Enterprise Risk Leadership

1
Presentation

• Enterprise Risk Leadership

2
Improving Risk Management

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

3
Presentation

• 1. Risk Management
• Decision-making

4
Leadership Quote

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

5
Presentation

• Facts and Beliefs

6
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.

7
Question (1)

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

8
Question (2)

• Is a fact the basis for a belief?

9
Answer

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

10
Question

• What is the role of facts in reaching a
  conclusion?

11
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.

12
Question

• What is the role of feelings in reaching
  conclusions?

13
Answer

• Feelings distort beliefs and thus distort
  conclusions.

14
Question

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

15
Answer

• Opinions and assumptions distort conclusions.

16
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.

17
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?

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?

19
Question

• A teenager asked, What should I do in college?
  Three people answered
• Uncle Pat Take accounting. Youll always have a
  job and youll 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?

20
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.

21
Question

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

22
Answer

• Risk management lessons are
• From Grandma. You dont 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.

23
Presentation

• Corporate Royalty

24
Question

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

25
Question

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

26
Answer (1) Rank the Following

• British Royalty
• King/Queen
• Marquees
• Duke/Duchess
• Viscount
• Baron
• Prince/Princess
• Earl/Countess

Corporation CEO Division Manager COO Senior
VP Vice President Executive VP Dept. Manager
27
Answer (2) Ranking

• British Royalty
• King/Queen
• Prince/Princess
• Duke/Duchess
• Marquees
• Earl/Countess
• Viscount
• Baron

Corporation CEO COO Executive VP Senior VP Vice
President Division Manager Dept. Manager
28
Oligarchy Diagram

29
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.

30
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.

31
Question

• Who is someone today in a modern corporation who
  fits each of the following?
• Absolute CEO.
• Executive CEO.
• Nominal CEO

32
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.

33
Presentation

• Home Depot

34
Home Depot

• Founded in 1978.
• From zero to 40 billion in revenues in 20 years.
• 1999 Growth and profits stalled.

35
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.

36
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.

37
Results 2000-2006

• Between 2000 and 2005 at Home Depot
• Sales rose 75.
• Profits doubled.
• By 2006, world's third largest retailer.

38
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 .

39
ERM Concern?

• Home Depot
• Stock price dropped 7.
• Lowes
• A major competitor.
• Over 1200 stores (half
• the size of Home Depot).
• Stock price rose by 210.

40
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.

41
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.

42
Story Three

• University of Michigan Customer Satisfaction
  Survey
• Company 2001 Score 2006 Score
• Home Depot 75 67
• Lowes 75 78
• 2006 score of 67 was last place among all stores
  in the department store and discount store
  category.

43
Cultural Risk?

• Full-timers describe a culture of fear. Cultural
  changes created some new language. What do you
  think each means?
• Aprons.
• Bobs Army.
• Bobaganda.
• Home Despot.

44
Aprons

• Store workers with orange aprons.

45
Bobs Army

• Store leadership program with half the
  individuals as former military.

46
Bobaganda

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

47
Home Despot

• The company itself to disgruntled employees.

48
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.

49
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.

50
Presentation

• Managers and Leaders

51
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.

52
Question

• What is the difference between a manager and a
  leader?

53
Answer

• A manager pursues stability.
• A leader pursues change.
•  

54
Question

• How do managers and leaders get power?

55
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.
•  

56
Question

• What do managers and leaders respect in an
  organization?

57
Answer

• Different things.
• Managers. Respect people, relationships,
  structure, and policies.
• Leaders. Respect the emotional elements in the
  interaction between themselves and their
  constituents.

58
Question

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

59
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.

60
Question

• Are you a manager or a leader?

61
Question

• Do managers or leaders get more respect in a
  hierarchy?

62
Question

• In 1984, ATT relinquished its monopoly on U.S.
  local telephone service.
• The company directed its marketing unit to accept
  products from ATTs manufacturing unit.
• The marketing personnel objected.
• What was the outcome?

63
Answer

• ATT sided with the marketing unit.
• The ATT 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.

