Risk Governance

CMRA is a leader in promoting good risk governance. In addition to our subject matter expertise, Leslie Rahl is a member of the Board of Directors of two public companies, chairs the Risks policy and Capital Committee of one of them and is a member of the Risk Committee of another. She has also served on the board of the MIT endowment, the Advisory Board of the NYS Common Retirement Fund, the ISDA Board, the IAFE Board and the Boards of several Business Schools and not-for-profits. She attended the Executive Education Governance Program at HBS in 2004.

Selected Risk Governance Assignments

• Advised the Board of an insurance company on the risks in a new variable rate annuity product
• Assisted the Board of a large pension plan in the creation of a Risk Appetite and Attitude Statement
• Provided Board Education program on "Lessons Learned from the Crisis"
• Conducted Risk Governance Survey of 140 financial institutions
• CMRA assisted the Mutual Fund Directors Forum in the creation of "Risk Principles for Fund Directors"
• Evaluated risk budgeting program and governance for several pension plans
• Advised servicer boards of pension plans re: hedge fund due diligence
• Assisted several firms in formulating "Risk Appetite Statements"
• Advised several clients on Chief Risk Officer (CRO) roles, responsibilities and selection
• Advised several firms on the structure of their "Risk Management" Governance Committees
• Conducted a training session for the Board of Directors of a large mutual fund complex on risk governance
• Advised a sovereign wealth fund on risk governance
• Advised the Board of Directors of one of the largest non-US corporate plan sponsors on risk management
• Developed derivative guidelines for a large US corporate pension fund
• Advised the Board of Directors of a large European bank on derivatives
• Drafted and reviewed risk management policies and procedures for numerous buy- and sell-side firms
• Engaged by a Japanese think tank to provide in depth research on risk management practices of major banks and investment banking
• Advised several clients on a Charter for a Risk Committee of the Board

Recent and Upcoming Speeches re: Governance

November 2010

June 2010

May 2010

April 2010

November 2009

June 2009

March 2009

CMRA in the Press re: Governance

CRO Creation on the Rise, But Role Continues to Evolve
By Julie Goodman

A new risk governance survey indicates that the number of chief risk officers is going up among financial institutions and that the role of those CROs is becoming an increasingly strategic one – not simply one of control.

According to this year's Risk Governance: A Benchmarking Survey, 66% of CROs have both a strategic and a control role, up from 47% last year. The number of participants reporting that they have a CRO increased from 70% to 89%.

The Capital Market Risk Advisors [CMRA] survey was conducted over two weeks in July 2010 among 66 financial institutions, including asset managers, commercial and investment banks, insurance companies, plan sponsors, sovereign wealth funds, endowments and hedge funds. Of the respondents, 45% were asset managers, most of whom have mutual funds.

"In their narrowest sense, a CRO is a cop, and they keep track of the people [who] are staying within their risk limits," says Leslie Rahl, managing partner of CMRA.

"In its broadest definition, and I think in its most effective definition, the CRO is also an adviser, a participant in new product development, a thought leader in how should we think about our business. So that strategic part of their job is growing, and I think that's a very healthy sign. I think a good CRO should be much more than a cop."

The survey also stated that 84% of respondents with a board and a CRO have executive sessions at most meetings. That number is up from 44% last year. A risk appetite statement is one way to communicate those dynamics.

According to the results, 74% of respondents have board-approved risk policies, up from 60% last year.

The survey says that, over the last 12 months, changes to risk governance include modifying limits and increasing trend and exception reporting. Boards are increasingly reviewing counterparty, liquidity, and operational risk information.

The government changing the rules remains the top concern among risk managers, coming in at 40% among volatility, credit losses and other issues.
(August 2010)

9 in 10 institutions have chief risk officer, survey shows
By Barry B. Burr

Some 89% of pension plans, endowments, foundations, sovereign wealth funds, hedge funds and other asset managers have a chief risk officer, compared with 70% last year, according to a Capital Market Risk Advisors survey on risk governance practices at financial institutions.

