IN human psychology, it?s well-established that there?s such a thing called confirmation bias. People wanting to hear only what they want to hear, people accepting information that?s only consistent with their stand. They?d rather forget facts that will undermine their own position.

Consider, for example, investing. When markets are bullish, they conveniently forget that investing is a constant companion of risks that markets are not efficient, and most investors do not have rational expectations.

Shortcomings

The recent global financial crisis has revealed many shortcomings such as lack of oversight, due diligence, moral fortitude, and common sense on the part of many individual and corporate investors. Monetary rewards seem to warp the judgement of a lot of people that even if risks are understood, they prefer to take in more risks than they can handle until they stumble into ethical minefields. This sometimes happens in areas of commercial banking, stock brokerage, insurance, HMOs, finance, and investment banking.

In the field of HMO and life insurance industry, for instance, client companies select the company-issuing health cards based primarily on cost. However, given the recent almost global financial meltdown, they should seriously first consider the medical-issuing company?s financial stability before doing any business with said entity. Cost should only be one of the criteria.

Client company must subject medical benefit provider (HMOs and life insurance companies) to a thorough financial screening just like what banks do when doing credit evaluation of potential and existing borrowers. They should review the paid-up capital, its track record of profitability, business sales, management and owner?s reputation, and other sources of revenue. They can do random check with hospitals or the hospitals? experience with these health card providers and check out their reliability or their after-sale services.

If the medical benefit provider delays or fails to pay a hospital, the medical benefit provider gets suspended; consequently, the health cardholders (the employees of their client companies) could not avail of the medical services due them, a case of having been lulled into a false sense of security by the medical card-issuing companies? claim of a strong balance sheet or good business reputation.

Understanding

People should ask questions and check out the answers to avoid being scammed. Many individuals or business organizations don?t even bother to investigate before they shell out their money to their counter parties. Know the company well before you deal with it. Take time to understand the company?s business, its ownership, its management, its products, or services. Check out its financial statements as well as the footnotes. Do a great deal of work on your own to make sure the company is legitimate with unblemished reputation, and its products appropriate for your group. Read carefully the company news releases but never use them as the only basis for your business decisions.
As earlier mentioned, the lack of reliable, readily available information about a company?s leadership and finances opens the door to possible future fraud. One should only make business or investment decision first on the basis of the fundamental economic strength of a company?s business.

Year 2010 heralds a new decade, a fresh start for every business, for every investor. This is the new consensus: Now more than ever, clients expect greater transparency in the products or services offered them, having been tempered by their renewed appreciation of business and market risks, and the fresh emphasis on long-term business sustainability rather than questionable short-term gains.

Financial markets around the world surged late last year and they continue to do so. Part of the reason is that the bears seem to be losing their grip on the mindset of investors.

Hopefully, this market rally will be the catalyst for a sustained global economic recovery.

That being said, still it?s hard to expect things to keep going on smoothly without any bump; nonetheless, at the end of the day, what becomes more important now, a challenge to all of us, is to understand, communicate and manage all kinds of risks.

Systems, techniques

Risk management is not only systems and techniques. It?s beyond that, it?s knowing well your own key people, it?s knowing a company is in trouble long before it got the attention of regulators; it?s prioritizing and putting in place within your own business organization a risk culture and risk governance.

Give risk management the attention it deserves. Anytime, anywhere, it always makes sense.

(This article reflects the personal opinion of the author and not the official position of the Management Association of the Philippines. The author is trust officer at ATR KimEng Capital Partners Inc., a major investment bank Feedback at map@globelines.com.ph For previous articles, please visit