64
Question

• Can leaders or managers be created?

65
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.

66
Question

• Where does Manager number one want to go?

67
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?

68
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

69
Question

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

70
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?
• Ill take that any day.
• What I have to tell you is (pause)
• SO WHAT! We did not invent corruption.

71
Presentation

• Peter Drucker

72
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? 

73
Answer

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

74
Question

• Who is the customer of a hospital?

75
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.

76
Question

• Who is the customer of a university?

77
Answer

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

78
Question

• Who is the customer of the American Red Cross?

79
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.

80
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?

81
Question

• People also have visions for themselves in the
  future.
• Do you have a vision?
• If yes, what is it?
• If no, why not?

82
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?

83
Question

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

84
Question

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

85
Question

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

86
Question

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

87
Question

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

88
Questions

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

89
Presentation

• U.S. Health Care Reform in 2013
• A Lesson in the Failure to
• Implement Enterprise
• Risk Management

90
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.

91
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.

92
Question

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

93
Questions

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

94
Issues

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

95
Question

• Should we build an integrated system?
• Systems Software. Operating system. Libraries,
  services, drivers configuration, utilities,
  security.
• Applications. Performance of useful tasks.

96
Answer

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

97
Question

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

98
Question

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

99
Question

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

100
Conclusion

• ?

101
Presentation

• 2. Embrace
• Enterprise Risk Management

102
Leadership Quote

• Whatever you do, dont 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.

103
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.

104
Question

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

105
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.

106
Question

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

107
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.

108
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.

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.

110
Results of Business Risk Consolidation
External environment
- Business risks in the external environment,
operational processes, and internal environment -
Customers
Competitors
Business partners
Failures to respond to changing customer needs
Technical partners
Subcontractors
Suppliers
Increasing competition due to competitors'
products
Country-specific risks
Naturaldisasters
Falling market prices
Dependence on specific business partners
Inadequate business partner handling
Laws and regulations
Operational processes
RD
Marketing Sales
Manufacturing
Delayed production
Lack of differential technology
Failures of sales channel strategies
Delayedtechnologicaldevelopment
Failures of sales promotion
PL and quality issues
Internal environment
Cost increases (increasing inventory, soaring
material costs, declining yield)
Delayed collaboration due to insufficient linkage
between divisions
Internal infrastructure and organization
operations
Information
Insufficient manufacturing reforms and IT
innovations
Organization
Human resources
Staff allocation and development
Structural reform-related issues
111
Business Structure
Business domain
Business Domain Companies and Group Companies
Segment
Global and Group Head Office
AVC
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.
Fixed-line communications
Mobile communications
Automotive electronics
Systems
Home appliances, household equipment, healthcare
systems
Home Appliances
Matsushita Home Appliances Company, Matsushita
Refrigeration Company Healthcare Business
Company Lighting Company Matsushita Ecology
Systems Co., Ltd.
Lighting
Environmental systems
Semiconductors
Semiconductor Company Matsushita Battery
Industrial Co., Ltd. Panasonic Electronic
Devices Co., Ltd. Motor Company Others
Components and Devices
Display devices
Head Office CISC Panasonic Design Company RD
divisions Sales division Overseas divisions
Batteries
Electronic components
Motors
FA, Corporate eNet Business Division
Solutions
Panasonic Factory Solutions Co., Ltd., and others
Matsushita Electric Works, Ltd., PanaHome
Corporation
MEW and PanaHome
Victor Company of Japan, Ltd.
JVC
112
Group-wide Risk Management System for General
Control
(2) Establish a GG Risk Management Committee to
address the current problems
After the Committee's establishment
Establishing and improving Group-wide RM
system Instructing risk assessment
ltRoles of the Committeegt 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
GG RM Committee
Committee
Corporate Functional Division A
Domains
Support
Subsidiaries
Committee
Corporate Functional Division B
Corporate Regional Management Divisions
/ Regional HQs
Support
Corporate Functional Division C
Results of Group-wide risk assessment
Collecting risk information from across the Group
Secretariat
113
Clarify Sections Responsible for Each Risk
(4) Information systems
1. Disasters and accidents
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
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
2. Politics, economy, and society
(5) Environment
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
Environmental pollution Corporate Environmental Affairs Group
Waste treatment Corporate Environmental Affairs Group
Environmental regulations Corporate Environmental Affairs Group
(6) International relations
3. Operations
Violation of security export control Corporate Legal Affairs Division
Trade issues Corporate Legal Affairs Division
(1) Quality, CS, and intellectual property
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
(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
(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
(8) Labor issues
(3) Information
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
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
114
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.

