considering that such structured portfolio was a typical loan product of bank lending activities during the pre-shock scenario. Thus, market recovery appears to be dependent on a large-scale financial rescue program that may be considered as an inevitable exogenous variable in the post-shock scenario.
by Cenen Herrera
Writing from Bracknell, Berkshire, United Kingdom
Understanding a bank’s operation starts with a simple balance sheet analysis. The typical balance sheet of a bank, i.e., large or small, would normally comprise of four main components:
Earning assets (loans and liquid) and non-earning assets (property, plant and equipment and others) on its left side, while liabilities and equity will be on its right side. Asset mix will be typically different when compared with its liability-equity mix. For example, a liability-equity mix of 80/20 would be compared to a 90/10 earning/non-earning asset mix. This means that the pre-shock financial scenario (before the sub-prime lending contagion) would typically have a large proportion of earning assets when compared to the total asset portfolio. An example is provided below.
Simplified Balance Sheet (pre-shock scenario)
[Rounded to the nearest billion of currency]
Earning Assets -------90-----Liabilities -------------------80
Non-Earning Assets --10-----Equity ----------------------20
Total Assets --------100-----Total Liabilities & Equity----100
The sub-prime lending financial shock gave rise to massive loan defaults arising mainly from the inability of bank clients to pay the debt service payments due on their housing loans. The corresponding market decline of housing prices led to borrowers defaulting on their loans instead of holding to their properties which were mortgaged to banks at much higher-than-market price. In the post-shock scenario, earning assets had been substantially reduced as a result of massive loan defaults giving rise to a “debt-overhang scenario” (where liabilities had no matching earning assets). Thus, bank failure was a result mainly of the inability of the institution to meet its maturing obligations, i.e., liability exceeding by large amounts the bank’s earning assets. Using the example presented earlier, a possible view of the balance sheet accounts after the post-shock scenario is provided below:
Simplified Balance Sheet (post-shock scenario)
[Rounded to the nearest billion of currency]
Earning Assets--------- 90--Liabilities----------------- -80
Loan Losses
from Sub-prime*------ (70)
Non-Earning Assets-- - 10 --Equity Beginning – Loan--- 20
----------------------------Losses from Sub-prime* --(70)
Total Assets----------- 30--Total Liabilities & Equity----30
*Note that earning assets were reduced by 70 as a result of loan losses, but liability remains at 80. Thus, negative equity stood at 50 [the amount of deficit that must be considered in business recovery].
In my view, it is expected that very few market participants would have avoided the current financial difficulties considering that such structured portfolio was a typical loan product of bank lending activities during the pre-shock scenario. Thus, market recovery appears to be dependent on a large-scale financial rescue program that may be considered as an inevitable exogenous variable in the post-shock scenario.
Saturday, January 26, 2008
Financial Shocks, Risk Bearing Capacity and Social Responsibility
By Cenen Herrera
Writing from Martinez, San Francisco Bay Area
The recent financial shocks, i.e., financial institutions adversely affected by the sub-prime contagion and the large French bank rogue trader scandal of about $7 billion, demonstrated the importance of an institution’s risk bearing capacity and social responsibility. Risk bearing capacity represents the sum of net income retained by the institution over time plus freely usable paid-in capital contributed by its shareholders minus special reserves divided by the sum of its risk assets. Social responsibility is the ethical response of an institution to society in light of these financial shocks.
Strategic management provides the platform for projecting the level of risk bearing capacity that would be appropriate in meeting regulatory standards, e.g., Basel II requirements, and the planned cushion needed to protect an institution from expected and unexpected losses. On the one hand, expected losses such as bad debt expenses projected during an accounting period, e.g., after applying a probabilistic or non-probabilistic methodology, are viewed as part of operational expenses. On the other hand, unexpected losses are viewed as the risk of doing business. The adverse impact of the sub-prime contagion and the large French bank rouge trader scandal are examples of unexpected losses, i.e., risks of doing business. Both events (expected and unexpected losses) are traditionally considered in crafting the long-term plans of an institution. However, the magnitude and intensity of the recent financial shocks may have been extremely difficult to consider in the course of an ordinary strategic planning exercise. While sensitivity analysis and scenario planning tools provide the platforms for considering the degree of financial shocks that could be absorbed given a particular level of risk bearing capacity, adequate and effective controls are also needed to ensure that strategic plans are executed within the boundaries of the planning framework.
At the end of the day, what mattered most was the social responsibility demonstrated by the affected institutions in addressing the repercussions of the financial shocks, i.e., adverse impact of the sub-prime contagion and the French bank rogue trader scandal. Protecting the overall interest of the stakeholders goes beyond the metrics of risk bearing capacity. The affected institutions clearly demonstrated their social responsibility by prioritizing renewal efforts in bringing back normalcy to their operations.
