1

Presentation

Enterprise Risk Leadership

Improving Risk Management

We need to understand:• How we know things.• How we decide.• How we learn to go outside the box.

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Presentation

#1. Risk Management

Decision-making

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Leadership Quote

 “I used to say of Napoleon that his presence on the field made the difference of forty thousand men,” Duke of Wellington

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Presentation

Facts and Beliefs

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Starting Point

People approach decisions based upon: Facts. Empirical data or observable phenomenon

supported by evidence. Beliefs. Combination of facts and interpretations of

people and activities. Feelings. Emotions that intensify or diminish facts or

beliefs. Opinions. Judgments masked as facts, beliefs, and

feelings. Assumptions. Beliefs without reflection. Bias. A pre-judgment that interferes with an objective

perspective.

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Question (1)

Of beliefs, facts, feelings, opinions, and assumptions, which is the dominant factor in decision making?

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Question (2)

Is a fact the basis for a belief?

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Answer

A fact is something supported by evidence. It can be the foundation for a belief. It may or may not be true.

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Question

What is the role of facts in reaching a conclusion?

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Answer

Facts give people either: A basis for reaching a conclusion. A need to reach a conclusion. An excuse to reach a conclusion. A way to defend the wrong conclusion at a

later time.

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Question

What is the role of feelings in reaching conclusions?

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Answer

Feelings distort beliefs and thus distort conclusions.

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Question

What are the roles of opinions and assumptions in reaching conclusions?

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Answer

Opinions and assumptions distort conclusions.

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Bias

Bias is subjectivity where a person has a preference for an interpretation with or without evidence to support a belief. It may be conscious or subconscious. It leads the person to a conclusion that

supports the belief.

Question

In 1994, Congress held a famous series of on the negative effect of smoking.

• Four CEOs of tobacco companies testified.• They denied that they knew that cigarettes were

addictive and were killing people.• They all claimed they did not believe their own

evidence.

Was this behavior based on belief, facts, or something else?

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18

Question

A small child asked, “Grandma, Who are you?”

She answered, “I am a Democrat, a Roman Catholic, and an atheist.”

How is that possible?

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Question

A teenager asked, “What should I do in college?” Three people answered:•Uncle Pat: Take accounting. You’ll always have a job and you’ll make a lot of money•High School Teacher: Get a teaching certificate. You can always get a job. •Friend of the Family: It does not matter. Everything you need to know in life you learned in a sandbox with other kids.

Who is right?

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Answer

Maybe the friend of the family. Did the person learn?•Play nice.•Never throw sand.•Nobody wants to play with mean kids.•No taking the buckets of others or destroying their sandcastles.

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Question

What are the risk management lessons from Uncle Pat, the teacher, and the friend?

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Answer

Risk management lessons are:

From Grandma. You don’t have to believe all the dogma or do everything required by the authorities.

From Uncle Pat and the Teacher. You have to be careful when asking for advice.

From the Friend of the Family. The lessons of life are really simple.

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Presentation

Corporate Royalty

Question

A corporation can be described as a monarchy, an oligarchy, or a democracy. Which is most accurate?

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Question

Royal families have titles. Governments have executive, legislative, and judicial branches. Companies have CEOs, officers, and boards. Are these parallel structures?

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Answer (1) Rank the Following

British Royalty

King/Queen

Marquees

Duke/Duchess

Viscount

Baron

Prince/Princess

Earl/Countess

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Corporation

CEO

Division Manager

COO

Senior VP

Vice President

Executive VP

Dept. Manager

Answer (2) Ranking

British Royalty

King/Queen

Prince/Princess

Duke/Duchess

Marquees

Earl/Countess

Viscount

Baron

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Corporation

CEO

COO

Executive VP

Senior VP

Vice President

Division Manager

Dept. Manager

Oligarchy Diagram

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Categories of CEOs

One way to characterize the most powerful corporate person is:

• All-powerful CEO.• Powerful CEO, Supporting Oligarchies.• Powerful Oligarchy, Influential CEO.  • Oligarchy and CEO Wary of Outsider.• Ineffective Oligarchy or CEO.

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More Categories

Another way to categorize CEOs is:• Absolute CEO. Stronger than the other

oligarchs individually and combined.• Executive CEO. Has power that is carefully

monitored by a board of directors.• Nominal CEO. This is the ranking oligarch by

title but power is in the group.

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Question

Who is someone today in a modern corporation who fits each of the following?

• Absolute CEO.• Executive CEO.• Nominal CEO

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Question

Which of the following fits your organization?• Monarchy. A king reigns.

• Democracy. Employees have an equal say in decision-making.

• Republic. The board restricts the actions of management.

• Anarchy. Individual managers manipulate people, assets, customers, and clients.

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Presentation

Home Depot

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Home Depot

Founded in 1978. From zero to $40 billion in revenues in 20

years. 1999: Growth and profits stalled.

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Nardelli Management Style

Bob Nardelli became CEO in 2000. Nardelli implemented a military-style

management model. 2002-2005: Half of newly-hired managers

were previously military officers. 2006: Over 100 former military officers were

store managers.

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Culture at Home Depot

Pre-2000: Store managers had enormous authority. Instinct rather than analytics.

2000-2005 All major decisions from the top. Measure performance with new analytics:

Margins on products.Number of customers greeted at the door.

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Results 2000-2006

Between 2000 and 2005 at Home Depot: Sales rose 75%. Profits doubled.

By 2006, world's third largest retailer.

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Home Depot in 2006

Fortune magazine Number One Most Admired Specialty Retailer for 2006.

April 2006: Model of corporate governance in an article in the Harvard Business Review .

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ERM Concern?

Home Depot: Stock price dropped 7%.

Lowe’s: A major competitor. Over 1200 stores (half

the size of Home Depot). Stock price rose by 210%.