While there is wide agreement among the 66 institutions surveyed of the need for a chief risk officer, "opinion varies as to whether the CRO should have both a strategic/consultative role or just a control role," said a report on the survey, Risk Governance: a Benchmarking Survey 2010.

Among respondents with CROs, 66% said their officers have both strategic and control duties, up from 47% last year, the survey found.

In addition, 84% of those have private sessions between the CRO and the board's risk committee or the full board, without management in attendance at most meetings, up from last year's 44%.

Among other results, 57% of respondents have a risk appetite statement, whose definition includes the ways an institution wants to take risk and the variability of results they want to accept. That's up from 37% last year.

Of respondents with risk appetite statements, 56% include in the statements attitudes on liquidity needs; 43% address consequences on breaching risk limits, including when the breach makes or loses money; 35% include how much to invest in hard to value assets; 33% include how much to invest in complex investments; and 33% address lack of transparency in investments.

The greatest concern cited by risk managers for the second half of this year is government changing the rules that affect investment and capital markets, cited by 40%, up from 38% last year, when it also ranked at the top.

Other top concerns for the second half of the year are volatility and credit losses, cited each by 19%; inflation, 6%; and counterparty risk, 2%. By contrast, last year, respondents ranked as their second top concern inflation, cited by 26%, followed by credit losses, 21%; counterparty risk, 7%; accountants changing the rules, 5%; and volatility, 2%.

"Overall, I think progress is being made toward more people using better risk management practices, e.g., risk appetite statements, chief risk officers, in-camera executive sessions of the risk committee or full board and the CRO without management present," Leslie Rahl, CMRA managing partner, said in an interview.

"Institutional investors (e.g., pension funds, SWF, foundations, endowments) are still lagging a bit behind other financial institutions (e.g., asset managers), such as looking at things like counterparty risk and operational risk."

Ms. Rahl said that the reason for the gap may be "overall they (institutional investors) aren't as heavily regulated (as other financial institutions). I think they've always lagged behind, but it isn't getting any worse. By the nature of the entities, they have had less pressure (on) risk management and governance.

"Institutional investors are extremely interested in risk governance in companies in which they invest as equity investors, but it is equally important for them to think about their own risk governance," Ms. Rahl said.

The survey was conducted over two weeks ended July 20. Commercial banks, investment banks and insurance companies were also among those surveyed.
(August 2010)

Financial Regs: A Top Concern for Institutional Investors
By Paula Vasan

Preliminary findings by Capital Market Risk Advisors show 37% of executives at pension funds, sovereign wealth funds, investment management firms and other institutional investors believe the financial reform act signed by President Barack Obama July 21 will make the financial market system safer.

The firm's 2010 Risk Concerns Survey, which was conducted over two weeks, closing July 20, found that US respondents ranked "government changing the rules" as their chief concern for the year ahead. Market volatility and credit losses tied for their second highest-ranking concern. Additionally, risk due diligence by clients, regulators and rating agencies increased by 54%, 64% and 44% respectively.

"It is disappointing but not surprising that 'Government Changing the Rules' remains the #1 concern for U.S. participants for the 2nd year in a row," said Leslie Rahl, Managing Partner of CMRA, in a statement.

CMRA's findings were based on risk-related concerns, including risk budgeting, risk appetite statements on limits and liquidity, stress testing. The firm plans to release the full survey August 2nd.
(July 2010)

Reform not a hit with institutional investors — survey
By Barry B. Burr

Thirty-seven percent of executives at pension funds, sovereign wealth funds, investment management firms and other institutional investors believe the financial reform act signed by President Barack Obama July 21 will make the financial market system safer, according to preliminary results of a survey by Capital Market Risk Advisors, a risk advisory firm.