115
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.

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?

119
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?

120
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 nos for major
  issues.

121
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

122
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.

123
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?

125
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?

126
Answer

• No. it was exactly the opposite. Fords 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.

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.

131
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.

132
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 Tatas potential customers?
• What was the strategy to reach them?

133
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.

134
Presentation

• 4. Central Risk Function
• Grocery Acquisition

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.

137
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.

140
Question

• An upscale food retailer was negotiating the
  acquisition of another grocery chain.
• The business model was to convert the acquired
  locations to the companys own stores.
• The CEO added the risk manager to the negotiating
  team.
• What role can a central risk function play in
  that capacity?

141
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.

142
Presentation

• 5. Technology

143
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.

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.

145
Question

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

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).

148
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?

154
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.

155
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.

156
Question

• Do you think the professor ever changed the grade?

157
Presentation

• Risk Management in Baseball

158
Presentation

• Risk Management at AIG

159
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.

160
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. 

161
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.
•  

162
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.

163
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?

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.
• PW in Russia.

170
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.

171
Pratt Whitney in Russia

• PW created two joint ventures with Russian
  companies
• One built commercial aircraft engines.
• One built rocket engines.

172
Central Risk Scanning

• Observed Risk China and Russia do not protect
  intellectual property.
• Mitigation Strategy ?

173
Question

• What is this?

174
Answer

• The GM Spark Car made in the Chinese joint
  venture.

175
Question

• What is this?

176
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.

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 PW plants.

179
Presentation

• 3. Implementing ERM

180
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.

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.

183
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.

184
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.

185
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.

186
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.

187
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.

188
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?

189
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

193
Visualization The Whole Picture

• Cluttered but risks can be tagged.

194
Tagged

• Legacy Costs isolated yet shown with other risks.

195
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

196
Assess and Evaluate

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

197
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.

198
Strategy 2 High Costs

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

199
Strategy 3 Legacy Costs

• Face the reality.
• Abandon them.
• Ask the government for help to reduce abuses and
  economic disruption during a transition.

200
Strategy 4 Dealerships

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

201
Strategy 5 Contractual Commitments

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

202
Strategy 6 Management

• Fix it.
• Fords Mullally and Chryslers Nardelli may be
  crisis managers.
• GMs 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.

204
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.

205
Option 2 High Costs

• Reduce the number of salaried and hourly
  employees.
• Whoops.
• A UAW hourly worker was quoted I think weve
  given enough.
• It reflected the union mood and position.
• Score two for Chapter 11.

206
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.

207
Option 4 Dealerships

• Reduce the number.
• State laws made it prohibitively costly to close
  dealers.
• Score four.

208
Option 5 Contractual Commitments

• Who signed these things?
• Never mind.
• Score five.

209
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.

210
Evaluate a Little More

• A good ERM analysis looks for opposing views.

211
Bankruptcy as an Option

• GMs 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.

212
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?

213
Labor Costs

• The UAW view?
• We already did this one.
• I think weve given enough.

214
Likelihood of Change

• GMs Wagoner said he would not resign.
• GMs 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?

216
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.

217
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.

220
Is GM Making a Comeback?
Did you see Transformers?
221
Is GM Making a Comeback?

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

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

225
Two Leadership Styles

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

226
Wartime Leader

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

227
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?

228
Question

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

229
Answer (1)

• Compare him to George S. Patton.

230
Question

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

231
Answer

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

232
Question

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

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.

241
Question

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

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?

Slide 245