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Story One

Inventory was sluggish at Home Depot: CEO focused on a single metric -- inventory

turnover. Store managers stopped ordering inventory. Shelves were often empty of goods to sell.

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Story Two

Home Depot cuts costs of staffing: CEO ordered a reduction of full-time staffing. Part-timers to make up half of the workforce. Part-timers have no real commitment to the

company.

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Story Three

University of Michigan Customer Satisfaction Survey:

Company 2001 Score 2006 Score

Home Depot 75 67

Lowe’s 75 78

2006 score of 67 was last place among all stores in the department store and discount store category.

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Cultural Risk?

Full-timers describe a culture of fear. Cultural changes created some new language. What do you think each means? “Aprons.” “Bob’s Army.” “Bobaganda.” “Home Despot.”

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Aprons

Store workers with orange aprons.

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Bob’s Army

Store leadership program with half the individuals as former military.

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Bobaganda

Company programming on TVs in employee break rooms with continuous play of tips, warnings, and executive messages.

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Home Despot

The company itself to disgruntled employees.

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Home Depot Finale

On January 2, 2007, Home Depot and Robert Nardelli mutually agreed on Nardelli's resignation as CEO after a six-year tenure. Nardelli resigned amid complaints over his heavy handed management and whether his pay package of $123.7 million, excluding stock option grants, over the past 5 years was excessive considering the stock's poor performance versus its competitor Lowes.

Epilogue

The story of Mr. Nardelli did not end when he left Home Depot. He became CEO of Chrysler Corporation. Although Mr. Nardelli did not get a full chance to turn around Chrysler, the Chrysler board made a calculated decision to appoint a CEO who was a crisis manager.

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Presentation

Managers and Leaders

Leadership Quote

  “If you seek to lead, invest at least 50% of your time in leading yourself . . . at least 20% leading those with authority over you, and 15% leading your peers." Dee Hock, Founder of Visa.

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Question

What is the difference between a manager and a leader?

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Answer

A manager pursues stability.

A leader pursues change. 

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Question

How do managers and leaders get power?

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Answer

Different places:• Manager. Is powerful by virtue of a formal

position in an organizational hierarchy.• Leader. Is powerful from an ability to influence

others.

 

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Question

What do managers and leaders respect in an organization?

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Answer

Different things.• Managers. Respect people, relationships,

structure, and policies.• Leaders. Respect the emotional elements in the

interaction between themselves and their constituents.

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Question

Is a good manager or good leader more effective in dealing with multiple constituencies?

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Answer

It depends upon the culture.• Traditional Hierarchy. A good manager can

use position authority to keep organizational units focused.

• Knowledge Culture. A good leader is more likely to be effective dealing with conflicting requirements of constituents.

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Question

Are you a manager or a leader?

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Question

Do managers or leaders get more respect in a hierarchy?

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Question

In 1984, AT&T relinquished its monopoly on U.S. local telephone service.

• The company directed its marketing unit to accept products from AT&T’s manufacturing unit.

• The marketing personnel objected.

What was the outcome?

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Answer

AT&T sided with the marketing unit.• The AT&T business model had been driven by

technology and engineers.• Phones lasted 50 or more years.• Marketing argued that customers had to tell

what they wanted.• Changing technology and throw-away phones

turned out to be right.

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Question

Can leaders or managers be created?

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Answer

Probably.• Some people are naturally managers.• Others perform the role of leaders.• Both thrive or fail depending upon the way they

align or ignore the strengths and weaknesses of the organizations they join.

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Question

Where does Manager number one want to go?

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Question

In 2004, Prince Bandar was a powerful member of the Saudi political structure. He was accused of accepting bribes of one

billion pounds from BAE. In return, he awarded BAE arms contracts. A British agency investigated the payments.

What happened next?

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Answer

Tony Blair, British prime minister, halted the investigation. In 2008, a British court learned that Prince

Bandar flew to London in 2006. The Prince threatened to withhold data on

terrorists planning to attack Great Britain. To avoid that situation, the British government

ceased the corruption investigation. The story created an international outcry:

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Question

In 2008, Prince Bandar was interviewed on British television. What was his reaction to questions about the bribery activities?

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Answer

Prince Bandar said: “You tell me that building this whole country? Spending 350 billion out of 400 billion? That we had misused or kept grasp of 50

billion after 10 years? I’ll take that any day. What I have to tell you is (pause) SO WHAT! We did not invent corruption.”

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71

Presentation

Peter Drucker

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Question

Peter Drucker (1909-2005) was a management consultant, educator, and author.

• He was a proponent of Management by Objectives.

• What did Drucker claim was the only strategic goal of an organization? 

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Answer

Create a customer. Everything else is an activity involved in pursuing that goal.

 

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Question

Who is the customer of a hospital?

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Answer

It is rarely the patient. It may be:• A doctor who has hospital privileges.• An emergency medical services responder.• A spouse or guardian of a child or aging parent.• The policeman who first arrives on an accident

scene.

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Question

Who is the customer of a university?

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Answer

The customer may be:• A parent• A teacher.• A guidance counselor.• A current or former classmate.

Question

Who is the customer of the American Red Cross?

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Answer

It is not the victim of a disaster. The customer can be anyone who:

• Is emotional about restoring lives after a disaster, accident, or injury.

• Is able to donate funds.• Can convince others to donate funds.• Has access to the Internet or mass media.

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Question

People and organizations have missions.• “I want to raise my children.”• “I want to build a business.”• “I am determined to get a book published.”

What is your mission?

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Question

People also have visions for themselves in the future.

• Do you have a vision?• If yes, what is it?• If no, why not?

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Question

Purpose brings together mission and vision.• A purpose is a reason for taking an action or for

something to exist.• It is the starting point for strategic decisions.• At its basic level, we ask, “Is there a reason for

me to exist.”

