Search My Blog
 About Donald

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

 Connect
 Now Available

An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

 Contact Us
Kamakura Corporation
2222 Kalakaua Avenue

Suite 1400
Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898
info@kamakuraco.com

Americas, Canada
James McKeon
Director of USA Business Solutions
Phone: 215.932.0312

Andrew Zippan
Director, North America (Canada)
Phone: 647.405.0895
 
Asia, Pacific
Clement Ooi
Managing Director, ASPAC
Phone: +65.6818.6336

Australia, New Zealand
Andrew Cowton
Managing Director
Phone: +61.3.9563.6082

Europe, Middle East, Africa
Jim Moloney
Managing Director, EMEA
Phone: +49.17.33.430.184

Tokyo, Japan
3-6-7 Kita-Aoyama, Level 11
Minato-ku, Tokyo, 107-0061 Japan
Toshio Murate
Phone: +03.5778.7807

Visit Us
Linked In Twitter Seeking Alpha

Careers at Kamakura
Technical Business Consultant – ASPAC
Asia Pacific Region
Business Consultant – ASPAC
Asia Pacific Region

Consultant
Europe

Kamakura Risk Manager Data Expert
Europe, North America, Asia & Australia 

 

 Archive
  

Kamakura Blog

  
Jun 19

Written by: Donald van Deventer
6/19/2009 3:04 PM 

In our recent posts on Washington Mutual and Countrywide, we discussed the role of the Board of Directors in the two firms’ distress.  In the case of Washington Mutual, the Board was notably lacking in risk expertise.  In the case of Countrywide, the risk expertise was there but the Board didn’t stand up to the CEO.  To be effective in risk oversight, a director has to have a unique set of qualities:

 

Education: The board member needs a graduate education, preferably a Ph.D., in economics, finance or a closely related discipline.  Note that this is necessary but not sufficient for effectiveness.  Renowned economist Martin Feldstein, for example, was a long time director of AIG.  Countrywide had two Ph.D.s in economics on its Board, but the institution still needed to be bailed out.

Specialist Training.  It’s not enough to be “a doctor” if the specialty needed is brain surgery, not urology.  The same is true in risk management.  There are financial economics who special in risk and things related.  That’s a completely different field of study than someone with expertise in accounting for the Gross National Product.

Experience.  An academic background in finance needs to be combined with training in the hard knocks of risk as a business person or advisor to business people.  Robert C. Merton laughingly agreed with me in May that to be a political success the first hedge has to have a gain on the hedging instrument, not on the instrument being hedged (see our blog post “The politics of hedging”).  My friend Ben Golub at BlackRock may disagree with me, but I think even those risk managers who have made large mistakes have lots to offer if the lesson of those mistakes has been well learned.

Guts.  The director will ultimately have to take a stand against the CEO on risk issues, and the director needs to be comfortable in this role.  The director will need to confront the CEO in the board meeting on repeated occasions and likely be in a position where a public resignation is necessary.  Only a rare person, as Ben Golub noted in a recent e-mail, would go to a party where he’s unpopular.  That’s the highly likely role of the risk expert on the Board.

 

So who would I nominate for the Board of a major bank holding company?  I don’t want to make the common mistake of only selecting from people known to me personally.  If I were conducting a search for a risk expert or 2 or 3 for a key bank board, I’d be looking at these lists of people:

 

  • Member of the 2002 RISK Hall of Fame
  • Winners of the RISK Lifetime Achievement Award
  • Current and Past Directors of GARP
  • Current and Past Directors of PRMIA
  • Members of Risk Who’s Who

 

For the sake of executive search firms who don’t have this information at their fingertips, I am listing the 50 members of the RISK 2002 Hall of Fame.  With the exception of myself, this is a uniquely talented group who helped mold risk management as a profession, and this is probably the first place I would look to fill a board seat.  Many of these RISK pioneers have retired but have the time, the money and the expertise that it takes to be an effective director.  I’ve listed them in tabular form with their current post as noted in the 2002 RISK issue.  I apologize in advance to those who have subsequently gone on to do something different. I’ve updated a few of the current positions where the person is well known to me.  Here’s the list I would choose from, with two caveats.  The first caveat is that reader will note that a few of the RISK Hall of Fame members have passed away.  EVEN in that scenario, these luminaries would be more effective as directors than the average director of big banks have been leading up to this crisis.  The second caveat is that a few of these people have been at firms that got in trouble.  That’s a potential asset in my book, if the lesson learned has stayed with them.  Here are the members of the RISK Hall of Fame:

 

Name

For work done at

Current employer

Rod Beckstrom

C.ATS

philanthropist

Fischer Black

MIT

deceased

Denise Boutross-McGlone

Sallie Mae/First Chicago

adviser to start ups

Cristobal Conde

Devon

Sungard

John Cox

MIT

MIT

Peter Cyrus

Fenics

Founder of a toy company

Ron Dembo

Algorithmics

Zero Footprint

Emanuel Derman

Goldman Sachs

Columbia University

Patrick de Saint-Aignan

Morgan Stanley

Morgan Stanley

Bruno Dupire

Societe Generale

consultant

Jessica Einhorn

World Bank

Johns Hopkins

Mark Garman

FEA

retired

Chris Goekjian

Bankers Trust

Hedge fund manager

Duncan Goldie-Morrison

Kleinwort Benson

Bank of America

Ian Green

Panorama

Credit Suisse First Boston

Till Guildimann

JP Morgan

retired

Peter Hancock

JP Morgan

start up

Steven Heston

Goldman Sachs

University of Maryland

John Hull

University of Toronto

University of Toronto

Jonathan Ingersoll

Yale

Yale

Robert Jarrow

Kamakura Corporation and Cornell

Kamakura Corporation and Cornell

Tom Jasper

Salomon Brothers

Primus

Robert Jeanbart

Kondor+

Reuters

Steven Kohlhagen

University of California

writer

Roger Lang

Infinity

start up

Jeffery Larsen

Chase Manhattan

electronic broker Icor

Robert Litterman

Goldman Sachs

Goldman Sachs

Bob Litzenberger

Goldman Sachs

consultant

John Meriwether

Salomon Brothers

Hedge fund manager

Robert Merton

MIT

Harvard Business School

Merton Miller

University of Chicago

deceased

Azam Mistry

HSBC

Native American Securities

Edson Mitchell

Merrill Lynch

deceased

Antoine Paille

Societe Generale

Hedge fund manager

Joe Patrina

Wall Street Systems

Wall Street Systems

Lisa Polsky

Morgan Stanley

sabatical

Eric Rosenfeld

Salomon Brothers

retired

Stephen Ross

MIT

MIT

Mark Rubenstein

University of California

University of California

Petros Sabatacakis

Citigroup

Citigroup

Charles Sanford, Jr.

Bankers Trust

retired

Myron Scholes

Stanford

Platinum Grove Asset Management

William Sharpe

Stanford

Financial Engines

Michael Spencer

ICAP

ICAP, interdealer broker

Donald van Deventer

Kamakura

Kamakura

Oldrick Vasicek

KMV

retired

Conrad Volstad

Merrill Lynch

Hedge fund manager

Allen Wheat

Bankers Trust

retired

Don Wilson

JP Morgan

JP Morgan

Bill Winters

JP Morgan

JP Morgan

 

The world financial system would be suffering from a lot fewer problems right now if a large number of this group and the other groups I’ve mentioned were serving on bank boards.

 

Donald R. van Deventer

Kamakura Corporation

June 20, 2009

Tags: