This is the first attempt in the financial services industry to use an Ombudsman to act as a mediator on behalf of the holding entity and with financial information consumers, corporate entity employees and financial industry member companies.
McGraw-Hill Companies holds a broad variety of business publications including Standard & Poors, the securities credit ratings unit. The S&P President and CEO Deven Sharma “admitted failures”, expressed a variety of lessons that had been learned; and committed to independent and transparent Credit Ratings and to moving quickly to make changes and develop new “valuation methods and procedures”. Mr. Sharma made that commitment 22 October 2008.
As a result several, other press releases came down and the key word that “we” are all familiar with was always present. That word was and is, “independent”. Yes, you guessed right, former Ernst & Young CEO Ray Groves was appointed Ombudsman by the McGraw-Hill Board of Directors and he goes to work 16 February 2009, just a few days from now. He reports to both the CEO of S&P and Audit Committee of McGraw-Hill, a typical structure for “independent directors and advisers” to be in and one that works. I do think this can work. Why? Consultants do get “close” to their clients, but from my own experience engagements stay at “arms length” a majority of the time. Even more to the point this is a very innovative step that says “big business” is listening and observing trends, is responding; and now knows what has to happen. In this case, McGraw-Hill has moved in the right direction using the first Ombudsman to rectify “trust and integrity” issues. Will it work? I believe so, yes. There will be the recognition during engagements with ALL “clients” that S&P provides ratings to, that they are “safe” from legal prosecution and free to “talk confidentially” with Ombudsman Groves who can recommend changes and finally “fix” a key dysfunctional element of the financial services industry that “went along” and perpetuated the problem. If outright self dealing, fraud, embezzlement, insider trading, ponzi scams have been committed, Groves can move those towards “justice”. As an Ombudsman, Groves is suppose to handle “conflicts of interest” at all levels and field complaints from S&P employees, most likely in relation to “pressures” on them from powerful clients who want to skew reports, ratings and information, which “skews” market trading. This is significant because of the historical “go along to get along” relationship that ratings units have with the companies they rate. More importantly, if Groves can restore “integrity” and truly be independent in establishing a new ratings methodology; and publish poor ratings if warranted, he will be successful in restoring regulator, investor and legislator confidence in the industry.
My advice would be that while “integration” of systems is efficient and improves access to information and reduces time cycles, objectivity MUST also be a core principle in the new method so that “favors” and “tips” cannot influence ratings or any form of “quasi-insider relationship”. Ratings units CANNOT anymore be the contracted “risk mitigation” functions in a supply chain structure with the financial institutions they obtain information from. This IS conflict of interest. Such relationships have proven to be “self dealing” and “inherently subjective” ignoring fundamental economics laws. The key to solving this is to always keep your mission statement in mind and that is “who do we serve” and do it by implementing a new physical operating structure with objectivity and integrity in analysis and decision processes. If necessary, new unit charters and committee oversight at the board level may be a good idea too.
This is the first instance of an Organizational Ombudsman approach in any segment of the financial services industry that I’ve seen, it’s “well positioned” to make the appropriate impact. I hope this leads to more Ombudsmen appointments and a good industry model for others to follow.