Its 2010 Risk Concerns Survey found U.S. respondents ranked "government changing the rules" as their chief concern for the year ahead. Tied for their second highest-ranking concern were market volatility and credit losses.

Among non-U.S. respondents, market volatility and credit losses tied as their top concern, with government changing the rules in third.

"The general consensus is the financial reform bill isn't necessarily going to solve the problem," Leslie Rahl, CMRA managing partner, said in an interview. "And even though the bill has been passed, there is lots of rulemaking to be done. The devil is in the details in figuring out how the new regulations will be implemented."

CMRA plans to issue the full survey results Aug. 2, Ms. Rahl said.

The survey was conducted over two weeks, closing July 20, on risk-related concerns, including risk budgeting, risk appetite statements on limits and liquidity, stress testing.
(July 2010)

From Kirsten Bischoff, Opalesque New York:

While US legislators work to put together a bill that will merge the Restoring American Financial Stability Act of 2010 with the Wall Street Reform and Consumer Protection Act of 2009, corporate governance is expected to see increased oversight on compensation, voting rules, proxy access, and corporate structures. However, some of the biggest challenges facing corporate boards in 2010 are the same challenges that many failed at in the run up to the 2008 financial crisis and will not be necessarily be affected or improved by new regulation.

In one of the panel discussions to be held this Friday (June 18) during the IAFE Annual Conference, the talk will focus on "Should Boards Do More?" Led by IAFE Board of Directors member and Founder and Managing Partner of Capital Market Risk Advisors (CMRA) Leslie Rahl, the discussion will center around the perceived top challenges for corporate directors during the next year and the importance of how a firm’s view of risk management is integrated with its business.

"If you look at the crisis that we went through, the things that really damaged firms were the lack of liquidity, lack of transparency, complexity and a whole series of soft factors that generally do not get calculated into the risk metrics," she says.

Rahl says that while there were companies who understood the importance of deep risk analysis prior to the global financial crisis, those that did not have learned its importance and are beginning to widen their view of what contributes to their risk.

"I happen to believe that when people talk about risk adjusted compensation, they take too narrow a view of risk," she says.

In fact, CMRA offers on its website a list of the "galaxy of risk" that firms are exposed to.

In addition to acknowledging the wide scope of risk firms must deal with, Rahl also says that boards should define their approach through a risk appetite statement. "A risk appetite statement is one tool that has become very important. Some statements are not sufficient though, because not only should they quantify the risks but they should also help investors understand what a firm’s attitude is towards risk."

"When you are asking what the ramifications are if someone goes over their limits, you will often get a different answer depending on how the question is phrased and the question should be asked both ways: What are the ramifications if a person goes over their limit and makes money? And, what are the ramifications if a person goes over their limit and loses money?" Rahl says.

Even though it is not expressly addressed in new regulation, developing a corporate level approach to risk management is fast becoming a requirement for firms due to investor pressure. "The analyst community is asking more questions about these topics – about the role or the board and the role of oversight," she notes.

For more information on the IAFE Conference: The Truth About The Crisis or a Crisis of Truth (June 18th at Goldman Sachs at 32 Old Slip, New York, NY) visit: www.IAFE.org
(June 2010)

Manager Punished for Failing to Report Error
By Scott Johnson

Consulting firm Wurts & Associates is recommending its clients immediately terminate AXA Rosenberg across all of the firm's products, after the equity manager waited six months to disclose a serious glitch in its quantitative investment process. Wurts says the firm has still not offered a satisfactory explanation.

The situation is "quite an unusual occurrence" in the asset management space, says Peter Niculescu, a partner with New York-based Capital Market Risk Advisors, which provides risk advisory services to pensions, law firms and financial institutions.

