The human ear can only simultaneously comprehend two, or at most three, distinct melodies. Even renowned classical composers generally don’t aspire to create pieces that exceed this number of tunes played concurrently – the sheer volume of melodic combinations renders it unthinkable to write coherent music.
The single glorious exception in history is the final movement of Wolfgang Amadeus Mozart’s final symphony, popularly called the Jupiter symphony. In this stunning tour de force of musical composition, Mozart introduces five separate musical themes, then closes with a fugato counterpoint in which all five play simultaneously. The result is not discordant but stirring and sonorous, even as themes frolic about from strings to horns to woodwinds at a pace the human mind cannot possibly focus on or comprehend.
Harvard musicologist Robert Levin told NPR about the symphony’s finale: “At the very end, [Mozart] does something absolutely unimaginable, which is that he combines all five of these tunes simultaneously, tossing them about from one instrument to the other in a display of intellectual fireworks that remains unprecedented in the symphonic domain.” No composer had ever reached this pinnacle before Mozart – a literal quintessence of symphonic development – nor has any composer that followed him.
We thrill to hear Mozart’s soaring finale, marveling at the super-human genius from whence it sprang – a sharp contrast from our all-too-human inability to “focus on five melodies at once.” Yet while doing so, we can’t help but think of the challenges faced by the contemporary finance or treasury officer. In a world where risk and its management has become exceedingly complex and inter-woven, it’s no longer sufficient – if indeed it ever was – to isolate each risk management discipline and optimize it before turning to the next. Rather, senior finance executives need to make decisions that contemplate interactions among many connected disciplines, such as economics, contracts, accounting, and regulatory. Only an inter-disciplinary approach, expert in all topics, permits the formulation of a risk management strategy that optimizes across them simultaneously.
Here are a few examples of how we’ve helped clients adopt more holistic thinking in their risk management practices:
(1) Symphonic Risk Policy: A multinational corporation asked Chatham for a total re-assessment of its risk management across its worldwide businesses; we were requested to leave no policy, governance, regulatory, or economic stone unturned. Because multi-asset and multi-business risk management drives its organizational performance, the corporation requested that we study how each business unit manages risk and what best practices could be codified in global policy. Again, thinking about currencies but not fuel, or thinking only about Europe but ignoring North America, would lead to a discordant risk management approach, unfit for the complexity of the risks it faces.
(2) Symphonic Hedging Strategy: For publicly traded regional banks, it is essential to deploy hedging strategies that minimize accounting noise. Often, a bank’s economic need is clear, but there are multiple ways of addressing that need, each yielding better or worse accounting outcomes. For example, a bank needing to reduce its sensitivity to rising rates can swap floating rate debt to fixed or fixed rate assets to floating. The key question becomes how to achieve the desired hedge in a way that minimize accounting burdens. The integration of hedging and accounting strategy is thus essential to ensuring a sweet-sounding outcome that deftly blends economics and accounting.
(3) Symphonic Transaction Management: We recently alerted a client to a 0% floor that was contained within its loan agreement. That initial finding led to a broader discussion with numerous implications, including economic, accounting, and regulatory. Such a conversation could not merely focus on financial considerations, then think about accounting, and finally cover regulatory – it needed to harmonize all of them simultaneously into a coherent solution.
Mozart was a one-of-a-kind intellect who could master five themes simultaneously. Rather than recruit the next Mozart, corporate finance executives must tackle their risks holistically, taking pains to avoid the kind of silos that produce discordant risk management outcomes.
Chatham has been wrestling with this challenge since our founding more than two decades ago, and we’ve learned that the job is never finished. It takes vigilance across all aspects of an organization, from team composition to floor plan design to compensation strategy. Our approach has been to build collaborating teams of experts in structuring, trading, accounting, documenting, and complying with regulations for financial risk instruments. And when you call us, you may sometimes be distracted by the whir of activity in the background – a function of our open floor plan with no offices. Our approach to compensation also strives to remove obstacles that might otherwise discourage collaboration. In other words, every decision we make is about creating a beautiful risk management symphony that thrills and delights.
Whether you play the conductor or ask us to do so, we think this kind of interdisciplinary approach is the cornerstone of effective risk management in today’s complex world. It is our earnest hope to see your organizations experience the beauty of well-harmonized risk management, so that your boards and investors say like Diana Ross and the Supremes, “Whenever you’re near, I hear a symphony.”