What is the purpose in your life?

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Question

A purpose is a reason for an organization to exist. Can an organization have a mission or vision without having a purpose?

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Question

 Purpose addresses, “What is our business? Who is our customer? How does this help an organization?

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Question

 Would it be better to ask, “What will be our business? Who will be our customer?”

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Question

 Would it be better still to ask, “What should be our business? Who should be our customer?”

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Question

 What answer should Barnes and Noble give to the questions, “What should be our business? Who should be our customer?”

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Questions

• Wrong Question. What do we have?• Right Question. What do we need?

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Presentation

U.S. Health Care Reform in 2013

A Lesson in the Failure to

Implement Enterprise

Risk Management

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News Item

October 15, 2013:•202,000 individuals signed up for Mars One colony project.•36,000 registered at Healthcare.gov.•U.S. Department of Health and Human Services said that number is wrong.

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Answer

October 15, 2013:

•202,000 individuals signed up for Mars One colony project.

•36,000 registered at Healthcare.gov.

•U.S. Department of Health and Human Services said that number is wrong.

•The actual number is 51,000.

Question

Is it better to ask the right question and get the wrong answer or ask the wrong question and get a great answer?

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Questions

• Wrong Question. What do we have?• Right Question. What do we need?

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Issues

Should we build 50+ sites?• 50 states plus territories.• 26 states agreed to participate.

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Question

Should we build an integrated system?• Systems Software. Operating system.

Libraries, services, drivers configuration, utilities, security.

• Applications. Performance of useful tasks.

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Answer

Should we build upon what we already have?• Legacy System.• Legacy Applications.

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Question

How much should we spend?• $94 million first contract.• Medicare and Medicaid “free.”• $400 million one month later.

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Question

How do we involve all agencies?• Updates and changes.• Differences in state plans.• Incompatible legacy systems.

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Question

What is the scope of the project?•50 million uninsured Americans.•20 million need insurance yesterday.•Start everybody on same day.

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Conclusion

?

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Presentation

#2. Embrace

Enterprise Risk Management

Leadership Quote

“Whatever you do, don’t mention risk management. It is so boring.”

Doreen Tango Hampton, upon learning that her husband had been invited to speak at an insurance industry conference.

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Enterprise Risk

Do not wait until the system is in trouble to fix it.• Enterprise Risk. The full range of risks and

opportunities confronting organizations.• Enterprise Risk Management (ERM). A model

to manage enterprise risk.• Enterprise Risk Leadership (ERL). An update

to ERM.

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Question

 Ford Motor Company experienced a 13 percent drop in production during the fourth quarter of 2001. What caused the decline?

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Answer

 Trucks carrying components for automobile and truck manufacturing were stopped at the Mexican and Canadian borders in the weeks following the 9/11 attack on the World Trade Center in New York City.

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Question

 In 2010, Thailand experienced a series of flash floods. Who was affected by the climatic event?

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Answer

 Manufacturers of computer components around the world.

• Dell and others advised customers that deliveries could be delayed by as much as three months.

• Companies in need of parts experienced serious problems when their equipment could not be repaired.

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ERM by COSO

ERM refers to the process of managing all risks in a single, coordinated program.

• Named in the 1980s.• COSO provides thought leadership in

management and governance.• In 2004, COSO developed the most popular

ERM framework.

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109

ERM Implemented

One ERM program: 800 Business Risks. Consolidated into 20

categories:Aligned with business goals.Analyzed in relationship to operational

processes. 2100 Common Risks Group-wide

exposures.

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Subcontractors

Technical

partners

Suppliers

Information

Organization

Human resources

Customers

Operational processes R&D Marketing & SalesManufacturing

CompetitorsExternal environment

Internal environment

Business partners

Delayed production

Dependence on specific business

partners

Failures of sales channel

strategies

Failures of sales promotion

Inadequate business partner handling

Insufficient manufacturing reforms

and IT innovations

Internal infrastructure and

organization operations

Falling market prices

Failures to respond to changing

customer needs

Increasing competition

due to competitors' products

Structural reform-related issues

Naturaldisasters

Laws and regulations

Country-specific risks

Lack of differential technology

Delayedtechnologicaldevelopment

Delayed collaboration due to insufficient linkage between divisions

Cost increases (increasing inventory, soaring material costs, declining yield)

PL and quality issues

Staff allocation and development

Results of Business Risk Consolidation

- Business risks in the external environment, operational processes, and internal environment -

Business StructureBusiness domain Business Domain Companies and Group Companies

Global and

Group Head Office

Global and

Group Head Office

Home appliances, household equipment, healthcare systemsHome appliances, household equipment, healthcare systems

LightingLighting

Environmental systemsEnvironmental systems

Home Appliances

Home Appliances

Matsushita Home Appliances Company, Matsushita Refrigeration Company*Healthcare Business CompanyLighting CompanyMatsushita Ecology Systems Co., Ltd.*

Matsushita Home Appliances Company, Matsushita Refrigeration Company*Healthcare Business CompanyLighting CompanyMatsushita Ecology Systems Co., Ltd.*