"It's impossible for an outsider to assess how serious the issue is because we don't have the facts as to what the quantitative implications are," he says. "All that we really know is that AXA is according the issue due gravity. Given the elapsed time, that seems like it's appropriate."
(April 2010)

Navigating Post-Crisis Dynamics

Directors duty at the brink of insolvency, the importance of liquidity, the shortfalls of GAAP

The capital markets presented public company board directors with a variety of vexing issues in 2009. Leslie Rahl, founder, Capital Market Risk Advisors, suggested that the "next great front" for financial firms and banks, in particular, "is for boards to figure out what its risk appetite and risk attitude is and how to communicate that to management."

"Ask the real simple questions: what could go wrong?" suggested Rahl.
(February/March 2010)

Opalesque Exclusive: Chief risk officers-the newest new hedge fund thing
Kristin M. Fox

The autumn of 2008 well may go down as The Great Fall of the financial system, as the broadmarket indexes and three storied U.S. financial institutions collapsed and the masterminds of previously unfathomable Ponzi schemes, Bernard Madoff and Alan Stanford, were exposed for lining their own pockets with billions of dollars of other people's money.

"The role of the Chief Risk Officer varies from fund to fund," says Leslie Rahl, founder and managing partner at Capital Markets Risk Advisors, a New York-based risk advisory and consultant. "At its best, a CRO wears both strategic and control hats, but in some funds it is primarily a 'cop' role, while at others it is a marketing role. It is impossible to make money without taking risk and risk is not a four-letter word. Only unintended risk-risk that is not understood and undertaken without a reasonable chance of reward-is a problem. The most effective CROs think strategically about how to allocate the firm's scare risk appetite, as well as ensure that risk is diversified within limits and well understood. A CRO also worries about what could go wrong and the least likely events and whether the fund could withstand them, leaving the portfolio manager to focus on the more likely outcomes. You need both perspectives," says Ms. Rahl.
(November 2009)

Beyond Box Ticking: A New Era for Risk Governance

Board-level executives' responsibility for risk does not stop at the creation of policy.

Senior managers should convey a clear message that risk should be seen as part of every employee's job, not just something that is taken care of by a small cadre of risk professionals. "Risk is not the responsibility of somebody in isolation," says Barbara Lucas, a partner at Capital Market Risk Advisors. "It is everybody's responsibility."

Even once a CRO is in place, there is no guarantee that he or she will play a role in key strategic initiatives. Among respondents to our survey, less than half say that their CRO or equivalent is involved in mergers and acquisitions, financial strategy, product development or forecasting.

This perplexes many risk professionals, who believe that the recession has reinforced the value of carrying out a secure evaluation of the risk/reward equation before making any major decisions. The CRO should, they argue, play a role in hel.ping to determine the future of their organizations. "The whole purpose of risk management is to find the optimal balance between risk and reward consistent with whatever your objectives are," says Ms. Lucas. "That is a strategic function."
(September 2009)

Bright Ideas: How to Execute Strategic Change
By Scott Johnson

Strengthening Risk Management in the Boardroom

A new survey of large asset managers reveals several missed opportunities for strengthening risk management from the top down. Managers may be able to mine the survey for some relatively inexpensive fixes.

At nearly half of large asset managers surveyed, the chief risk officer has never had an executive session with the firm's board of directors, according to the survey, which Capital Market Risk Advisors co-sponsored with the Professional Risk Managers' International Association. "To me, that's an easy thing to do, and it really adds value," says Leslie Rahl, Founder and Managing Partner of CMRA.

Maintaining communications between the CRO and the board creates an "open, unfettered dialogue," she says, and in the event of a crisis, it can prevent the board from overreacting.

Just 7% of large managers currently have a risk appetite statement, which is another way to empower the CRO and keep risk under control. Risk appetite statements are typically documents that offer asset management professionals guidelines for dealing with risk. Still, about 29% of large managers are considering drafting such statements, a figure Rahl finds encouraging.

