Issues management can be defined as a management intervention process for anticipating trends, concerns or evolving events which have the potential to substantially impact a business and its stakeholders. 1 The global financial crisis that originated in 2007 is a prime example of why it is essential for a business and its management team to have a strong issues management plan in place. The subprime mortgage meltdown will provide many young investment advisors, including myself, with a real life history lesson which will lay the foundation for our careers in the business world.
It is crucial that one understands broader concepts such as strategic management and corporate public policy in order to develop the proper approach to issues management. Issues management requires knowledge of the changing mix of issues, the issues management process, the issues development process and how companies might implement issues management in practice. By drawing on these tumultuous past events and conducting issues management initiatives, we can forecast trends in the finance industry so that future crises may be anticipated or averted.
There are two approaches that are central to the issues management discussion: the conventional approach and the strategic management approach. The conventional approach is more narrowly focused and centered on public policy or social issues. The conventional approach could be perceived as a subset of the strategic management process because many issues tend to arise from the social or ethical domains. The recent financial crisis has magnified the unethical behavior of financial companies as well as their lack of corporate social responsibility.
According to an article by George Akerlof and Rachel Kranton, the “pay for performance” system that is in place on Wall Street demonstrates bad faith and leads to manipulation of the system. 2 The risky practices by these institutions brought the financial system to its knees. These companies have failed to exercise effective stakeholder management and, as a result, have lost society’s respect. 3 The financial advisory/planning field has been tremendously impacted by these events.
As an investment advisor, it is my responsibility to properly engage my clients and transact business in a moral and ethical way. The strategic management approach is more broadly inclusive and typically is the responsibility of senior level management. It is seen as an approach to the anticipation and management of external and internal challenges to the company’s strategies, plans, and assumptions. The financial crisis that began in 2007 was a product of easy credit conditions, sub-prime mortgage lending, deregulation of the derivatives markets and utter incompetence on the part of business executives.
The CEOs of the biggest U. S. investment banks played the biggest role in the credit crunch. They have been much maligned and deservedly so. Financial firms failed to recognize the power of the collateralized debt obligations that they had created. When the bubble burst on the housing market, many deceived investors were left helpless as the value of their portfolios plummeted. It is imperative that a well-constructed SWOT analysis is adopted when using the strategic management approach.
Financial executives only saw the opportunities and strengths of the derivatives market and failed to evaluate the potential threats and weaknesses associated with such risky transactions. The business world is a dynamic environment and is becoming increasingly competitive so it is necessary for companies to adapt to the changing issue mix. A firm’s reputation, status, and well-being are greatly influenced by its handling of social, ethical, and economic issues.
Goldman Sachs’ reputation has been tarnished as a result of its amoral trading practices and lack of fiduciary responsibility. Sleazy businessmen, such as Richard Fuld and Fabrice Tourre, are products of a culture that fosters risk and reward. 5 Business schools have been battered by criticism because of the role that they may have played in the financial downturn. The future businessmen and women must be properly educated in light of these recent events in order to be prepared for the escalating challenges that constantly confront them.
By revamping the curriculum at institutions, we may be able to cultivate a sense of responsibility and accountability in tomorrow’s leaders. Defining an issue in an organization can be a very complicated and drawn out event between multiple parties. Some voices may be ignored or not taken into consideration while others may refuse to come to a consensus. The issues management process entails an abundance of sequential and interrelated steps and contains planning and implementation aspects that are interrelated. The first stage of the issues management process is the identification of issues.
This step includes social forecasting, environmental scanning, and public issues scanning. The one element that is common to all of these techniques is the need to scan the environment and identify emerging trends that may impact the organization in some way. The financial crisis has taught us that organizations need to address issues at their earliest stages in order to prevent potential calamities. Businesses can assign specific departments to continuously scan environmental issues and monitor changes with compliance regulations.
These findings can then be circulated via an internal report or newsletter so that employees are kept abreast of market conditions. Another way to spot trends in the industry is to summon the professional services of a consulting agency. These companies are experts in trend spotting and would enable financial firms to have a strong strategic management approach in place to counter social, cultural, and economic issues. The CDO market and lax financial regulation are two trends that were ignored during the two past two presidential administrations.
As we march forward in the 21st century, financial institutions will be analyzed under a microscope. The derivative market will be just one aspect of the financial services industry which will undoubtedly be subject to stricter regulatory standards. Rating agencies, such as Moody’s and Standard and Poor’s, will have stringent guidelines in place when determining the credit risk of securities. Hedge funds will become regulated as investors and government officials clamor for the transparency that is clearly absent in the industry.