AVCAVC

Fixed-line communicationsFixed-line communications

Mobile communicationsMobile communications

Automotive electronicsAutomotive electronics

SystemsSystems

AVC Networks

AVC Networks

Panasonic AVC Networks Company

Panasonic Communications Co., Ltd.*

Panasonic Mobile Communications Co., Ltd.*

Panasonic Automotive Systems Company

Panasonic System Solutions Company

Panasonic Shikoku Electronics Co., Ltd.*

Panasonic AVC Networks Company

Panasonic Communications Co., Ltd.*

Panasonic Mobile Communications Co., Ltd.*

Panasonic Automotive Systems Company

Panasonic System Solutions Company

Panasonic Shikoku Electronics Co., Ltd.*

MotorsMotors

Electronic componentsElectronic components

SemiconductorsSemiconductors

Display devicesDisplay devices

BatteriesBatteriesComponents and DevicesComponents and Devices

Semiconductor Company

Matsushita Battery Industrial Co., Ltd.*

Panasonic Electronic Devices Co., Ltd.*

Motor Company

Others

Semiconductor Company

Matsushita Battery Industrial Co., Ltd.*

Panasonic Electronic Devices Co., Ltd.*

Motor Company

Others

FA, Corporate eNet Business DivisionFA, Corporate eNet Business DivisionSolutionsSolutions Panasonic Factory Solutions Co., Ltd.*, and othersPanasonic Factory Solutions Co., Ltd.*, and others

Victor Company of Japan, Ltd.*Victor Company of Japan, Ltd.*

Segment

JVCJVC

Matsushita Electric Works, Ltd.*, PanaHome Corporation*Matsushita Electric Works, Ltd.*, PanaHome Corporation*

Head Office

CISC

Panasonic Design

Company

R&D divisions

Sales division

Overseas divisions

MEW and PanaHomeMEW and PanaHome

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Secretariat

Results of Group-wide risk

assessment

Establishing and improving Group-wide RM systemInstructing risk assessment

After the Committee's establishment

After the Committee's establishment

Corporate FunctionalDivision A

Corporate FunctionalDivision A

Corporate FunctionalDivision C

Corporate FunctionalDivision C

Support

Support

Corporate FunctionalDivision B

Corporate FunctionalDivision B

G&G RM Committee G&G RM

Committee

<Roles of the Committee>

[1] Establishing and improving Group-wide RM system

[2] Conducting Group-wide risk assessment

[3] Reporting to the President, and Board of Corporate Auditors

[4] Studying possible measures to prepare for major risks; suggesting such measures to President and Corporate Functional Divisions

[5] Improving Group-wide support systems against emergencies

CommitteeCommittee

CommitteeCommittee

Domains

Subsidiaries

Corporate Regional Management

Divisions /Regional HQs

Collecting risk information from across the Group

Group-wide Risk Management System for General Control

(2) Establish a G&G Risk Management Committee to address the current problems

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3. Operations

2. Politics, economy, and society

1. Disasters and accidents

　 (3) Information

Earthquakes, typhoons, tsunamis, floods, and other natural disasters

General Affairs Group, Overseas Security management Office

Fires, explosions, airplane crashes, terrorist attacks, and other major destructive or violent events

General Affairs Group, Corporate Personnel Group, Overseas Security Management Office

Wars, civil wars, conflicts, etc. General Affairs Group, Overseas Security Management Office

Corporate threats, abduction, and violent civil unrest

General Affairs Group, Overseas Security Management Office

PL and recall issues, other quality problems Corporate Quality Administration Division

Failure in complaint-handling Corporate CS Division

Intellectual property right infringements Corporate Intellectual Property Division

(2) Sales and procurement Violation of antitrust (competition laws) Corporate Legal Affairs Division

Bribery Corporate Legal Affairs Division

Violation of Subcontractors Act Corporate Procurement Division

Soaring raw material prices and unavailability Corporate Procurement Division

Trade secret leakage Corporate Information Security Division

Private data leakage and violation of privacy Corporate Information Security Division

Information security incidents related to products and services

Corporate Information Security Division

Insider trading General Affairs Group

Shutdown or malfunction of information systems and communication networks

General Affairs Group, Corporate Information Security Division

Unauthorized use of information systems General Affairs Group, Corporate Information Security Division

Inadequate security measures related to information systems

General Affairs Group, Corporate Information Security Division

(4) Information systems

Environmental pollution Corporate Environmental Affairs Group

Waste treatment Corporate Environmental Affairs Group

Environmental regulations Corporate Environmental Affairs Group

(5) Environment

Violation of security export control Corporate Legal Affairs Division

Trade issues Corporate Legal Affairs Division

　 (6) International relations

(7) Finance Bad loans and business partner bankruptcy Corporate Accounting Group

Tax and accounting system changes Corporate Accounting Group

Exchange rate fluctuations Corporate Finance & IR Group

Interest fluctuations Corporate Finance & IR Group

Stock price fluctuations Corporate Finance & IR Group

Impairment of long-term assets and deferred tax assets

Corporate Accounting Group

(8) Labor issues Human rights issues, including sexual harassment

Industrial Relations Group, Corporate Personnel Group, Overseas Security Management Office

Employment Corporate Personnel Group, Industrial Relations Group

Industrial accidents Industrial Relations Group

Health issues such as infectious diseases Industrial Relations Group, Overseas Security Management Office

(1) Quality, CS, and intellectual property

Clarify Sections Responsible for Each Risk

ERM Features (1)

Upside of Risk. A lost opportunity is as much a loss as damage to people and property.

Alignment with the Business Model. What are we trying to do? How will we do it?

Risk Owners. A specific person or group should be responsible for every risk. If everyone is responsible, no one is accountable.

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ERM Features (2)

Central Risk Function. An individual or group that scans for changing conditions from a central vantage point and share the findings with risk owners.

High-tech Risk Platform. Cutting-edge technology to help organizations understand risk.

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116

Presentation

1. Upside of Risk

Female Vice President

117

Question

Do you agree that a missed opportunity a “risk?”

118

Question

Upside of Risk

A female vice president was advancing rapidly in an organization, responsible for managing 700 employees in the customer services division of a global manufacturer of aircraft parts and systems. At age 33, she resigned and spent 8 years raising two children. At age 42, she applied for a position quite similar to her previous job before the resignation. Should she be a serious candidate for that job?

