Risk Management Case Project

Case projects are valuable tools for teaching risk management and insurance (RMI). This article describes a flexible case study approach that can be used as a comprehensive capstone project for the RMI major or in modules for graduate and undergraduate RMI courses. The project incorporates both fundamental RMI concepts and emerging trends in the field. The use of the case project provides benefits to both students and the RMI program, especially given the increasing pressure for assessment in college curricula.     

Risk Management: The Unifying Framework for Business Scholarship and Pedagogy

In this article, I provide a brief critical assessment of the intellectual history of risk management and insurance (RMI) as an academic discipline. Although the level of rigor and overall quality of RMI scholarship and pedagogy continue to improve, RMI remains too narrowly focused upon risk management issues specifically affecting insurance markets and institutions. Since risk management is of fundamental importance to virtually all areas of business scholarship and pedagogy, we must seek ways to more broadly apply risk management concepts.     

Good decisions,bad decisions: the interaction of process and outcome in evaluations of decision quality

Process‐based considerations are generally accepted by experts and analysts as being the fundamental drivers of decision quality. However, little work has been done to account for the role of a risk management decision’s outcome as a key driver of the public judgments about decision quality. To this end, the objective of the research reported here was straightforward to determine – via an experiment – the relative importance of decision‐making process and the associated outcome in lay evaluations of decision quality. Our results demonstrate that people seem to have a difficult time unpacking decision‐making processes, even ones they strongly prefer, from their associated outcomes when evaluating decision quality. From a practical standpoint, our results cast doubt on the generally accepted belief that participatory and deliberative decision‐making processes (e.g., for risk management) will – on their own – contribute to positive evaluations of decision quality.     

How Corporate Diversity and Size Influence Spinoffs and Other Breakups

In recent months, the list of large diversified companies that have decided they would be worth more as several smaller, focused companies has grown sharply. In many of these cases, it has been outside pressure from activist investors that has motivated these actions by management—and with some pretty favorable results. But what is driving these strategic actions and what is most important in determining whether breakups create value? To answer this fundamental questions, it is critical to decide whether large, diversified companies have a value recognition problem or a value creation problem. In this article, the authors present and try to integrate the findings of two separate but related research studies on business diversity and size with the aim of identifying their implications for corporate strategy and helping company executives create more value for their investors. The specific reasons for underperformance by large diverse companies vary greatly, but there are a number of potential problems discussed in this article, including organizational “distance,” capital allocation, human capital allocation, cross subsidies, and ineffective governance. Instead of waiting for activist investors to demand a breakup, executives of large diverse companies should be proactive in addressing the potential weaknesses of their organizations. Private equity firms understand how to make diversification work and many of today's executives could learn some valuable lessons from these firms. Large diverse businesses should embrace “Internal Capitalism,” a corporate culture and set of practices that emphasizes the importance of strategic decision‐making that is linked through continuous performance assessment to the corporate goals of boosting efficiency and sustainable growth.     

Managing risk through the veil of ignorance

Background. We view overconfidence within risk management as a problem likely to manifest within philosophical preferences for anticipationism over resilienism, and in assumptions that risks are objectively real external powers or potentialities rather than subjective knowledge propositions. Methods. We argue that the realist tradition within Italian social theory, first crystallised by Niccolò Machiavelli and later elaborated by the sociologist Vilfredo Pareto, offers valuable lessons for corporate risk management praxis by demanding that we map out the complex relations between the risk subjectivities of risk managers, and their objective risk environments, from a standpoint of psychological and sociological realism which stresses the risk ignorance of practitioners. We caution that risk management efforts to improve risk subjectivities to achieve perfect veridicality to objective risk environments might often amount to a wishful bildungsroman of epistemological growth, reflecting the common aspirations of risk managers to demonstrate professional competence. We suggest that the profession should control this overconfidence problem by stressing the corrigibility of risk subjectivities with reference to sociological understandings that reflect on the widespread risk ignorance that can persist and even intensify where risk management effort is made. Results. Following the macrosociological framework sketched by Pareto, we show how two common ‘modes of uncertainty’ can be scrutinised for their adaptive fitness to two common types of risk environment. Conclusions. It can be helpful to think sociologically of organisations as engaging with some highly significant strategic risks blindly through a veil of ignorance.     