At least two lessons emerged from the recent financial shocks: (i) the underpinnings of good governance such as character and reputation are invariably linked to performance, i.e., adverse impact of sub-prime contagion and the French rogue trader scandal are both governance and risk management issues, and (ii) the accompanying financial losses highlight the importance of an institution’s risk bearing capacity in meeting expected and unexpected losses, as well as the need to go beyond established controls in ensuring the effectiveness of risk management.
Writing from Martinez, San Francisco Bay Area
The recent financial shocks, i.e., financial institutions adversely affected by the sub-prime contagion and the large French bank rogue trader scandal of about $7 billion, demonstrated the importance of an institution’s risk bearing capacity and social responsibility. Risk bearing capacity represents the sum of net income retained by the institution over time plus freely usable paid-in capital contributed by its shareholders minus special reserves divided by the sum of its risk assets. Social responsibility is the ethical response of an institution to society in light of these financial shocks.
Strategic management provides the platform for projecting the level of risk bearing capacity that would be appropriate in meeting regulatory standards, e.g., Basel II requirements, and the planned cushion needed to protect an institution from expected and unexpected losses. On the one hand, expected losses such as bad debt expenses projected during an accounting period, e.g., after applying a probabilistic or non-probabilistic methodology, are viewed as part of operational expenses. On the other hand, unexpected losses are viewed as the risk of doing business. The adverse impact of the sub-prime contagion and the large French bank rouge trader scandal are examples of unexpected losses, i.e., risks of doing business. Both events (expected and unexpected losses) are traditionally considered in crafting the long-term plans of an institution. However, the magnitude and intensity of the recent financial shocks may have been extremely difficult to consider in the course of an ordinary strategic planning exercise. While sensitivity analysis and scenario planning tools provide the platforms for considering the degree of financial shocks that could be absorbed given a particular level of risk bearing capacity, adequate and effective controls are also needed to ensure that strategic plans are executed within the boundaries of the planning framework.
At the end of the day, what mattered most was the social responsibility demonstrated by the affected institutions in addressing the repercussions of the financial shocks, i.e., adverse impact of the sub-prime contagion and the French bank rogue trader scandal. Protecting the overall interest of the stakeholders goes beyond the metrics of risk bearing capacity. The affected institutions clearly demonstrated their social responsibility by prioritizing renewal efforts in bringing back normalcy to their operations.
At least two lessons emerged from the recent financial shocks: (i) the underpinnings of good governance such as character and reputation are invariably linked to performance, i.e., adverse impact of sub-prime contagion and the French rogue trader scandal are both governance and risk management issues, and (ii) the accompanying financial losses highlight the importance of an institution’s risk bearing capacity in meeting expected and unexpected losses, as well as the need to go beyond established controls in ensuring the effectiveness of risk management.
Wednesday, July 04, 2007
“Three Levels of Heroism”
by Cenen Herrera
Writing from Martinez, San Francisco Bay Area
First Level of Heroism: Embracing the Winning Habits - I use Stephen Covey’s 8 winning habits as my baseline reference point to describe what I consider as the first level of heroism: (i) Be Proactive; (ii) Know the End before you begin any project; (iii) Know your Priorities; (iv) Learn to always adopt a Win-Win Solution; (v) Understand Others Before You Understand Yourself; (vi) Learn to Achieve Synergy; (vii) Continuously Sharpen Your Saw i.e., adopt a continuous learning mode, and (viii) Find your voice and allow others to find theirs. Izaak Walton indicated that God has two dwelling places: (i) in Heaven and (ii) in the Heart of a meek and thankful server. My advice to the young: Learn by heart the winning habits of Stephen Covey. After learning such habits, be meek and thankful.
Second Level of Heroism: Mastering the Championship Anchor – To become a Champion is to consistently win in the trials of life. One must not be overwhelmed by a big win or by the inevitability of an impeding check mate, i.e., a losing situation. Life is not a one-time event, but a series of challenges. The championship anchor begins with a passion to inspire your sweet spot (please see John C. Maxwell’s book titled “Talent is Never Enough”). It then identifies one’s development drivers, which are your strengths and your commitment to a positive direction that will ultimately become your benefit engine, i.e., source of livelihood. Competitive professional skills are then transformed into development objects. Such transformation becomes the ultimate leadership skill, i.e., converting one’s highly successful benefit engine into a philanthropic leadership anchor. Philanthropic activity, after all, is the Champion’s favorite past time.
Third Level of Heroism: Demonstrating a Constituency-Focused Heroism – Striking a balance among risky variables in one’s service function is the biggest challenge in the third level of heroism. This means engaging mostly in competency enhancing activities without measuring the intensity of one’s sacrifices. The third level of heroism goes beyond the metrics of performance and focuses on the construct “constituency development” (please see my vision/mission statement) as the seamless transformation from a chaotic interregnum (please see the book titled “Firms of Endearment: How World Class Companies Profit From Passion & Purpose by Rajendra S. Sisodia, David B. Wolfe & Jagdish N. Sheth”) to a paradigmatic governance structure. Demonstrating a constituency-focused heroism involves a firm commitment to providing professional care, ethical protection, and development opportunities for those who have less in life.