Finally, while many firms have a CRO, roughly half empower that individual with both a consultative, strategic role as well as the traditional "control role," in which the individual polices risk and maintains compliance. More should do so, Rahl suggests. "It is the next level of making the CRO an integral part of a well-run organization, to give them a real seat at the table as opposed to just the ability to say no," she says.
(August 2009)

Risk Governance Survey Shows Troubling Lack of Board-CRO Communication
By Julie Goodman

A new risk governance survey polling asset managers and banks indicates that 28% of chief risk officers never have executive sessions with their boards and that only 60% of boards approve risk policies.

The survey, conducted by Capital Market Risk Advisors (CMRA) and Professional Risk Managers' International Association (PRMIA), looked at the risk governance practices of banks, insurance companies, asset managers, hedge funds and institutional investors from 26 countries.

It was conducted over a two-week period in July, with input from 121 financial institutions. Of the respondents, 25% are asset managers, most of whom have mutual funds.

A number of fund boards have focused lately on strengthening risk management and opening communication channels between risk staff members and boards, and in some cases, they have appointed chief risk officers (CROs).

But while the survey suggests promising trends according to risk management advocates, it reveals some areas of deficiencies for corporate and fund boards.

It found that 85% of financial institutions have a chief risk officer, but 25% of those individuals are limited to a control role, as opposed to a more strategic one.

The survey says the CRO's "regular and unfettered access" to boards is still evolving, with 44% of respondents with a board and a CRO holding executive sessions at most meetings. It also says 11% have executive sessions only once a year, while 28% never hold such sessions.

"I think that risk is a little scary still to a lot of boards, and therefore the comfort level of dealing directly with a risk officer might not be there," says Leslie Rahl, founder and managing partner of CMRA.

The analysis corporate and fund boards receive also was covered by the survey. The results show that only 48% of boards receive trend analysis, and only 42% receive exception reports.

Rahl, a member of a bank board, says those trend and exception reports are extremely valuable for boards.

"It's very, very difficult when you pop in a month or six weeks after the last meeting and someone gives you a snapshot," she says. "I always advise my clients to put their risk reports into a context and provide a trend analysis."
(August 2009)

47% of Funds Have Chief Risk Officer, Survey Says
By Barry B. Burr

Only 47% of pension funds, endowments, foundations and sovereign wealth funds have a chief risk officer, according to a survey of risk governance practices at financial institutions worldwide.

Also, 27% of these four fund sponsor types have a "risk-appetite statement," defining the variability of results they want to take, while 13% plan to create one, according to the survey by Professional Risk Managers' International Association and Capital Market Risk Advisors.

Among the fund sponsors, 14% have a risk committee of their board, while 21% plan to create one.

The survey of 121 financial institutions also included traditional investment managers, hedge funds, investment banks and insurance companies.

When all responding financial institutions were included, 85% have a chief risk officer or a similar position.

The survey, the first of its kind by the two organizations, looks at risk from the financial institutions' governance or board point of view, said Leslie Rahl, CMRA founder and managing partner.

"Formal risk appetite statements haven't fully caught on with institutional investors," Ms. Rahl said, calling the documents "a valuable tool for the board to communicated risk appetite with management."
(July 2009)

Risk Management Gains Higher Profile
By Beagan Wilcox

As losses stemming from defaults on subprime mortgages ricochet through the financial markets, It has become apparent that some financial institutions with strong, well-integrated risk management programs skirted some of the worst damage.

Another risk-focused group, The Buy Side Risk Manager Forum, issued a report February that calls attention to "risk governance" as an important part of effective overall risk management.

The forum is made up of heads of risk management and chief risk officers from asset management and investment advisory companies.

The forum's report "Risk Principles for Asset Managers," states that risk governance refers to "the creation of checks and balances through organizational structure."