Management accounting systems, top management team heterogeneity and strategic change

Institutional and market changes force many organizations across economic sectors to reconsider their strategic position and engage in strategic change. Organizations differ in their ability to realize strategic change, however, which appears to depend on several factors in their strategic management process. In this paper we explore two such factors simultaneously, which are the composition of the top management team and the characteristics of the management accounting system. In particular, the paper investigates how top management team heterogeneity affects strategic change both directly, and indirectly, through the design and use of the management accounting system. Hypotheses are developed and tested through a survey study among 103 Spanish public hospitals. We find significant effects of top management team heterogeneity on the extent and direction of strategic change, and find that the use of the management accounting system partially mediates the relationship between top management team heterogeneity and strategic change. The paper contributes to the extant literature on the complex relationships between strategic change and MAS [Gerdin, J., & Greve, J. (2004). Forms of contingency fit in management accounting research – a critical review. Accounting, Organizations and Society, 29, 303–326], by analysing both extent and direction of strategic change, and by recognizing the importance of top management teams’ use of the management accounting system for strategic change.     

Creating Value at the Intersection of Sourcing,Hedging and Trading

Higher commodity prices, along with higher currency and commodity price volatility, have combined with challenging economic circumstances to make for difficult economics within many industries today. These factors can introduce risk to both top‐line revenue and the cost structure, and wreak havoc on net cash flow and profitability. To the extent that high prices and increasing price volatility continue to be the rule in many global commodity categories, the authors suggest that both sourcing and hedging will soon be (if they are not already) near the top of the strategic agenda for many companies. Many companies now design their hedging programs—and in some cases their sourcing—to achieve the goals of reducing cash flow volatility and optimizing value (as opposed to the more conventional aim of minimizing sourced or manufactured unit cost). And a growing number of corporate managements have expressed interest in an even more systematic approach to risk management. Rising pressure for growth and profitability has led companies with large commodities exposures—both those that are naturally long and those with a natural short—to explore a more strategic role for commodity hedging and trading, as well as the use of innovative risk‐shifting mechanisms for inbound and outbound material flows. This article shows how companies can design their commodity risk management programs to make the greatest use of the expertise and capabilities of four different corporate groups: Purchasing, Treasury, Selling, and Marketing. To that end, the authors presents a five‐step program for creating a company‐wide strategic risk management program:

• ? The first step involves making active design choices about what risks to “own” and what risks to limit based on the company's strategy, core competencies, and relative competitive advantages in owning that risk.
• ? The second step is to establish relevant risk guidelines based on capacity to own risks and, to a lesser extent, risk appetite, with specific hedging targets and benchmarks. This involves defining objectives, priorities, and constraints (for example, protecting liquidity or increasing debt capacity by reducing cash flow volatility).
• ? The third step is to identify and characterize a complete inventory of all exposures—source, size and drivers—and those exposures to be managed. This involves defining, measuring and analyzing all exposures (e.g., commodities, FX, interest rates), with special attention to aggregating, netting, natural offsets, and correlations.
• ? The fourth step involves comparing the suitability of various hedging tools and determining how to incorporate these tools into a systematic program that will achieve stated goals, views, and risk preferences for each exposure.
• ? The fifth and last step is establishing an appropriate risk management operating model, which involves considerations of organizational architecture, management processes, decision rights, information flows, and governance.

     

Allocating Shareholder Capital to Pension Plans

This article discusses the corporate challenge of providing retirement income to employees while limiting the costs and risks of pension plans to the companies themselves by addressing five main questions:

• ? What are the major issues and challenges surrounding pensions? Although the pension shortfalls have been the focus of attention, the author argues that the more serious concern is the risk stemming from the mismatch between pension assets and pension liabilities— that is, the funding of debt‐like liabilities with equity‐heavy asset portfolios.
• ? To what extent do the equity market and equity prices reflect the shortfall in value and the mismatch in risk? While the author describes some evidence of the market's ability to capture pension risk, analysts' P/E multiples and management's assessments of cost of capital may still be distorted by failure to take full account of the risks associated with pension assets.
• ? How should management analyze and formulate strategic solutions? Without offering specific solutions, the author presents a framework for analyzing the problem from a strategic perspective that can be used in formulating a company's pension policy. In particular, the article recommends that companies take an integrated perspective that views pension assets and liabilities as parts of the corporate balance sheet, and the pension asset allocation decision as a critical aspect of a corporate‐wide enterprise risk management program.
• ? If a company chooses to make a major change in its pension policy, such as a partial or complete immunization accomplished by substituting bonds for stocks, how would you communicate the new policy to the rating agencies and investors?
• ? What are the major issues to be thinking about when contemplating a change from a DB plan to a defined contribution, or DC, plan? The author argues that DC plans without some corporate oversight or responsibility for results are not a long‐term solution.