Writing from Martinez, San Francisco Bay Area
First Level of Heroism: Embracing the Winning Habits - I use Stephen Covey’s 8 winning habits as my baseline reference point to describe what I consider as the first level of heroism: (i) Be Proactive; (ii) Know the End before you begin any project; (iii) Know your Priorities; (iv) Learn to always adopt a Win-Win Solution; (v) Understand Others Before You Understand Yourself; (vi) Learn to Achieve Synergy; (vii) Continuously Sharpen Your Saw i.e., adopt a continuous learning mode, and (viii) Find your voice and allow others to find theirs. Izaak Walton indicated that God has two dwelling places: (i) in Heaven and (ii) in the Heart of a meek and thankful server. My advice to the young: Learn by heart the winning habits of Stephen Covey. After learning such habits, be meek and thankful.
Second Level of Heroism: Mastering the Championship Anchor – To become a Champion is to consistently win in the trials of life. One must not be overwhelmed by a big win or by the inevitability of an impeding check mate, i.e., a losing situation. Life is not a one-time event, but a series of challenges. The championship anchor begins with a passion to inspire your sweet spot (please see John C. Maxwell’s book titled “Talent is Never Enough”). It then identifies one’s development drivers, which are your strengths and your commitment to a positive direction that will ultimately become your benefit engine, i.e., source of livelihood. Competitive professional skills are then transformed into development objects. Such transformation becomes the ultimate leadership skill, i.e., converting one’s highly successful benefit engine into a philanthropic leadership anchor. Philanthropic activity, after all, is the Champion’s favorite past time.
Third Level of Heroism: Demonstrating a Constituency-Focused Heroism – Striking a balance among risky variables in one’s service function is the biggest challenge in the third level of heroism. This means engaging mostly in competency enhancing activities without measuring the intensity of one’s sacrifices. The third level of heroism goes beyond the metrics of performance and focuses on the construct “constituency development” (please see my vision/mission statement) as the seamless transformation from a chaotic interregnum (please see the book titled “Firms of Endearment: How World Class Companies Profit From Passion & Purpose by Rajendra S. Sisodia, David B. Wolfe & Jagdish N. Sheth”) to a paradigmatic governance structure. Demonstrating a constituency-focused heroism involves a firm commitment to providing professional care, ethical protection, and development opportunities for those who have less in life.
Thursday, April 05, 2007
“Diversity Management: An Evolving Challenge for the Third Millennium”
by Cenen Herrera
Writing from Martinez, San Francisco Bay Area
Diversity Management (DM) is all about managing differences in culture, behavior, orientation and the related tensions that arise as a result of such gaps. DM has become an evolving challenge for organizations with a multi-cultural working environment. The new-age Governance Champion has constantly encountered this phenomenon in the corporate world as one of the most pressing challenges of this millennium.
Traditionally, organizations have designed their ideal controls to match the best practices of the industry. Best practice is a benchmark often used by business organizations in rating the effectiveness of their operating performance. But what is best practice? One working definition indicates that best practices are those that produce outstanding results, i.e., positive results that exceeded targets. Best practice today could be different tomorrow in view of technological advancements, refinements in doing things, innovations, or even simply a change in mindset or lifestyle. Thus, best practice could be viewed as an evolving paradigm.
The new-age Governance Champion role is to perform the appropriate oversight in the control environment. Embracing the best practice mode has become an overarching objective for most Governance Champions in order to achieve a triple A advantage: 1. Attitude – Acquiring the attitude appropriate for the business environment to achieve and exceed the desired results; 2. Aptitude – Maintaining a leadership aptitude that continuously aligns business activities with best practices; and 3. Arbitrage – seeking risk-less profit making activities through strategic decisions in an uneven market opportunities.
As a result of having a multi-cultural working environment, aligning one’s corporate habits to best practices has become extremely challenging in light of the diversity of views and practices within an organization. The reaction from the Governance Champion is to adopt an effective Diversity Management Program. Effective diversity management means that Top Management sets the tone to continuously learn how to transform the working habits of multi-cultural staff into a one-mindset corporate identity, while respecting individual differences.
Writing from Martinez, San Francisco Bay Area
Diversity Management (DM) is all about managing differences in culture, behavior, orientation and the related tensions that arise as a result of such gaps. DM has become an evolving challenge for organizations with a multi-cultural working environment. The new-age Governance Champion has constantly encountered this phenomenon in the corporate world as one of the most pressing challenges of this millennium.