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Answer (1)

However you answered the previous exercise, assume that a headhunter arranged a high-level interview for the woman. He asked her whether she learned anything during the time as a full-time parent. Do you believe any important knowledge or skills might have been gained? If yes, what are they?

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Answer (2)

A female with an 8-year absence identified the following skills. She: Became a better listener, more patient, and

empathetic. Learned how to be firm without being strident. Appreciated the value of compromise. Appreciated the behavior of others. Learned how to say and to save “no’s” for

major issues.

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Answer (3)

Learned how to be attentive, filtering out distractions.

Discovered the importance of giving positive feedback.

Developed a behavior to be serious without being solemn.

Discovered the difference between a real emergency and a passing inconvenience.

Realized the value of “observation”

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Answer (4)

Organizations should recognize both the downside and upside of risk. Drawbacks include.

• Changing markets.• Few current customer relationships.• Fewer linkages with other key managers.• Outdated knowledge of products and

organizational philosophy and structure.

Upside is obvious to most people as a result of her answers to the question.

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Presentation

2. Assign Risk Owners

Ford and Palladium:

124

Question

The second contribution of ERM is to assign a risk owner as the single individual responsible for a risk or opportunity. Do you agree that every risk opportunity should have an owner?

Question

Importance of Risk Owners

In the late 1990s, Ford Motor Corp. recognized an exposure to price fluctuations in the rare metal palladium, an important component in catalytic converters. To reduce the risk, the purchasing department hedged the exposure by signing long-term contracts to purchase palladium at stable but high prices. Was this an effective enterprise risk management strategy?

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Answer

No. it was exactly the opposite. Ford’s Research and Development department recognized the same risk and redesigned catalytic converters requiring minimal palladium. Other companies followed suit. In 2001, the price per ounce of palladium dropped from $1,500 to $400 causing Ford to suffer a loss of $1 billion.

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127

Question

How many risks should be assigned to a single risk owner in an ERM structure?

128

Presentation

3. Align with Business Model

Tata Motors

129

Question

The third contribution is risk categories should be aligned with the business model of an organization. What is a business model? What is included in it?

130

Answer

A business model is the strategy of a specific firm to be successful. It includes: Value to be Created. Benefits to be obtained

by customers or clients. Architecture of the Firm. Hierarchy to

deliver value. Relationships. Network of partners for

creating, marketing, and delivering value. Resources. Capital, assets, and other

resources to generate sustainable profits.

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Risk Owners in a Business Model

Functional Staff. C-level production, marketing, finance, administration, technology,

Business Units. Regions, autonomous operations, and subsidiaries.

Key Initiatives. Major activities reflecting highly visible goals.

Question

Align with the Business Model

TATA was India's largest automobile company. It began to deliver the Tata Nano in 2009 with a starting price of US$ 2,200.

• Who were Tata’s potential customers?• What was the strategy to reach them?

132

Answer

Customers. Target buyers who used motorcycles to transport entire families.

Strategy. Designed the simplest possible car. • Windshield Wiper. One wiper, not two.• Power Steering. Not available.• Lug Nuts on Tires. Three instead of four.• Radio. None.

Local Assembly. Buy the modular components.

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Presentation

4. Central Risk Function

Grocery Acquisition

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135

Question

The fourth contribution of ERM is to create a central risk function to coordinate risk discussions across the entity. Where should it be positioned? What should it do?

136

Answer (1)

The central risk function: Should occupy a high position in an

organizational hierarchy. Should share unaligned risks and

opportunities.

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Answer (2)

The central risk function: Should occupy a high position in an

organizational hierarchy. Should share unaligned risks and

opportunities. Should not manage risk itself.

138

Question

How does a central risk function enhance an ERM program?

139

Answer

A central risk function enhances an ERM program in the following areas: Risk Identification. Risks that might

otherwise be missed by key executives. Risk Sharing. Open channels for

collaboration. Influencing Risk Discussions. Opening

silos.

Question

An upscale food retailer was negotiating the acquisition of another grocery chain.

• The business model was to convert the acquired locations to the company’s own stores.

• The CEO added the risk manager to the negotiating team.

• What role can a central risk function play in that capacity?

140

Answer

The risk manager visited a store and observed the intention to “gut” the interior.

• She asked when the store was built.• She confirmed all the stores contained asbestos

in the walls.• State law provided asbestos abatement.• The finding changed the deal.

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142

Presentation

5. Technology

Riskonnect

Riskonnect is a company that builds software platforms for central risk functions.

• It provides information from all areas of a company.

• It allows the sharing of risk and opportunities.• Go to www.riskonnect.com.

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144

Answer

The high-tech platform allows:• Sharing. Of risks and scope of exposures. • Storage. A repository to show how risk

owners are evaluating risks and relationships among exposures.

• Strategies. Alternatives, recommendations, and actions to mitigate risks.

• Communications. Managers can see and support or oppose risk management efforts.

Question

• Earthquake in central China.• Floods in Thailand.• Bombing at the Boston marathon?• Terrorism in London. • Train crash in Madrid.

Who needs to know?

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146

Presentation

Federal Express

147

Philosophy

The philosophy of Fed Ex is to “move, communicate, and shoot.”

• Start the package toward its destination (Move).• Make its position known to the receiver

(Communicate).• Deliver it (Shoot).

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Fed Ex Statistics

Information flows of FedEx: Packages a day 9 million Hubs 42 Countries 220 Airplanes 687 Vehicles 90,000 Employees 290,000

149

Question

In recent years FedEx spent over $1 billion on a high technology risk management system.

• Customers can track any individual FedEx shipment using the Internet.

• What happens if the customer does not know the tracking number?

150

Answer

A tracking number is not needed. A FedEx product called Insight allows a customer to see every inbound package.

151

Question

Why does a customer even need to track a package?