     

Education par excellence: Developing personal competencies and character through philanthropy-based education

This teaching note presents an innovation in accounting education called the Philanthropy Project. ² The Philanthropy Project emphasizes experiential learning and is designed to promote the learning of discipline-specific concepts while simultaneously addressing the social needs of the surrounding community. In the Philanthropy Project, students receive money to distribute to not-for-profit organizations (NFPs) based on a competitive proposal process they help to develop and administer. A distinguishing characteristic of this project is that it is not a simulation. Students make real decisions that have immediate consequences to certain groups of people in their own communities. They have to make difficult choices by allocating scarce resources to some agencies and saying “no” to other agencies, all with worthy causes.     

Goliath Corporation: An instructional case in transfer pricing policy

This case illustrates some of the issues associated with setting firms’ transfer pricing policies. The simulation requires students to assume the roles of top management and divisional management for Goliath Corporation in negotiating transfer prices. The student playing the role of top management first selects a transfer pricing policy from four possible mechanisms: market-based, cost-based, negotiated, and dual-pricing. Given the top manager’s policy choice, divisional managers are then constrained to use that policy as they decide whether to purchase internally or externally based on their respective negotiations. In each negotiation, there is an ex ante best decision for Goliath as a whole. The case is thus useful in demonstrating how managers’ transfer price policy choices can lead to bad sourcing decisions.     

The Goal Project: A Group Assignment to Encourage Creative Thinking,Leadership Abilities and Communication Skills

Abstract

The classroom assignment described in this paper, The Goal Project, gives students an opportunity to develop four of the skills and abilities required to be a successful accountant. In 1990, the Accounting Education Change Commission issued Position Statement Number One, Objectives of Education for Accountants. Appendix B of that statement contains eight categories of knowledge, skills, personal capacities and attitudes that are needed by accounting graduates. The Institute of Management Accountants has outlined the work of a management accountant to include working in small business teams and participating in strategic decision making. The project described in this paper replicates the work an accountant would perform when working in problem-solving teams. Data was collected and results are included from a questionnaire completed by 166 students who participated in The Goal Project. The results of perceived improvement in creative problem solving, leadership skills, and oral and written communication skills are presented.     

STRATEGIC HEDGING

This article presents a new approach to financial risk management whose primary objective is to ensure that companies have sufficient internal funds and access to outside capital to carry out their strategic investments. The foundation of this approach is a comprehensive measure of corporate exposure that views the firm as a collection of current cashgenerating assets and future investment opportunities and that attempts to show how changes in fundamental economic variables can threaten the firm's ability to realize its strategic objectives. As such, the measure of exposure reflects the effect of expected changes in economic variables not only on the firm's operating cash flows but also on its future investment requirements.
Because its focuses only on the exposures that need protection when regular sources of funds are exhausted, this strategic hedging approach will generally lead to a more conservative hedging policy. In so doing, it should enable companies to avoid the excessive and costly "micro" hedging of individual transactions—an approach that can easily degenerate into speculation.     

Risk Perception and Worry Related to Adolescents' Judgement of Three Types of Risk

The core aim of this study was to examine determinants of anticipated worry related to three types of risk among adolescents. The participants were Norwegian high‐school students aged 15–19 years (n = 335). They were students at 6 high schools and a total of 15 randomly selected school classes participated in the study. All the students were asked to fill in a self‐completion questionnaire. The response rate was 100 per cent. The participants were shown three video sequences of three‐minute conversations between a person and a listener discussing three risk sources, which each had developed into a problem (drug use, depression, and sexual abuse). The video sequences were shown to the students when they were in their classes. The results showed that there were gender differences in probability assessments as well as in anticipated worry related to the three types of risk. There were also differences in worry depending on the respondent's past experience with an identical or similar problem or risk. In addition to cognitive evaluations, own experience and gender, general worry, social support seeking, anxiety and depression significantly predicted worry. These variables explained 52 per cent of the variance. Worry may be a significant predictor of risk behaviour as well as decisions concerning risks and risk reduction. The results are related to the risk‐as‐feelings hypothesis (Loewenstein, Weber, Hsee and Welch) and other risk decision models are also discussed.     

