Enterprise-Wide Risk Management: Conceptual and Applied PerspectivesAbol Jalilvand and Jeannette SwitzerTable of Contents•Evolution of Risk Management•The Risk Management Process: A New Definition•Evidence on Risk Management Policies & Practices•Building Blocks of an Effective Risk Management Program•Enterprise Risk Management: The Case of United Grain GrowerEvolution of Risk Management•What is Risk?–The Origin of the Word “risk” derives from the early Italian Word “risicare” which means “to dare”.In this sense, risk is a choicerather than a fate.•As an Academic Topic, Risk Analysis draws on the Conceptual and Analytical Techniques from areas such as Mathematics, Statistics, Financial Economics, Psychology and Anthropologyto Measure the Extent and Consequences of Extreme Events.Evolution of Risk Management•Recent Debacles such as:–Misunderstanding the Forces of Globalization –Product Recalls –Fraudulent Securities Trading and Accounting Practices–Major Shifts in Markets (missed or seen too late)–Failure of Monetary and Regulatory Responses–Contagion Process –Increasingly Complex Environmental or Business Changes not Recognized by Management…Evolution of Risk ManagementRisk Management involves•Strategiesand processesto develop a rigorous approach to assessing and addressing risks from allsources that either threatenthe achievement of the organization’s strategic objectivesor representopportunitiesto exploit for competitive advantagesEvolution of Risk ManagementProduct Market RiskFinancial RiskLegal RiskOperational RiskTotal Firm RiskInput RiskTax RiskRegulatory RiskIn this Context, Risk Management...•Is Everyone’sResponsibility–Risk Mgmt Accountability is nota Corporate Function –Each Manager continues to manage risk within their scope with a Coordinated Approach–Boards need to have a Structured Understanding of key risks and approaches to manage themIn this Context, Risk Management...•Is Notjust about Mathematical Models–Large Derivative Losses by Barrings and Orange County and... –Questionable Accounting Practices and Securities Trading by Enron, Arthur Anderson and Global Crossing…...have demonstrated the importance of People, Supervision, and Leadership!In this Context, Risk Management...•Is Integrated across AllBusinesses–Not just financial, credit, market or insurable risks–Part of how one views All risks in All parts of businessIn this Context, Risk Management...•Is Notan “Add-on” to running the business day-to-day–It is Strategic–The basis for Business Planning–The basis for Resource Allocation–A Competitive AdvantageFailure to Develop Effective Risk Mgmt Strategies Results in:•Lost Time to Deal with Unanticipated Losses•Adverse Effect on Firm’s Credit Rating•Loss of Growth and Profitability•Deterioration of Public Image•Loss of Customers•Problems in Recruiting and Developing Management Compensation & Contracts•Poor Planning and BudgetingRisk Management Process•The Process Can be Broken Down into Five Steps:1.Risk Identification2.Risk Assessment3.Selection of Risk Management Techniques4.Implementation5.ReviewEvidence: Policy & Practice•Jalilvand & Switzer(2005)•Survey–Questionnaires mailed out to 548 largest Canadian non-financial corporations–Covered a wide range of issues–Allocated 3 wks for response and followed up–154 firms responded –28% response ratePurpose of the Study•This study uses corporate hedging explanations to examine the strategic nature of risk management decisions by Canadian and international users of derivatives products. International Comparison of Corporate Risk ManagementExtentProductsCanada75%forwards, swap, futuresEuropewidespreadswaps and FRA'sUSA35% -85%forwards, futures, swapsUse of DerivativesInternational Comparison of Corporate Risk ManagementExistence of PolicyIntegrationCanada80%49%Europe76%N/AUSAN/Alittle integrationPolicyInternational Comparison of Corporate Risk ManagementTreasury ResourcesPerformance MeasurementCanadasmall staff & budgets64% appreciate importanceEuropesmall staff & budgets65% measureUSAlittle resourcesN/ATreasuryUse of Derivatives & Credit Ratings0%10%20%30%40%50%60%AAAAAABBB