152

Answer

Many examples including:• A laboratory wants to know what it bone-marrow

shipments will be received today to prepare for testing the samples.

• A sample has a useful life span of 24 hours.• By tracking every inbound shipment early in the

day, the company can be sure to have enough people available to test all samples.

153

Question

The world view of Fed Ex is expansive.• Rob Carter was the chief information officer of

FedEx.• He was asked the question “What business are

you in?• How do you think he answered?

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Answer

FedEx engineers time. As the world shrinks and changes, FedEx offers solutions to allow customers to make things happen on time schedules that otherwise would be impossible.

Side Story

Fred Smith was the founder of Fed Ex.• He is a graduate of Yale University with a

degree in economics..• At Yale he wrote a paper outlining overnight

delivery service in a computer information age.• He received the grade of “C” on the paper.• The professor did not believe the idea was

feasible to compete with the U.S. Post Office.

155

Question

Do you think the professor ever changed the grade?

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Presentation

Risk Management in Baseball

157

Presentation

Risk Management at AIG

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Hank Greenberg

Maurice (Hank) Greenberg, CEO of AIG from 1968 to 2005, was a CEO in the tradition of John D. Rockefeller at Standard Oil, Henry Ford at Ford Motor, and Andrew Carnegie of U.S. Steel. He was also a consummate enterprise risk manager long before the term was coined in the 1980s.

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Guaranteed Investment Contract (GIC)

Derivatives are securities where their value comes from an underlying cash flow. AIG sold GICs.

• A municipality approves a construction project and sells a bond.

• The issuer deposits the proceeds with AIG.• AIG guarantees the return of principal within 72

hours when asked. 

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Collateralized Debt Obligation (CDO)

AIG sold CDOs• Investor buys a security with 1,000 mortgages

as the source of repayment.• Investor collects monthly mortgage payments

and ending value if property is sold.• Investor requests insurance to protect it in the

event of loss.• AIG provides the CDO guarantee.

 

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Crisis at AIG

In 2008, AIG was caught in a liquimonty squeeze.• Municipalities withdrew all their funds all at

once.• Homeowners defaulted on monthly mortgage

payments and banks foreclosed• Investors presents requests for payment to AIG.

162

Question

Elliott Spitzer brought legal charges against Hank Greenberg and had him removed as CEO of AIG in 2005. If Mr. Greenberg had stayed until 2008, would AIG have avoided the near collapse?

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164

Presentation

Management or

Empowerment

165

Question

An organization can apply a simple rule for deciding whether to honor a request from a visitor to its theme park, resort, hotel, cruise ship, or other facility.

• The employee asks five questions.• If the answer is no to all of them, the request

would be granted.

What are the five questions?

166

Answer

Cost. Is it expensive for the organization?

Legality. Is it illegal?

Convenience for Others. Will it inconvenience another guest?

Danger. Is it dangerous?

Image. Will it harm our image and reputation?

167

Presentation

GM and Pratt & Whitney

168

Question

General Motors went to China to build cars. Pratt and Whitney went to Russia to build aircraft engines. What was the potential for each company?

169

Answer

High potential. Big Markets for GM in China. P&W in Russia.

GM Joint Venture

Shanghai General Motors Company Ltd. is a joint venture between General Motors Company and Shanghai Automotive Industry Corporation (SAIC).Started in 1997.50/50 joint venture.Manufactures and sells Chevrolet, Buick, and Cadillac brand automobiles in mainland China.

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Pratt & Whitney in Russia

P&W created two joint ventures with Russian companies:One built commercial aircraft engines.One built rocket engines.

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Central Risk Scanning

Observed Risk: China and Russia do not protect intellectual property.

Mitigation Strategy: ?

Question

What is this?

173

Answer

The GM Spark Car made in the Chinese joint venture.

174

Question

What is this?

175

Answer

The Chery is the same car made from GM plans at the Chery Automobile Co, a state-owned car company. GM receives no royalties or fees as a result of the loss of its intellectual property.

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177

Question

What are secrets with the following world-class: Compressors. Combustors. Turbines. Afterburners. Nozzles. Thrust reversers. Propellant pumps. Control systems for jet engines?

178

Answer

We do not know and neither do the Russians.Pratt and Whitney does not share its advanced technology.The company maintains highly secure manufacturing plants.The highest tech components for joint venture engines are made exclusively in P&W plants.

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Presentation

#3. Implementing ERM

Leadership Quote

“Leadership is the art of getting someone else to do something you want done because he wants to do it.”

Dwight D. Eisenhower, Military leader and U.S. President.

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181

Presentation

Steps to Implement ERM

General Motors

182

Risk Identification

The situation facing General Motors in 2007: It shows an example of using a standard

risk management process. It starts with risk identification.

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Risk 1 -- Lagging Sales

GM alone once had half the U.S. auto market. In 2009, Toyota and GM were the same

size at 20% each.

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Risk 2 -- High Costs

General Motors had a bloated payroll: Salaried staff, probably 25% more than

needed. Hourly labor costs were higher than

competitive levels.

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Risk 3 -- Legacy Costs

General Motors agreed to historical costs that are no longer viable: Payments to non-working workers. Providing prohibitively-costly retirement

and health care benefits.

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Risk 4 -- Dealerships

General Motors had too many dealers: GM had 7,000 dealers. Toyota had 1,500 dealers. Remember, the two companies had the

same percentage of U.S. market sales.

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Risk 5 -- Contractual Commitments

Agreements: Supported a "Jobs Bank" program with

90% full wages and benefits to non-working former employees.

Obligations under revenue bonds for municipalities that financed closed facilities.

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Risk 6 -- Auto Company Management

General Motors had not made desperately needed changes: Did they lack the ability to change? Did they lack the courage to change?

