Without clarity of understanding, information becomes the most dangerous of tools

Citation

Bruce, R. (2002), "Without clarity of understanding, information becomes the most dangerous of tools", Balance Sheet, Vol. 10 No. 2. https://doi.org/10.1108/bs.2002.26510baa.001

Without clarity of understanding, information becomes the most dangerous of tools

Without clarity of understanding, information becomes the most dangerous of tools

The central core around which this issue of Balance Sheet is built is that of investment. Investment is at the heart of the financial services industry. Outsiders may see it as a simple topic. Nothing could be further from the truth as our authors show in a sequence of illuminating articles.

But first we have Malcolm McCaig who contributes this issue's column on corporate governance. His piece is a timely reminder that investment has to be based on solidity of corporate structure. The awful tale of how the huge Enron enterprise was built on sand will reverberate for years. McCaig takes a very clear look at the fundamentals of corporate governance. And his words are wise ones which any chief executive or chairman of the board should heed. He is an expert within the Deloitte & Touche Risk Consulting business and he specialises in financial services organisations. Put simply he makes the point that unless the responsibilities of corporate governance reach upwards to the very top of any corporate entity the system stands very little chance of succeeding. And as Enron showed disaster is easy to achieve.

McCaig's thesis connects us neatly with the central section of this issue of Balance Sheet: The Business of Investment. We start the section with a thoughtful and carefully argued piece by Dr Joseph Mariathasan. He is director of business development at GMO Woolley in London. But he is also the chairman of the UK ALMA, the central networking organisation for people working within the asset and liability management business. His experience is immense. His feel for how his profession works is wide. He argues that investment markets are becoming less rather than more efficient. His reasons for this line of argument are simple. Qualitative analysis depends on individuals who are not objective but rely on value judgements which some days are successful and sometimes are not. This is the culture of the personality. It is the following of individuals from organisation to organisation on the grounds that they have the Midas touch. This is reducing investment to a skill which depends more on magic than analysis.

Mariathasan believes in quantitative value management, the quiet pursuit of good investment. There are no fireworks here. Just solid independent number-crunching and computer analysis. That suits Mariathasan fine. The results are what matters, not the style in which they are produced.

Roger Bootle is another legend in the investment world. These days he runs his own economic information company and advises the House of Commons Treasury Select Committee. He too argues that investment advice has become overcome with the razzamatazz. Banks and investment houses cannot produce independent investment research because they face in two different directions. They have clients who are investors and clients who are investment targets. Small wonder, Bootle argues, that the large institutional investors have such a tough time. What they require is independent research and increasingly, Bootle argues, you can only get that from organisations and individuals like himself.

Bootle would probably warm to the thesis put forward by Chuck Joyce and Jack Gray, both strategists with Grantham, Mayo, Van Otterloo and based in Boston and London. For them value-based management is what is important. Book value is for the birds. They look at the great TMT bubble and then look at the examples of Campbell's Soup and AOL Time Warner. Investors, they suggest, who are tied too closely to a simple value benchmark have missed out on the value rally in the markets.

The world of asset and liability management is increasingly one where the revolutions are technology-driven. Not in the form of the disastrous boom of the TMT market but in terms of the tools and methods which ALM specialists increasingly have at their disposal. Robert Fiedler, Karl Brown and James Moloney provide us with a useful update on how the ALM world has developed in recent years and in which direction the technology is now taking the experts. In particular they focus on what banks ought to be thinking about in the months ahead.

After this we have a slightly more off-the-wall view of the ALM world. The consulting firm of Z/Yen has gained a reputation for perceptive analysis combined with a quirky delivery. Nothing exemplifies this more than the recent book: Clean Business Cuisine: Now and Z/Yen written by the firm's founders, Michael Mainelli and Ian Harris. So it is no surprise that the article they have created for this issue of Balance Sheet takes traditional views and stands them on their heads. Forget the deterministic numeric paradigm which traditionally underpins auditing and accounting. Think risk-based accounting methods instead. The result, they argue with great plausibility, would be infinitely more usable financial information. "We contend", they say, "that a single number for accounting terms such as turnover is 'clear, simple and wrong'. As long as accountants continue to indulge this false simplicity, they will leave themselves exposed to misunderstandings of what they said and subsequent misunderstandings of their roles in organisations." That gets to the root of many of the problems that we have seen in this Enron-dominated year so far.

Following on from that good old iconoclastic sideswipe we have another. John Thirlwell is director of the British Bankers' Association. Anyone present at the annual conference of the UK ALMA earlier this year will remember the presentation he made there. He stood concepts on their head and annoyed an awful lot of people. In his article for this issue of Balance Sheet he takes his thesis further. He suggests that understanding first credit risk and then operational risk has sorely taxed the banking industry. "Each bank", he argues, "has different levels of control, whether by design or (in)competence." As a result regulators are barking up the wrong tree. They try to change the management practices of banks, he suggests, when what they ought to be doing is encouraging banks to understand risk management better. Stirring words in difficult times.

And finally Abby Kyte from SunGard provides a guide to the current thinking in the world of financial instruments. She too is concerned about how the regulators reach their decisions. But in the end she reminds us that much of the world which Balance Sheet serves as a magazine depends on understanding and clarity of thinking. And that, hopefully, is what we also provide.

Robert BruceEditor