Traditionally, organizations have designed their ideal controls to match the best practices of the industry. Best practice is a benchmark often used by business organizations in rating the effectiveness of their operating performance. But what is best practice? One working definition indicates that best practices are those that produce outstanding results, i.e., positive results that exceeded targets. Best practice today could be different tomorrow in view of technological advancements, refinements in doing things, innovations, or even simply a change in mindset or lifestyle. Thus, best practice could be viewed as an evolving paradigm.
The new-age Governance Champion role is to perform the appropriate oversight in the control environment. Embracing the best practice mode has become an overarching objective for most Governance Champions in order to achieve a triple A advantage: 1. Attitude – Acquiring the attitude appropriate for the business environment to achieve and exceed the desired results; 2. Aptitude – Maintaining a leadership aptitude that continuously aligns business activities with best practices; and 3. Arbitrage – seeking risk-less profit making activities through strategic decisions in an uneven market opportunities.
As a result of having a multi-cultural working environment, aligning one’s corporate habits to best practices has become extremely challenging in light of the diversity of views and practices within an organization. The reaction from the Governance Champion is to adopt an effective Diversity Management Program. Effective diversity management means that Top Management sets the tone to continuously learn how to transform the working habits of multi-cultural staff into a one-mindset corporate identity, while respecting individual differences.
Friday, December 15, 2006
“Due Professional Patience and Granular Representation are Important Components of Good Governance”
by Cenen Herrera
Writing from Martinez, San Francisco Bay Area
Granular representation or transparency is opening up the book of your life to others while due professional patience is maintaining your leading-edge professional composure in distressful situations. The purpose of such heroic acts is to provide readers of your life, i.e., your stakeholders, an opportunity to learn from your service experience. Service opportunities after all, are the overarching deliverables for professional auditors. One needs only to embrace the value of due professional patience and granular representation to filter out the best attributes that could make life developmentally meaningful and experience worthy.
Ms. Rosabeth Moss Kanter (Harvard Business School Professor and HBR Editor) once said that there are four Fs that underpin effective organizational management: (i) Focus, (ii) Flexibility, (iii) Fast, and (iv) Friendly. Later on in my governance experience, I learned about the fifth F which is Future Value. To be effective, governance must have a Future value to generate the advantage, i.e., economic, social, environmental or otherwise, in order to sustain a high level of developmental living.
"It is a wise father that knows his own child." - William Shakespeare, The Merchant of Venice, Act 2, Scene 2. Shakespeare's sentiment on parenthood is applicable to due professional patience and granular representation because it is also true to say: "It is a wise person who knows his stakeholders." The relationship between business performance and good governance will always be the subject of interest for professional researchers so long as the business person believes in discipline as an overriding form of developmental living.
Writing from Martinez, San Francisco Bay Area
Granular representation or transparency is opening up the book of your life to others while due professional patience is maintaining your leading-edge professional composure in distressful situations. The purpose of such heroic acts is to provide readers of your life, i.e., your stakeholders, an opportunity to learn from your service experience. Service opportunities after all, are the overarching deliverables for professional auditors. One needs only to embrace the value of due professional patience and granular representation to filter out the best attributes that could make life developmentally meaningful and experience worthy.
Ms. Rosabeth Moss Kanter (Harvard Business School Professor and HBR Editor) once said that there are four Fs that underpin effective organizational management: (i) Focus, (ii) Flexibility, (iii) Fast, and (iv) Friendly. Later on in my governance experience, I learned about the fifth F which is Future Value. To be effective, governance must have a Future value to generate the advantage, i.e., economic, social, environmental or otherwise, in order to sustain a high level of developmental living.
"It is a wise father that knows his own child." - William Shakespeare, The Merchant of Venice, Act 2, Scene 2. Shakespeare's sentiment on parenthood is applicable to due professional patience and granular representation because it is also true to say: "It is a wise person who knows his stakeholders." The relationship between business performance and good governance will always be the subject of interest for professional researchers so long as the business person believes in discipline as an overriding form of developmental living.
Friday, October 27, 2006
Governance and Development Living
by Cenen Herrera
Writing From Martinez, San Francisco Bay Area, CA
Rating is evaluating probabilities. Whenever there is greater than zero probability of losing something, we are faced with risks. In virtually all aspects of life, each of us has greater than zero probability of losing something. The question that arises then is: “what is that something?”
In an attempt to manage well our life's balance sheet, we go for higher risk activities expecting to derive some benefits in the future. Such benefits are the expected returns from the sacrifices or risk-taking activities that we engage in at present. Whether we like it or not, we are rated by our peers and the members of our community, i.e., our family, friends, bosses or subordinates, teachers, students, and practically all the stakeholders of our life. The rating that we get from our stakeholders is actually our shadow. Great, good or not so good, the shadow of our life could spell the difference between success and failure. The important thing to remember is that Best Behavior is Good Governance, and embracing the life-time developmental mode really means being genuinely humble in accepting our mistakes whenever we are engaged in challenging enhancement opportunities.
