Risk management today. Why it is different and what is needed to manage today. Good read.
Excerpt: Rapidly changing global conditions have been particularly disruptive to the more precise risk management methodologies that enjoyed the high watermark of confidence levels during the period of macro-stability after World War II. At that time, extraordinarily stable conditions provided an environment that lent itself to mathematical applications and the ability to forecast with higher degrees of confidence, notes Andries Terblanche, a professor at the Australian School of Business and chair of financial services at Big Four consulting group, KPMG.
Of course, the world has changed. Significant among the financial and economic changes have been a big increase in the number of floating currencies, a significant growth in the use of derivatives, higher levels of public debt and an increase in global capital flows, aided by new technology.
Read full article via Risk Modelling: Is the Response to the New Complexity Really So Simple? – Knowledge@Australian School of Business.
Good read. Do you have your “head wrapped around innovation” yet? This article takes you through the definition and weighting of innovation projects to better help you manage and lead them.
Excerpt: From incremental to breakthrough innovation projects, managers need to handle different activities and with them dissimilar venues of risks. In this article the internal, external and hidden risks of incremental, differential, radical, and breakthrough innovation projects are identified and ranked accordingly. In addition, for every category a general innovation eco-system has been analyzed.
Read full article via Risks of Incremental, Differential, Radical, and Breakthrough Innovation Projects | Innovation Management.
A new model of handling the increasingly more important security risks. Risk management is not a small task and this model may help you meet the challenge.
Excerpt: In this webinar, Westerman discusses how an organization can identify its most pressing risks, eliminate silos in managing risks, and use the new model to create and leverage competitive advantage.
Check out video here via A New Model for Minimizing Cyber and IT Risk – Jason Sylva – HBR Events – Harvard Business Review.
Small business of-interest, need-to-know and news-to-watch.
Excerpt: Risk allocation provisions (RAPs) are an important part of M&A contracts. In a new research paper, Allocating Risk Through Contract: Evidence from M&A and Policy Implications, I analyze those provisions in the contracts for a representative sample of deals for US targets, and find both wide variation but also clear patterns in when they are used and how they are designed. The patterns I observe reflect multiple economic theories: they show that RAPs are used and designed in light of the information different parties to a deal are likely to have, their incentives during and after the deal, and also transaction costs, especially the costs of enforcing contracts. Despite these patterns, the contracts also show enormous variation in how risk is allocated — and some of this residual variation correlates with the experience of deal lawyers — suggesting that some choices are better than others. Practitioners can benefit from better understanding economic theories, and academics can benefit from better understanding how varied and complex real-world contracts are.
Read full article via Allocating Risk Through Contract: Evidence from M&A and Policy Implications — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business of-interest, need-to-know and news-to-watch
Excerpt: On August 16, 2012, the CFTC proposed rules that would permit affiliated swap counterparties to elect an exemption from mandatory swaps clearing, subject to various conditions. These conditions include reporting, documentation, risk management and other obligations, and, for swaps between financial entities, a requirement to provide variation margin. 
The Commodity Exchange Act requires swaps that have been designated by the CFTC as subject to mandatory clearing to be submitted for clearing to a designated clearing organization – unless a counterparty qualifies for an exemption from the clearing requirement. In proposing the inter-affiliate exemption from the clearing requirement, the CFTC recognized the risk management benefits and efficiencies that uncleared inter-affiliate swaps may provide for large financial and other organizations, but also noted its concerns about the “systemic risk repercussions” of uncleared inter-affiliate swaps. These concerns are reflected in the proposed conditions that would apply to affiliated counterparties seeking to rely on the exemption.
The CFTC’s proposed requirements for the use of the exemption are highly controversial
Read full article via CFTC Proposes Clearing Exemption for Inter-Affiliate Swaps — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business recommended takeaways — risk management assumes a much bigger business strategy role.
Excerpt: As noted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “In the aftermath of the financial crisis, executives and their boards realize that ad hoc risk management is no longer tolerable and that current processes may be inadequate in today’s rapidly evolving business world.”  However, especially for nonfinancial companies that may be relatively new to these topics, enhancing risk management can be a somewhat daunting task.
This article focuses on two key aspects of the relationship between risk and strategy: (1) understanding the organization’s strategic risks and the related risk management processes, and (2) understanding how risk is considered and embedded in the organization’s strategy setting and performance measurement processes. These two areas not only deserve the attention of boards, but also fit closely with one of the primary responsibilities of the board — risk oversight.
Read full article via Strategic Risk Management: A Primer for Directors — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Recommended read for all leadership and management today. The fallout of risk and risk fear in today’s executives.
Excerpt: Executives, spooked by devastating “black swan events” during the financial crisis, are increasingly examining these kinds of what-if scenarios to stress test risks in a potential strategy or to refine contingency planning.
One such exercise, the premortem, aims to do just what the name implies: identify potentially devastating problems to improve a product, project or strategy before deployment, or just to be better prepared to face the unknown – rather than getting caught unaware in the face of a real-life implosion.