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Risk Identification

190

Visualization (1)

High Costs

EVP Operations

Lagging Sales

EVP Marketing

191

Visualization (2)

Legacy Costs

Chief Counsel

Dealerships

EVP Dealer

Network

192

Visualization (3)

Dealerships

EVP Deal Relations

GM Management

Board of Directors

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Visualization – The Whole Picture

Cluttered but risks can be tagged.

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Tagged

Legacy Costs isolated yet shown with other risks.

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Assign an Owner

GM can visualize risk categories and assign risk owners:

Risk Owner Lagging Sales. EVP Marketing High Costs. EVP Operations Legacy Costs. Chief Counsel Dealerships. EVP Dealer

Network Contract Commitments. Chief Counsel GM Management Board of Directors

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Assess and Evaluate

General Motors needed to develop strategies to mitigate the identified risks.

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Strategy 1 – Lagging Sales

Become smaller: Some brands, ( Chevrolet, Buick, Cadillac)

have considerable loyalty. Even the quality is acceptable. Focus on them along with hybrids. Reduce U.S. manufacturing capacity. Sales could come into balance with available

and desired vehicles.

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Strategy 2 – High Costs

Cut them: To competitive levels. Streamline salaried positions. Reduce hourly labor costs.

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Strategy 3 – Legacy Costs

Face the reality. Abandon them. Ask the government for help to reduce

abuses and economic disruption during a transition.

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Strategy 4 – Dealerships

Close many of them: A horrible action for local communities. A probable outcome in any case.

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Strategy 5 – Contractual Commitments

Break them: Sorry about that. Tough times can be tough.

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Strategy 6 – Management

Fix it. Ford’s Mullally and Chrysler’s Nardelli

may be crisis managers. GM’s Wagoner is more problematic. The board of directors needs to demand

changes in the GM managerial culture.

203

Evaluate

General Motors, in partnership with the U.S. government, had specific options for each risk.

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Option 1 – Lagging Sales

Reduce production. Eliminate brands. Close plants. Whoops. UAW and municipality contracts made it

prohibitive to close plants. Score one for Chapter 11 bankruptcy.

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Option 2 – High Costs

Reduce the number of salaried and hourly employees. Whoops. A UAW hourly worker was quoted “I

think we’ve given enough.” It reflected the union mood and position. Score two for Chapter 11.

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Option 3 – Legacy Costs

Reduce them big time. No chance for success if they continue. The costs were contractual. No sign that workers would give them

up easily. Score three for Chapter 11.

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Option 4 – Dealerships

Reduce the number. State laws made it prohibitively costly to

close dealers. Score four.

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Option 5 – Contractual Commitments

Who signed these things? Never mind. Score five.

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Option 6 – Management

GM does not need a “Car Czar.” GM needs a functioning boards of

directors and executive leadership. Were they likely to occur absent

bankruptcy? Neutral.

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Evaluate a Little More

A good ERM analysis looks for opposing views.

211

Bankruptcy as an Option

GM’s Wagoner was quoted as saying, "bankruptcy is not an option." He was right. The term “option” implies other choices. If there were none, bankruptcy was not

an option. It would be an eventuality.

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Protecting Dealers

Michael Jackson was the CEO of AutoNation, the largest U.S. retailer of cars. He said GM improved quality, reduced

labor costs, and rationalized production. Does this mean it needed all the local

dealers included in AutoNation?

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Labor Costs

The UAW view? We already did this one. “I think we’ve given enough.”

214

Likelihood of Change

GM’s Wagoner said he would not resign. GM’s Wagoner said what? You have got to be kidding.

215

Effect of a Bankruptcy

CNW Marketing Research said 80% of car buyers would not purchase a car from a bankrupt company. Another survey said 51% would not buy

a car from G.M. in any case. Huh?

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Implement a Strategy

Are we ready to choose? A chapter 11 bankruptcy has negative effects. They are offset by the possibility of: Fixing high costs. Fixing legacy costs. Reducing the excessive number of

dealerships. Eliminating burdensome contractual

commitments.

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An Alternative Strategy

A bailout without conditions offered short-term continued operations. Did it offer anything else?

218

Conclusion in December 2008

GM was not choosing between bankruptcy and a bailout. The choice was bankruptcy alone. It was an eventuality, not an option. A bailout had to be contingent upon

filing Chapter 11. This is a useful insight from an

enterprise risk management analysis.

219

Monitor and Revise

That is the analysis. The situation changed daily in 2008 and

2009. We compare the analysis with the

outcome. GM earned $4.7 billion in 2010. Union workers got bonuses of $4300.

Is GM Making a Comeback?

220

Did you see Transformers?

Is GM Making a Comeback?

What about 2012?• China. Three million vehicles.• U.S. 2.5 million vehicles

221

222

ERM Leadership

Who do we Need?

223

Assign an Owner

Remember this from GM?:

Risk Owner Lagging Sales. EVP Marketing High Costs. EVP Operations Legacy Costs. Chief Counsel Dealerships. EVP Dealer

Network Contract Commitments. Chief Counsel GM Management Board of Directors

224

Presentation

Peacetime and Wartime Leaders

Two Leadership Styles

Leadership can be portrayed in two categories:• Wartime Leader. Action trumps planning.• Peacetime Leader. Planning trumps action.

225

Wartime Leader

• Goal. What are we trying to do?• Strategy. What might work?• Action. Go for it.

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Peacetime Leader

• Goal. Should we make changes?• Options. What alternatives do we have?• Strategy. What is our best choice?• Information. What else do we need to know?• Planning. How will we proceed?• Action. When should we start?

227

Question

Dwight D. Eisenhower was the Supreme Allied Commander in the European Theater in World War II. Was he a peacetime or wartime leader?

228

Answer (1)

Compare him to George S. Patton.

229

Question

Who believed the following?• Plans are nothing.• Budgets are nothing.• Planning and flexible budgeting are everything.