Development living is caring for others and leveraging from others strengths. Ratings indicate how we are doing in this life. If the rating comes from our loved ones, we would normally attribute them to our genes, i.e., our parents’ traits or character. On the other hand, if the rating comes from our boss, peer or subordinate, we would feel our worth or our worthlessness depending on what level of rating we receive. The good governance mindset continuously allows us to embrace genuine personal humility by possessing that fierce resolve to be professionally patient in transforming our behavioral patterns from mediocrity to first degree perfection.
First degree perfection is the ultimate goal of good governance. It is a state of mind that brings the best out of one’s character and actual works that underpin the driver of creative change.
Writing From Martinez, San Francisco Bay Area, CA
Rating is evaluating probabilities. Whenever there is greater than zero probability of losing something, we are faced with risks. In virtually all aspects of life, each of us has greater than zero probability of losing something. The question that arises then is: “what is that something?”
In an attempt to manage well our life's balance sheet, we go for higher risk activities expecting to derive some benefits in the future. Such benefits are the expected returns from the sacrifices or risk-taking activities that we engage in at present. Whether we like it or not, we are rated by our peers and the members of our community, i.e., our family, friends, bosses or subordinates, teachers, students, and practically all the stakeholders of our life. The rating that we get from our stakeholders is actually our shadow. Great, good or not so good, the shadow of our life could spell the difference between success and failure. The important thing to remember is that Best Behavior is Good Governance, and embracing the life-time developmental mode really means being genuinely humble in accepting our mistakes whenever we are engaged in challenging enhancement opportunities.
Development living is caring for others and leveraging from others strengths. Ratings indicate how we are doing in this life. If the rating comes from our loved ones, we would normally attribute them to our genes, i.e., our parents’ traits or character. On the other hand, if the rating comes from our boss, peer or subordinate, we would feel our worth or our worthlessness depending on what level of rating we receive. The good governance mindset continuously allows us to embrace genuine personal humility by possessing that fierce resolve to be professionally patient in transforming our behavioral patterns from mediocrity to first degree perfection.
First degree perfection is the ultimate goal of good governance. It is a state of mind that brings the best out of one’s character and actual works that underpin the driver of creative change.
Sunday, October 01, 2006
Is Compliance a Governance Issue?
by Cenen herrera
Writing from Martinez, San Francisco Bay Area
As a result of some uncontrolled deviations from good human behavior in the early part of this new millennium, Compliance has become an overarching objective of regulatory bodies in the banking industry. The regulatory alphabet soup provides a list of all the compliance rules that a national bank should adhere to in its operations. Some of the core principles that underpin most of these regulations focus on the following:
.
(i)Consumer Protection – Banks are public institutions which have extensive dealings with people in the community where it is of service. Some banks may be serving several communities even though these communities are not located within their business office, i.e. electronic banking transactions. Thus, it is important that certain rules are adopted in order to protect public interest and to preserve the integrity of legitimate financial transactions.
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(ii)Bank Secrecy, Anti-Money Laundering and Security – In any fiduciary undertaking, security is of great interest. Building relationship is the primary business of any banking institution. That relationship is anchored on trust which provides the public a baseline confidence for enabling depositors and borrowers to carry out their business with the bank of their choice. A good society will always encourage the preservation of ethical transactions in its banking industry, meaning, it will prohibit banking transactions that arise out of illegitimate or illegal sources. Further, legitimate banking transactions should be afforded not only with top-of-the line security measures but treated with respect in terms of preserving the secrets of a prudent Bank client.
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(iii)Social Responsibility – In the Consumer Reinvestment Act, banks are provided guidelines on how to demonstrate the parental care that is expected from a responsible business partner in the community. Banks are social institutions that provide ample opportunities to the community it serves in terms of employment, housing and other developmental projects.
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At the end of the day, compliance is a governance issue. This implies that there must be some basic rules that players in a particular industry should observe to meet the expectations of a Good Society. Banks are generators of intermediary benefits and how they allocate the benefits that they generate from their operations is of great interest to its stakeholders.
Writing from Martinez, San Francisco Bay Area
As a result of some uncontrolled deviations from good human behavior in the early part of this new millennium, Compliance has become an overarching objective of regulatory bodies in the banking industry. The regulatory alphabet soup provides a list of all the compliance rules that a national bank should adhere to in its operations. Some of the core principles that underpin most of these regulations focus on the following:
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(i)Consumer Protection – Banks are public institutions which have extensive dealings with people in the community where it is of service. Some banks may be serving several communities even though these communities are not located within their business office, i.e. electronic banking transactions. Thus, it is important that certain rules are adopted in order to protect public interest and to preserve the integrity of legitimate financial transactions.