Read full article via The premortem: Death before life. From CGMA
Small business takeaways. Risk management is more than buying insurance, as I am sure everyone is now aware. Auditors, whether internal or external, need to increase their role in assisting business with the missing and the required — as well as the why.
Excerpt: As stakeholders inside companies seek more cross-functional coordination on risk, internal audit also has to improve its communications to executive management and other departments. The E&Y survey found that 46% of respondents perform only annual updates or no updates at all to their risk-related audit plans. That can leave a company unprepared for events that arise throughout the year, like new product launches or retirements, new market entry, and litigation.
While audit plans used to be “set in stone,” the trend now is to take periodic “fresh looks” at them, says Schwartz. “Risk profiles change as companies make acquisitions or move into emerging markets,” he points out.
Read full article ernst & young risk management internal audit erm brian schwartz. via CFO.com
Recommended read for all small businesses. You may be missing the most important anti-fraud steps for your business, thus placing you at great risk. It is definitely easier to prevent a fraud than it is to clean up and recover from a fraud. Risk management includes more than just the routine internal controls.
Excerpt: Companies should start with an enterprise-wide risk assessment. Start with a control review. While the company may have wonderful controls in place, it may not be controlling its biggest, most common, or most obvious risks, or those unique to its business and/or industry. In performing a risk assessment, there is a need for a common language or nomenclature, a process to identify and rate the risks, and the ability to determine mitigation strategies for the company’s chosen level of risk (risk profile). Management will want to invest the time necessary ……
Read full article via How businesses can take control of the opportunities that drive employees to commit fraud | Smart Business.
Good read. Innovation Management continues its series on innovation and risk management of innovation.
Excerpt: Following these macro venues of innovation project’s risks and the list of possible risks outlined by the Executive Innovation survey (Andrew et al., BCG, 2009), two separated risk clusters have been created: external and internal risks to the innovation project. External risks refer to the risks that the company can/does not fully control. They are related to factors external to the company, meaning coming mainly from its environment (Raftery, 1994). On the other hand, the internal risks represent the risks arising in innovation project’s activities within the project/company (Raftery, 1994).
Read full study and article via Internal and Hidden Risks of Innovation Projects | Innovation Management.
More today on risk management, accounting — add in the critical internal controls and you are given the steps to ensure best practices strategies.
Excerpt: An effective internal control system is one of the best defenses against business failure and an important driver of business performance, according to the report. And it says accountants play a key role in internal control as creators, enablers, preservers, and reporters of sustainable value creation for organizations.
Read full article via Eight questions for a holistic risk assessment. From Journal of Accountancy
There is definitely a lot in business advice currently that addresses risk management (much to do with the recent economic crisis, obviously), and most advice has a specific ownership slant on the topic. This is another discussion with a suggested better “framework”. And while I think this is a very good listen, I also think this is another topic for which one has to research the best in class and then use the “poll” method of coming to your own best practice results.
Excerpt: The risk management approaches used by many organizations haven’t effectively mitigated crucial risks. BP made safety a top priority, only to be involved in one of the worst man-made disasters in history. And many financial firms had risk management activities in place and were still hit with disaster in the 2007/2008 financial crisis.
Harvard Business School professors Robert S. Kaplan and Anette Mikes say the problem lies with typical risk management approaches. They offer a systematic way to improve the effectiveness of risk management. Listen to their framework here.
Listen to webinar here via A Better Way to Manage Risk – Jason Sylva – HBR Events – Harvard Business Review.
Recommended read for all leadership and management. The world is into “innovation” — need to, should, tried, will try, trying, etc. — but within all the possible stages of innovation, has the risk management of innovation been addressed? In most companies, the answer would be no. Read how-to address both innovation and risk management for best practices projects.
Excerpt: Risk assessment and risk management activities are seldom used in innovation project proceedings. Only 30% of the managers surveyed for this study¹ use risk assessment procedures and the rest are either not doing it or do not know how to assess and then manage such risks. Apparently, the need is not for a more risk averse company but for more analysis and measurement practices before and after an innovation project starts in increasing the success rate of innovation projects. In this series of articles, I want to deliver an overview of risks associated with the innovation projects and a relative distinction of internal, external and hidden risks starting with some key determinants of a flourishing innovation organizational attitude that managers need to harness to their innovation activities.
Read full article via New Series of Articles on the Risks Faced by Innovation Projects | Innovation Management.
Leadership and board of directors update from recent forum. Small business takeaways.
Excerpt: RSA, The Security Division of EMC (NYSE: EMC) released key findings from the RSA Archer GRC Executive Forum it hosted recently, where governance, risk and compliance (GRC) leaders from 34 leading corporations discussed enterprise risk management strategies and best practices.
Read full article via Press Release: Top Executives Say GRC Programs Must Better Align to Strategic Priorities to Meet Board Needs. From EMC