With the caveat that risk governance structures will vary depending on the size and complexity of the organization, the report provides five risk governance guidelines that lay the foundation for effective risk management:

• "Establishment of organizational checks and balances, including an appropriate segregation of front/back and/or middle office functions;
• Creation of a culture in which understanding and managing risk is everyone's responsibility;
• Independent control groups, including, where possible a risk manager reporting and/or having access to the [chief administrative officer], [chief executive officer], Board, Executive Committee or the like;
• Senior management and board level understanding of risks, definition of risk tolerances, and setting of risk management and ethical tone;
• An organizational structure in which risk management roles and responsibilities are clearly defined, including written policies and other procedures identifying the specific people within the organization who are authorized to approve various actions, make exceptions to various policies, etc."

The report cites a recent survey of mutual funds conducted by the ICI, which states that "the vast majority" of fund groups do not have chief risk officers, but that there is a "growing trend toward creating such positions."

At the same time, independent fund directors should assure themselves tat the risk management programs of the funds they oversee are adequate given their trading strategies and investment objectives, says Barbara Lucas, partner at Capital market Risk Advisors (CMRA), a consulting firm that works with various financial entities, including mutual funds, to assess risk.

CMRA worked with the Buy Side Risk managers Forum to draft the report n asset managers' risk principles. Lucas suggests that boards ask their management trams to look at the principles, which are not prescriptive, and assess where they stand versus the principles. They should then lay out their plan as to which ones they aspire and which ones are not.
(April 8, 2008)

INDUSTRY ALERT

Buy-Side Group Outlines Risk Management Best Practices

NEW YORK - Governance, investment and operations personnel in the securities and investments industry will have all to adhere to certain principles to best manage risk, according to the Buy Side Risk Managers Forum and Capital Market Risk Advisors (CMRA), a consultancy.

The forum, a group of heads of risk managements and chief risk officers from traditional buy-side asset and investment management firms, recently issued a set of risk principles within each of these three areas, titled "Risk Principles for Asset Managers."

"This piece is an important update "says Leslie Rahl, President of the consultancy CMRA and a member of the forum. "Risk management is a journey not a destination. It's something that keeps going and keeps needing updates."

Governance risk principles concern organizational structure and oversight mechanisms, including the importance of independent controls, segregation of functions, senior management involvement in risk management and oversight and adoption of appropriate policies and procedures.

Investment risk principles relate to the need for risk controls at the portfolio level, and address market risk, liquidity risk, leverage, valuations and other aspects.

Operational risk principles concern risk occurring in the ordinary course of business and in disasters. These address identifying, assessing and monitoring such risks, setting up adequate systems and minimizing manual processes, managing counterparty credit risk and assuring business continuity in a disaster.

"These principles recognize the broader function for risk management, which is not just computing the numbers and tracking the limits, but the proactive functions that help firms optimize the relationship between risk and rewards," says Rahl. "The emphasis on governance has evolved. The focus on governance is clearly something that the regulators are looking for and where the industry is evolving. The principles should provide an important framework for best practice risk management. The discussion of risk governance and valuation are particularly critical in today's market environment."
(March 17, 2008)

The multibillion-dollar question: Who's minding the shop at CIBC?

Leslie Rahl has an impressive resume'. She's founder and president of Capital Market Risk Advisors, a firm that, in its own words, has "played an integral role in the evolution of hedge funds, derivatives, structured securities and risk management for more than 15 years.

Ms. Rahl has given 35 years of her life to high finance, 19 of them at Citibank, including nine as co-head of Citibank's Derivatives Group in North America where she pioneered the development of the swaps and derivatives business. She graduated at MIT and its Sloane School of Management.

So she sounds like a perfect, if late, addition to Canadian Imperial Bank of Commerce's board of directors. Ms Rahl joined the board in May of this year, so don't blame her for the bank's most recent cock-up. But what about the other members of the board, and in particular the risk committee Ms. Rahl sits on? What burden of responsibility should they shoulder for CIBC's latest costly blunder?

CIBC says its board is meant "to supervise the management of the business and affairs of CIBC. The quality and independence of the directors, as well as adhering to high ethical standards, are critical to fulfilling the board's oversight obligations."