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(ii)Bank Secrecy, Anti-Money Laundering and Security – In any fiduciary undertaking, security is of great interest. Building relationship is the primary business of any banking institution. That relationship is anchored on trust which provides the public a baseline confidence for enabling depositors and borrowers to carry out their business with the bank of their choice. A good society will always encourage the preservation of ethical transactions in its banking industry, meaning, it will prohibit banking transactions that arise out of illegitimate or illegal sources. Further, legitimate banking transactions should be afforded not only with top-of-the line security measures but treated with respect in terms of preserving the secrets of a prudent Bank client.
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(iii)Social Responsibility – In the Consumer Reinvestment Act, banks are provided guidelines on how to demonstrate the parental care that is expected from a responsible business partner in the community. Banks are social institutions that provide ample opportunities to the community it serves in terms of employment, housing and other developmental projects.
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At the end of the day, compliance is a governance issue. This implies that there must be some basic rules that players in a particular industry should observe to meet the expectations of a Good Society. Banks are generators of intermediary benefits and how they allocate the benefits that they generate from their operations is of great interest to its stakeholders.
Tuesday, August 01, 2006
Why Organizational Governance is Important
by Cenen herrera
Writing from Martinez, San Francisco Bay Area, CA
Writing from Martinez, San Francisco Bay Area, CA
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Let me borrow the definition of the Institute of Internal Auditors in defining organizational governance (commonly known as corporate governance) as the policies, processes and structures used by organizations to control and monitor its activities, achieve its objectives, and protect the interest of its stakeholders in a manner consistent with appropriate ethical standards. Indeed, organizational governance has gone a long way since it was formally recognized as an important component of scientific management.
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In our doctoral class at De La Salle University, we debated much on how a third world country such as the Philippines could effectively adopt an organizational governance structure that could satisfy the needs of all stakeholders of a company given that family based organizations dominate the great majority of Philippine companies. There are two good reasons why organizational governance is difficult to apply in the Philippines. First, like other corporate rules of business, regulatory guidance on Philippine governance is a codified version of the US governance code, which has been developed to cater mostly on the needs of a country which has a different level of business maturity and exposure. Second, while the Philippine governance code is aligned with internationally accepted good governance principles, e.g. the Cadbury Report and Sarbanes Oxley Act, experience on good governance among business players in the international field is substantially varied. This means that institutional differences could arise merely as a result of cross-cultural upbringing.
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The question that arises at this point is whether organizational governance could be viewed as a principal - agent relationship that traditionally characterized the Anglo-American model or the Franco-German model of organizational governance, which focuses on the stakeholder approach. Existing literature cites these concepts as the Agency Theory, i.e., principal-agent relationship, or the Stewardship Theory, i.e., the stakeholder approach.
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We have learned from our management doctoral class under Dr. Benito Teehankee (DBA Director of De La Salle University) that agency theory is the Governance Champion's choice of organizational relationship in Corporate Philippines. We also learned from Dr. Ben's class about the intricacies that evolve over time when organizations embrace the principles of stakeholder theory, i.e., where each stakeholder plays a pivotal role in influencing the organizational structure of the entity.
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Chris Argyris once said that integrative thinking means that your theory in use, i.e., actual performance, should be aligned with your espoused values. Experience generated from actual performance should serve as the foundation for crafting policy directions that could help achieve one's vision in life. Against this backdrop, during our class with Bro. Rafe Donato, FSC at De La Salle, I came to know the true meaning of integrity, and that is "doing what is right." Integrity is an important component of Good Governance. The other three equally important components are possessing an independent mind, transparency and accountability. These governance attributes form the foundation of Good Moral Character, which is the only critical requirement for winning the championship anchor that most people call Luck.
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I was extremely privileged to be given a rare opportunity to renew my professional career in what Vincent Paele considers as the greatest country where one could live today, i.e., the United States of America. It is only now that I have come to realize the value of the third discipline, i.e., 1.) possessing an intense professional will; 2.) embracing extreme humility; and 3.) learning to balance the paradoxes of developmental living. Indeed, in Corporate America each staff is called upon to act as a true catalyst of change, i.e., one who appreciates diversity, one who provides equal service opportunity, and one who embraces the life-time learning mode.
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The Governance Champion in Corporate America is an assurance provider. An assurance provider creates strategic service opportunities that leads to transformational change, i.e., enhancements in the efficiency, effectiveness and economy of an organization's operations. The resulting paradigm is full compliance and continuous improvement.
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The greatest challenge to organizational governance is how to create synergy across physical boundaries. The resounding response from the Governance Champion is to create an inter-generational and inter-class society grounded not on the traditional income engine that characterizes the corporate world, but in producing comprehensive benefits that collective human efforts can deliver, i.e., benefit engine.
