Enron's company logo. It prompted employees to refer to the firm as the "Crooked E."
Enron's experience with financial risk management is instructive. The firm maintained a risk management function staffed with capable employees. Lines of reporting were reasonably independent in theory, but less so in practice. The group's mark-to-market valuations were subject to adjustment by management. The group had few career risk managers. Enron maintained a fluid workforce. Employees were constantly on the lookout for their next internal transfer. Those who rotated through risk management were no different. A trader or structurer whose deal a risk manager scrutinized one day might be in a position to offer that risk manager a new position the next. Astute risk managers were careful to not burn bridges. Even worse, risk mangers were subject to Enron's "rank and yank" system of performance review. Under that system, anyone could contribute feedback on anyone, and the consequences of a bad review were draconian. Risk managers who blocked deals could expect to suffer in "rank and yank."
Of the above four criteria for independence, Enron was weak on the first but utterly failed to satisfy the second two. Despite the sophistication of individual employees, financial risk management at Enron was hollow.
Proceeding now to the fourth criteria for independence, we want to distinguish between risk taking and risk management. Within firms, there are strategic and tactical risk takers. The CEO and other senior managers are strategic risk takers. They formulate a strategy for the firm that entails taking certain risks. They communicate the strategy to tactical risk takers?including traders, structurers, and asset managers?whose job it is to implement that strategy. This is how b ...