Ms. Rahl did speak about risk in general. Her advice to directors: "Ask tough questions." One hopes her appointment is more than window-dressing, that it shows the bank is serious about the mandate it givers the board. She has those credentials, after all. But you need more than that, apparently, Ms. Rahl is also the chair of the risk committee over at Fannie Mare – a lender whose subprime writedowns might go as high as $14- billion (U.S.), according to Barron's.
(December 31, 2007)

Amassing your governance capital
By Alice Korngold

On a nonprofit board, you will work with others to develop the organization's greater vision, revenue model, and case for support. Leslie Rahl, president of Capital Market Risk Advisors, points out that "you deal with matters of ethics that transcend what you learned in business school. You learn the dynamics of being part of a team of peers, of knowing when to defer to others, especially in situations where you are also ultimately responsible and accountable."

Rahl was asked to join the board of Fannie Mae in 2004. Her firm specializes in risk management, hedge funds, financial forensics, and derivatives, and she has authored books on hedge funds. She has an undergraduate degree from MIT and an M.B.A. from MIT's Sloan School.

Clearly, her business expertise qualified her to serve on the Fannie Mae board, but it was her nonprofit board experience that distinguished and elevated her as a candidate. "When they were interviewing me for the position," she explains, "the Fannie Mae board members spent a great deal of time asking me about my work on the board of 100 Women in Hedge Funds and my experience in chairing its philanthropy committee in particular." She adds, "Once I was identified for the Fannie Mae board, and my business qualifications were dear, my having served on a nonprofit board was definitely considered a plus."

Business background may open the door, but leadership experience gets you into the boardroom. Rahl was recently elected to the board of CIBC, a leading North American financial institution Hedge funds vary widely in the quality of their internal controls and disclosures, said Barbara Lucas, a partner at Capital Market Risk Advisors, a financial advisory firm. When it comes to the quality of hedge fund operations, "we see the good, the bad, the ugly and the indifferent," said Lucas, a longtime securities attorney. "It's really all over the place."
(Third Quarter 2007)

Where the jobs are: Chief Risk Officers
By Suzanne McGee

"Businesses need to be able to take risk in order to make money, but they need to know how to do so wisely," says Leslie Rahl, founder of Capital Market Risk Advisors, a New York-based consulting firm. Ms. Rahl, who is often consulted by headhunters or chief executives seeking a chief risk officer, says she sees the role as just as important as any other top-level executive position.
(May 4, 2005)

Corporate Governance
The Great American Corporate Director Hunt
By Susanne McGee

It's never been more vital - or harder - to attract qualified independent directors. Who needs the hassle? Yet good corporate governance depends on how companies cope with today's director shortage.

For more than two decades, Leslie Rahl had made her living analyzing risks, but she never come across one quite like this: In December 2003, Fannie Mae approached her about taking a seat on its board of directors

Rahl was honored, and in many ways she was the perfect candidate for the now-troubled mortgage lender. A star options trader for Citibank in the 1980s, she had opened her own consulting shop, Capital Market Risk Advisors, in 1994 and was soon counseling Orange County, California, on how to handle $2 billion in derivative market player, needed a financial expert on the board to replace former Goldman, Sachs & Co. chairman Stephen Friedman, who was leaving to join George W. Bush's administration as director of the National Economic Council.

But Rahl was also a little worried. She had never been a public-company director before, and the previous few years of corporate scandals and strict new regulations had refined then nature of board service, turning what had often been a cushy networking opportunity into a high-risk endeavor. Congress's quick response to frauds at companies like Enron Corp. and WorldCom – the Sarbanes-Oxley Act of 2002 – had heaped unprecedented legal and financial responsibilities on board members. Regulators, activist shareholders and trial lawyers increasingly were targeting directors for failing to question or prevent corporate misdeeds. Complicating things further for Rahl, federal regulations had just announced and examination of Fannie Mae's accounting practices following the company's disclosure of a $1.1 billion error in its third-quarter earnings statement.