Tuesday, June 06, 2006
Promised Value or Expected Value
by Cenen Reyes Herrera
Writing from Martinez, San Francisco Bay Area
Which would you prefer: a promised value or an expected value?
There seems to be a contradicting premise on the values that both paradigms would suggest. When I read the proceedings on the review of FAS no. 7 on the use of present value accounting, two of the members of the Board issued dissenting views on the use of present value as a measure for estimating fair value.
What could be the main distinction between a promised value and an expected value?
A promised value refers to the nominal cash flows that are indicated in the contractual agreement. The main difficulty of this paradigm is that under the promised value concept, a $100 received today is the same as the $100 received at a future date after considering the implicit interest of the contract. On the other hand, the expected value concept presents the realistic view that future cash flows could vary in terms of amount and timing. The word "expected" connotes a probabilistic view that is aligned with the concept of risk. Risk represents an exposure to an adverse consequence. That adverse consequence, however, could happen anytime depending on a number of variables. The timing of payment and the actual amount of payment could be estimated using a number of porbabilistic models that are available in financial markets.
The main problem in the shift towards the present value accounting is on the impact on liabilities. FAS 7 indicates that diseenting views focused on the fact that it would appear that changes in the effective interest rates of liabilities could impact on equity and that in an environment of rising interest cost of borrowings, there would be a tendency to increase equity. This is something that could create some difficulties in financial reporting. My long years of experience in accounting also point to a need to clarify how the changes in present values of both assets and liabilities could be handled or treated in a transparent manner, i.e., should they be treated as an activity account or a resource account?
Writing from Martinez, San Francisco Bay Area
Which would you prefer: a promised value or an expected value?
There seems to be a contradicting premise on the values that both paradigms would suggest. When I read the proceedings on the review of FAS no. 7 on the use of present value accounting, two of the members of the Board issued dissenting views on the use of present value as a measure for estimating fair value.
What could be the main distinction between a promised value and an expected value?
A promised value refers to the nominal cash flows that are indicated in the contractual agreement. The main difficulty of this paradigm is that under the promised value concept, a $100 received today is the same as the $100 received at a future date after considering the implicit interest of the contract. On the other hand, the expected value concept presents the realistic view that future cash flows could vary in terms of amount and timing. The word "expected" connotes a probabilistic view that is aligned with the concept of risk. Risk represents an exposure to an adverse consequence. That adverse consequence, however, could happen anytime depending on a number of variables. The timing of payment and the actual amount of payment could be estimated using a number of porbabilistic models that are available in financial markets.
The main problem in the shift towards the present value accounting is on the impact on liabilities. FAS 7 indicates that diseenting views focused on the fact that it would appear that changes in the effective interest rates of liabilities could impact on equity and that in an environment of rising interest cost of borrowings, there would be a tendency to increase equity. This is something that could create some difficulties in financial reporting. My long years of experience in accounting also point to a need to clarify how the changes in present values of both assets and liabilities could be handled or treated in a transparent manner, i.e., should they be treated as an activity account or a resource account?
Monday, June 05, 2006
The Accounting Profession - Emerging Issues
by Cenen Herrera
Writing from Martinez, San Francisco Bay Area
Financial Accounting Concept No. 7
Accounting Measurement Using Cash Flow Information and Present Value
The FASB guideline finally recognizes the importance of the time-value of money in measuring assets or liabilities.
After reading the FASB guide, I am surprised at the length of time that the accounting professionals have come to realize the value of measuring the economic differences that result from changes in the amount and timing of expected cash flows.
Highlights:
OMDA - the use of observable marketplace-determined amount reflects the importance of measuring company assets or liabilities with a view towards integrating the market forces that influence a company's resources.
Expected versus Present Value Cash Flows - The distinction might not be quite clear to all accountants, but again the underlying principle is to recognize that whenever we speak of economic differences, it is not only the timing and the amount that matter, but we also need to consider the probabilistic nature of valuing company assets and liabilities.
3. Accounting Measurements could be classified into three (hccnp):
a. Historical Cost - The cost that is usually reflected in our invoice when we buy a certain asset.
b. Current Cost - The replacement cost of the asset.
c. Current Market Price - The price of the asset in the market today.
d. Net realizable value - The amount that would remain after deducting all selling expenses.
e. Present Value - Expected cash flows discounted at the risk-free interest rate.
The guideline offers a framework for financial accounting and reporting assets and liabilities in the financial statements.
The conceptual framework is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting.
Financial accounting concepts are necessary in (EIA) establishing, interpreting, and applying accounting and reporting standards.
Fair value as defined in this conceptual framework is the amount at which an asset or liability could be bought or sold between willing parties (I find the definition quite simple compare to many definitions elsewhere in the FASB pronouncements).
Fresh-Start Measurement - Pertains to subsequent periods.
