Investor risk is perceived as fear or underperformance, notably in losing the value of the original investment. Substantial benchmarking occurs, notably in the comparison of returns against inflation, stock-market and other industrial yardsticks. Similar executive peer-group pressure and benchmarking lead them to see who gained the highest award from the remuneration committee. Not all CEOs are intent on removing value from the company, a fine minority contribute by increasing investor wealth whether in share price or earnings per share.
The hazard remains that many CEOs are executive recruitment failures. They create negative shareholder return and blacken the name of the company. Reputational risk emerges as one of the more obscure risks, while being costly too. An incompetent executive seems to be excusable in the markets, certainly if we believe the newspaper accounts; being crooked is not. Either way, CEO tenure is usually short term, so CEOs may adopt the attitude: “Better clean up the company assets before they boot me out.”
We have seen that the Board of Directors is not always an adequate counter to the ego of the CEO and the wish for more M&A and self-aggrandisement. Non-executive directors, who are enlisted in a cabal to add to the existing yes-men on the Board, can never serve to deter the company from embarking on an unacceptably risky course. We need an essential set of conditions for successful corporate guidance.
An appropriate range of multidisciplinary skills
Power to ensure effective implementation of decisions
Ability to undertake effective assessments of the soundness of decisions associated with projects
Suitably qualified and dedicated support staff for the collection and analysis of data
Otherwise, we are condemned with the dire corporate leadership that has steered so many companies on the rocks.
An incompetent or crooked CEO underperforms colleagues and rivals. The bottom line is either the profit level or the share price. They fail on both scores. Failure should destroy their reputation in the industry. While the CEO can inflict great damage upon the company, reputational risk decrees that the executive can be punished with the embarrassment of being summarily ejected. By then it may be too late. There are two subrisks operating here – stemming from:
an inept executive;
a crooked executive.
What to do? Risk management becomes an empirical business study in corporate control.
We have seen how risk comprises:
hazard;
catalyst;
result.
We come back to the risk of a shark attack described in previous posts. The shark has a large dorsal fin that alerts us to its impending attack. We have already detailed an AEW warning system to alert us to the adverse CEO choice.
There are various risk management techniques to shed light upon a dark corporate operational area. These can include more effective interviewing to bring unsuitable executive candidates under the spotlight. Another is to undertake a management review of the control structure for recruiting key staff. Redesign the audit processes to block potential fraudulent financial statements passing the accounting process.
Compare this risk management arsenal against the risk of a fraudulent CEO. Fraud needs conditions:
1. motivation;
2. opportunity;
3. rationalisation.
We deploy risk countermeasures:
1. Anti-fraud motivation measures – better training of staff and recruitment, screening and interviewing of new applicants, monitor HR performance at work plus instigate an effective ethics programmes.
2. Anti-fraud opportunity measures – better staff monitoring, accounts screening, external audits, limit IT systems access and raise security physical access limits.
3. Anti-fraud rationalisation measures – raise chances of detection, raise punishment levels to act as deterrent, lower expectations of profit.
Risk management is really about a logical sequence of tasks to protect the business investment. The enterprise risk management strategy or life-cycle could be outlined as the series of tasks.
I. Risk detection.
II. Risk countermeasures.
III. Risk monitoring.

In this blog we have discussed many aspects of forward contracts and forward markets. We will conclude the post (and each of the following posts, which cover futures, options, and swaps) with a brief discussion of the role that these markets play in our financial system. Although forward, futures, options, and swap markets serve similar purposes in our society, each market is unique. Otherwise, these markets would consolidate.
Forward markets may well be the least understood of the various derivative markets. In contrast to their cousins, futures contracts, forward contracts are a far less visible segment of the financial markets. Both forwards and futures serve a similar purpose: They provide a means in which a party can commit to the future purchase or sale of an asset at an agreed-upon price, without the necessity of paying any cash until the asset is actually purchased or sold. In contrast to futures contracts, forward contracts are private transactions, permitting the ultimate in customization. As long as a counterparty can be found, a party can structure the contract completely to its liking. Futures contracts are standardized and may not have the exact terms required by the party. In addition, futures contracts, with their daily marking to market, produce interim cash flows that can lead to imperfections in a hedge transaction designed not to hedge interim events but to hedge a specific event at a target horizon date. Forward markets also provide secrecy and have only a light degree of regulation. In general, forward markets serve a specialized clientele, specifically large corporations and institutions with specific target dates, underlying assets, and risks that they wish to take or reduce by committing to a transaction without paying cash at the start.
Forward contracts are just miniature versions of swaps. A swap can be viewed as a series of forward contracts. Swaps are much more widely used than forward contracts, suggesting that parties that have specific risk management needs typically require the equivalent of a series of forward contracts. A swap contract consolidates a series of forward contracts into a single instrument at lower cost. Forward contracts are the building blocks for constructing and understanding both swaps and futures. Swaps and futures are more widely used and better known, but forward contracts play a valuable role in helping us understand swaps and futures. Moreover, as noted, for some parties, forward contracts serve specific needs not met by other derivatives.