So rather than accept the position right way, the risk expert embarked on several weeks of painstaking due diligence. She spoke with other Fannie Mae directors, scrutinized the company's financial statements going back several years and even asked her husband, a bankruptcy lawyer, to vet the offer from a professional perspective. After two months of checking out the company, she agreed to join its board. (Since then the accounting probe had prompted a huge earnings restatement and the resignations of Fannie's CEO and CFO.)
(April 2005)

Bite the bullet on governance
By Leah Nathans Spiro

You've heard it here first: corporate governance will be the next big issue to hit hedge funds. The industry is wide open to criticism on this front. Word to the wise – jump on the bandwagon early, because soon you will be hearing about it from institutional investors and regulators.

For hedge funds, corporate governance usually translates to the following: Is there any independent oversight and standards in important areas such as valuation of assets? Usually this boils down to whether a fund has a board, and whether that board has independent directors. Another issue – does a hedge fund have a compliance structure and procedures that provide genuine checks and balances to the gunslingers out on the trading floor?

When it comes to corporate governance, hedge funds are clearly still in the Dark Ages. Most hedge funds do not even have boards, independent or otherwise, says Barbara Lucas, a partner with Capital Market Risk Advisors, a New York management consulting firm.

Of course, there's a good reason for this. The structure of the hedge fund industry never called for boards. Hedge funds are not public companies, but are by large limited partnerships run by general partners. "They can be organized by one person and have shareholder agreement and have all the powers in a corporation would belong to a board." says Lucas. "Or they are limited partnerships managed by a general partner, not a board. The legal structures are different."

Hedge funds are trading and investing entities built around the powerful personalities of their founders. It is an industry that is so entrepreneurial and has grown so quickly, and people with trading backgrounds are interested more in trading strategies than organizational and structural issues." says Lucas.

But Lucas thinks pressures from institutional investors will grow. "I do see the possibility that there would be increased concern by major institutional investors that would cause funds to beef up their governance practices," she says. Some funds have advisory committees of outside people who meet periodically. It ‘s not commonplace yet."

Yet it is starting to happen. "I have been hearing stories about people beefing up, putting in advisory committee structures and getting real live directors, says Lucas, who would not be persuaded to name names.

Even if a hedge fund has a board, its probably packed with cronies," says Lucas. "The kind of people you want to see are independent, not vendors to the fund in question, or people with ongoing business relationships. What you also look for is people with market knowledge."

"If you have group of group of friends of the administrator in the Cayman Islands wouldn't understand the impact of some trading development, that's not the kind of director you want. You want someone who can ask questions."

Says Lucas: "Increasingly, the things that are customary in other parts of the financial services world and asset management world point to an underlying logic that applies whether you're registered or not."
(November 2004)

Risk Pro for Fannie
By Barbara A. Rehm, Robert Julavits, and Geeta Sundaramoorthy

Fannie Mae is adding former Citigroup Inc. banker Leslie Rahl to its board of directors, filling the seat formerly held by Goldman Sachs & Co. alum Stephen Friedman, who joined the Bush administration as the director of the National Economic Council in late 2002.

As the president and founder of Capital Market Risk Advisors Inc., Ms. Rahl specializes in risk management and capital markets strategy. She previously ran her own consulting firm, Leslie Rahl Associates, which concentrated on swaps, options and derivative products.

Her years at Citi stretched from 1972 through 1991; she rose to co-head of the company's North American derivatives group. She holds two academic degrees, including an MBA from Massachusetts Institute of Technology.

"Leslie Rahl's experience in the financial markets and her understanding of the derivatives markets will bring us an extremely broad range of skills, which will benefit our board, senior management, and our company as a whole," said Franklin D. Raines, Fannie's chairman and chief executive, in a news statement. "Leslie has a keen understanding of financial markets and an interest in the mission of Fannie Mae, and we look forward to benefiting from her expertise."
(February 20, 2004)