MIT Roundtable on Corporate Risk Management

Against the backdrop of financial crisis, a distinguished group of academics and practitioners discusses the contribution of financial management and innovation to corporate growth and value, along with the pitfalls and unintended consequences of such innovation. The main focus of most panelists is the importance of a capital structure and risk management approach that complement the strategy and operations of the business. Instructive examples are provided by Judy Lewent, former CFO and head of strategic planning at Merck, and Lakshmi Shyam‐Sunder, director of finance and risk management at the International Finance Corporation. But if these represent successful applications of finance theory, what about the large number of cases where the use of derivatives and other innovations has led to high leverage and apparent risk management failures? Part of the current trouble, as pointed out by Andrew Lo, can be attributed to the failure of risk managers and their models to account for highly improbable events—the so‐called fat tails of the distribution. But, as Robert Merton suggests in closing, there is a more comprehensive explanation for today's problems: the tendency of market participants to respond to potentially risk‐reducing financial innovation by increasing their risk‐taking in other areas. “What we have here,” says Merton,

相似文献   

Fundamentals of corporate currency exposure

I model the relation between corporate currency exposure and fundamental variables like demand elasticities and operating cost structure. The currency location of a firm's operating costs may be in the home currency, the foreign currency, or partially in each. I start with a single-firm setting and extend the results to a competitive setting. The model should help managers better understand the determinants of currency exposure and thus better perform the important tasks of strategic planning and managing enterprise risk.     

Science and proven experience: a Swedish variety of evidence-based medicine and a way to better risk analysis?

A key question for evidence-based medicine (EBM) is how best to model the way in which EBM should ‘[integrate] individual clinical expertise and the best external evidence’. We argue that the formulations and models available in the literature today are modest variations on a common theme and face very similar problems when it comes to risk analysis, which is here understood as a decision procedure comprising a factual assessment of risk, the risk assessment, and the decision what to do based on this assessment, the risk management. Both the early and updated models of evidence-based clinical decisions presented in the writings of Haynes, Devereaux and Guyatt assume that EBM consists of, among other things, evidence from clinical research together with information about patients’ values and clinical expertise. On this A-view, EBM describes all that goes on in a specific justifiable medical decision. There is, however, an alternative interpretation of EBM, the B-view, in which EBM describes just one component of the decision situation (a component usually based on evidence from clinical research) and in which, together with other types of evidence, EBM leads to a justifiable clincial decision but does not describe the decision itself. This B-view is inspired by a 100-years older version of EBM, a Swedish standard requiring medical decision-making, professional risk-taking and practice to be in accordance with ‘science and proven experience’ (VBE). In the paper, we outline how the Swedish concept leads to an improved understanding of the way in which scientific evidence and clinical experience can and cannot be integrated in light of EBM. How scientific evidence and clinical experience is integrated influences both the way we do risk assessment and risk management. In addition, the paper sketches the as yet unexplored historical background to VBE and EBM.     

Risk assessments at the Royal Netherlands Air Force: an explorative study

In this paper, differences in the assessment of mission risks and mission benefits between operators and members of the management level in the transport helicopter branch of the Royal Netherlands Air Force (RNLAF) are studied. Results were obtained from a risk analysis that was conducted in accordance with RNLAF procedures. The analysis suggests that the two organizational levels have a coherent perception on risks despite their hierarchical position. Perceived measures of control – controllability – seem to induce the inclusion or the exclusion of what is appeared to be a risk. The analysis also suggests that risk management tools may obscure these perceptual differences. Risk management tools may therefore not be sufficient to attain safe operations. In discussions and future studies on risk management and on hierarchical differences in risk perception, this is something to take well notice of. Also, managers and others involved in risk management need to recognize the implications of using risk management instruments that are based on simplified models of risk. This research adds to the risk management theory because it connects multi-dimensional risk theory with actual organizational risk management practice.     

The ownership of ratings

We identify the optimal contract between a rating agency and a firm and the circumstances under which simple ownership contracts implement this optimal solution. We assume that the decision to obtain a rating is endogenous and the price of a rating is a strategic variable. Clients hiding their ratings can be an equilibrium only if they are ex ante uncertain of their quality and if the hiring decision is not observable. For some distribution functions, a competitive rating market is necessary for this result to obtain. In this context, competition between rating intermediaries will lead to less information in equilibrium.     

Stronger Risk Controls,Lower Risk: Evidence from U.S. Bank Holding Companies

We construct a risk management index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). The U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower nonperforming loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a higher lagged RMI have lower tail risk and higher return on assets, all else equal. Overall, these results suggest that a strong and independent risk management function can curtail tail risk exposures at banks.