It is quite explicit in the guideline that it does not cover recognition principles (while it might be directly related to measurement issues). Further, it says that recognition is the process of formally recording or incorporating an item into the financial statemetns as an asset, liability, revenue or expense.
The conclusions reached in this Statement apply only to measurements at initiail recognition, fres-start-measurements, and amortization techniques based on future cash flows (para 15).
Present value should attempt to capture teh elements that taken together could comprise a market price.
The objective of the present value is to capture the economic difference between sets fo future cash flows.
Present value must represent some observable measurement atttribute of assets or liabilities.
Present value formula is a tool used to incorporate the time value of money in a measurement.
Present value helps to distinguish between unlike items that might otherwise appear similar.
If there is no observable market price, use estimates of future cash flows in measuring assts or liabilities.
3 Objectives of Financial Statements:
a. Usefulness
b. Assesses amounts, timing and uncertainty of cash flows
c. Resource Information
Marketplace is the final arbiter of asset & liability values.
Conclusion: Expected Cash Flow Approach is a more effective measurement than the traditional approach because of the computational limitations of the traditional approach. The expected cash flow approach offers computational transparency which makes the measurement issue clear to users of Financial statements. It further argues that developing cash flow scenarios is critical for present value applications.
I find this financial accounting concept paper of FASB to be reader-friendly despite its very technical subject matter. The subject has become a point of contention between accountants and economists, and I have come across several instances where such differences could lead to a clarification note by the external auditor. The guideline certainly helped in threshing out any differences that long existed in measuring the financial resources of an organization.
5 June 2006 USA
Writing from Martinez, San Francisco Bay Area
Financial Accounting Concept No. 7
Accounting Measurement Using Cash Flow Information and Present Value
The FASB guideline finally recognizes the importance of the time-value of money in measuring assets or liabilities.
After reading the FASB guide, I am surprised at the length of time that the accounting professionals have come to realize the value of measuring the economic differences that result from changes in the amount and timing of expected cash flows.
Highlights:
OMDA - the use of observable marketplace-determined amount reflects the importance of measuring company assets or liabilities with a view towards integrating the market forces that influence a company's resources.
Expected versus Present Value Cash Flows - The distinction might not be quite clear to all accountants, but again the underlying principle is to recognize that whenever we speak of economic differences, it is not only the timing and the amount that matter, but we also need to consider the probabilistic nature of valuing company assets and liabilities.
3. Accounting Measurements could be classified into three (hccnp):
a. Historical Cost - The cost that is usually reflected in our invoice when we buy a certain asset.
b. Current Cost - The replacement cost of the asset.
c. Current Market Price - The price of the asset in the market today.
d. Net realizable value - The amount that would remain after deducting all selling expenses.
e. Present Value - Expected cash flows discounted at the risk-free interest rate.
The guideline offers a framework for financial accounting and reporting assets and liabilities in the financial statements.
The conceptual framework is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting.
Financial accounting concepts are necessary in (EIA) establishing, interpreting, and applying accounting and reporting standards.
Fair value as defined in this conceptual framework is the amount at which an asset or liability could be bought or sold between willing parties (I find the definition quite simple compare to many definitions elsewhere in the FASB pronouncements).
Fresh-Start Measurement - Pertains to subsequent periods.
It is quite explicit in the guideline that it does not cover recognition principles (while it might be directly related to measurement issues). Further, it says that recognition is the process of formally recording or incorporating an item into the financial statemetns as an asset, liability, revenue or expense.
The conclusions reached in this Statement apply only to measurements at initiail recognition, fres-start-measurements, and amortization techniques based on future cash flows (para 15).
Present value should attempt to capture teh elements that taken together could comprise a market price.
The objective of the present value is to capture the economic difference between sets fo future cash flows.
Present value must represent some observable measurement atttribute of assets or liabilities.
Present value formula is a tool used to incorporate the time value of money in a measurement.
Present value helps to distinguish between unlike items that might otherwise appear similar.
If there is no observable market price, use estimates of future cash flows in measuring assts or liabilities.
3 Objectives of Financial Statements:
a. Usefulness
b. Assesses amounts, timing and uncertainty of cash flows
c. Resource Information
Marketplace is the final arbiter of asset & liability values.
Conclusion: Expected Cash Flow Approach is a more effective measurement than the traditional approach because of the computational limitations of the traditional approach. The expected cash flow approach offers computational transparency which makes the measurement issue clear to users of Financial statements. It further argues that developing cash flow scenarios is critical for present value applications.
I find this financial accounting concept paper of FASB to be reader-friendly despite its very technical subject matter. The subject has become a point of contention between accountants and economists, and I have come across several instances where such differences could lead to a clarification note by the external auditor. The guideline certainly helped in threshing out any differences that long existed in measuring the financial resources of an organization.
5 June 2006 USA
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