230

Answer

Wartime and peacetime leaders believe:• Plans are nothing.• Budgets are nothing.• Planning and flexible budgeting are everything.

231

Question

Would a wartime or peacetime leader be more receptive to implementing a program of ERM?

232

233

Presentation

Hill A

234

Strategies and Tactics

Strategy. An approach to achieving a goal. During the evaluation process, you can decline the goal.

Tactic. An approach to achieving a goal when it is not possible to decline the goal.

235

Strategy

A commander has a goal to capture hill A, a dominant terrain feature on a battlefield.

• The initial plan is to capture hills B and C first.• The two smaller flanking hills are occupied by

enemy soldiers.• After taking hills B and C, all forces will attack

hill A.

236

Tactic

The commander has three infantry companies and an artillery battery to provide support. The tactic is:

• Send one attack unit to hill B.• Send another attack unit to hill C.• Keep one attack unit in reserve.• Use artillery to soften up hills B and C.

237

Implementation

The battle is underway.• Unit 1 attacks hill B and clears it of enemy

soldiers.• Unit 2 attacks hill C but bogs down. The

attacking force is pinned down by intense fire 300 meters below the enemy ridgeline on hill C.

Question: What do you do now?

238

The Plan

Hill A

Hill B Hill C

Unit 1 Unit 2

Unit 3

239

Move, Shoot, Communicate

Hill A

?

Hill B Hill C

?

Unit 1 Unit 2

Unit 3

240

Answer

In military settings, the most common philosophy is to continue on and commit unit 1 and unit 3 to take Hill A.

The slogan is “Exploit success, not failure.”

Question

Is the implementation of ERM a tactic or a strategy for an organization?

241

242

Intelligence and Emotions

Intelligence Quotient (IQ) is the ability of someone to be aware of something and to make a correct judgment about it.

Emotional Quotient (EQ) is the capacity to understand emotional information and to reason with emotions.

243

Question

In implementing an ERM program, is it more important for the management team to have a high level of intelligence quotient or emotional quotient?

244

Question

Can an individual increase his or her intelligence quotient? Emotional quotient?

245

Answer

Most researchers believe the intelligence quotient is stable over time and cannot be changed. Researchers are mixed on emotional intelligence. Some argue it is static. Some say it is dynamic.

246

Presentation

Alpha Behavior at JPMorgan Chase

Alpha Males and Females

 The individual with the highest rank.• Preferential access to food and desirable

activities.• In some species only alphas are permitted to

reproduce.• Achieve status by superior physical prowess or

building alliances.• Monarchs and oligarchs know behavior well.

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248

Financial Situation

In 2012 J.P. Morgan reported a $6 billion trading loss on credit default swaps. This is that story.

249

Jamie Dimon as CEO

In 2006 Mr. Dimon changed the bank’s strategy:• Previously the goal was to protect capital.• The new goal was to generate profits from

financial transactions involving derivatives.• Use the bank’s financial muscle (Assets of

$2.25 trillion) to develop opportunities that were beyond the capabilities of others.

• The philosophy was “exploit success not failure.”

Bruno Iksil

Mr. Iksil:•Was a JPMorgan trader.•Took large risks to achieve large profits.•Was nicknamed “The London Whale.”

250

Enter Boaz Weinstein

Mr. Weinstein:•Was a derivative trader.•Ruthlessly attacked market weaknesses.•Was nicknamed the “Monster.”•Spotted a weakness in the strategy of JPMorgan.•He started buying the JPMorgan derivatives.

251

Outcome

From November 2011 to May 2012, the two men played the game:•Iksil sold more and more securities.•Weinstein bought more and more.•Weinstein was losing at first.•The market recognized the weakness in the JPMorgan strategy.•The JPMorgan position collapsed.•The “Monster” had beaten “The Whale.”

252

Question

Did Mr. Iksil explain what he was doing?

253

Answer

Yes. He told the U.S. Senate:• “Sell the forward spread and buy protection on

the tightening move.• Use indices and add to existing position.• Go long risk on some belly tranches, especially

where defaults may realize.• Buy protection on HY and Xover in rallies and

turn the position to monetize volatility.”

254

Question

Did the Senators understand Mr. Iksil’s testimony?

255

Answer

We do not know if any of the senators understood Mr. Iksil’s testimony.

The Senate did approve a plan to regulate future derivative trades.

256

Question

• In 2010, JPMorgan paid $7.3 million to Mr. Iksil.• In 2011, the bank paid him $6.8 million.• In 2012, the bank fired him.• Where is he now?

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258

Presentation

Jürgen Schrempp, CEO

259

Question

What is the difference between strategic leadership and situational leadership?

260

Answer

Strategic leadership seeks to manage people, resources, and behavior to solve problems and make correct decisions. It includes strategy. It evaluates skills.

Situational leadership occurs when leaders match actions to the situation. It occurs when action is needed. The action is determined by current realities.

Question (1)

Jürgen Schrempp, CEO, led Daimler Benz to acquire Chrysler for $37 billion in 1998.

2007. Daimler sold 80% of Chrysler to Cerberus for $7 billion.

1998. Schrempp described the union as "a merger of equals, a merger of growth, and a merger of unprecedented strength.”

2000. Schrempp told a German newspaper that he always intended Chrysler to be a subsidiary of DaimlerChrysler.

261

Question (2)

Is Mr. Schrempp an example of the failure of strategic leadership, the failure of situational leadership, or neither?

262

Answer

Both. Failure of strategic leadership. Bad

acquisition Failure of situational leadership. Statement to

the German newspaper.

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264

Presentation

ERM = Leadership Assess the Situation. Process to Implement? Wartime or Peacetime? Intelligence or Emotional Quotient? Strategy or a Tactic? Strategic or Situational Leadership?