The Risk Institute Releases Fourth Annual Survey on Integrated Risk Management

Data Reveals Risk Management Funding Growing, Opportunity to Improve Corporate Objectives

Columbus, Ohio – Today The Risk Institute at The Ohio State University Fisher College of Business, a leading risk-management research organization, reveals its Fourth Annual Survey on Integrated Risk Management. The report surveyed more than 500 financial, nonfinancial, public and private firms to understand how U.S. companies view the role of risk management, the influence of governance and culture and how risk impacts business decisions.

The data reveals 70% of firms have an integrated risk management unit and companies are
increasing funding for risk management, but the size of those units continues to decrease. Despite recognizing the need to invest in risk, firms are not investing in people. Among the other 2018 findings:

  • 60% of risk managers believe that artificial intelligence will play a role in risk management in the future.
  • 28% of firms surveyed have been victims of a cyber attack – a risk that continues to grow each year.
  • 55% of respondents do not use predictive analytics, and those that do have been using them for less than two years.
  • 44% expect to outsource some or all of their risk function.

Risk management policies play an increasingly critical role in a firm’s ability to create value and remain competitive. Both financial firms and nonfinancial firms reported that when they integrate risk management into business processes, they are able to improve corporate objectives.

“One of our key objectives at The Risk Institute is to create a greater understanding of how organizations can proactively leverage risk management to create shareholder value,” said Phil Renaud, Executive Director of the Risk Institute. “Volatility in the current economic and political environment, as well as cyber risk becoming a real threat to many firms, lead to a more vulnerable business environment, making the role of risk management more integral.”

To learn more about the Risk Institute and its Fourth Annual Survey on Integrated Risk Management, please visit: http://go.osu.edu/risksurvey

About the Risk Institute

The Risk Institute at The Ohio State University Fisher College of Business is a collection of forward-thinking companies and academics that provide effective risk management strategies to not only protect firms, but position firms to create growth and value. The Risk Institute helps members consider risk from all perspectives: legal, operational, strategic, reputational, talent, financial and many more. The Risk Institute operates at a unique intersection between faculty, students and professionals from a broad cross-section of industries. With a leading-edge approach to risk management, The Risk Institute creates a unique exchange for risk-centered conversations, ideas and strategies that can’t happen anywhere else.

 

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Risky Business

7 common reasons given for a merger

Mergers and acquisitions are likely to be the biggest capital investment for a firm. For the acquired, stock prices typically rise significantly, but for the buyer, they typically fall. So what are the main reasons given for a merger or acquisition? In a recent Risk Series session hosted by The Risk Institute, Isil Erel discussed these and more during her talk.

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Introducing the SCRAM™ Tool

The Risk Institute is excited to announce SCRAM™, a supply chain resilience assessment and management tool, developed by researchers at The Ohio State in collaboration with the U.S. Air force, Dow Chemical, L Brands and a number of other companies.

Businesses Need Resilience
In an age of global turbulence, resilience is a key competency for corporations. How can a company improve the resilience of its supply chain processes, so that it can recover rapidly from unexpected disruptions, assure business continuity and adapt effectively to changing external conditions?

The Solution
SCRAM™ is a facilitated process, supported by a computer-based toolkit, that provides a diagnostic assessment of an organization’s preparedness and fitness for coping with turbulent change. The process identifies resilience gaps and then suggests enhancements that will strengthen the company’s capacity to survive, adapt, and flourish—even when surprises occur.

What Can SCRAM™ Do For You?
SCRAM™ offers businesses a unique, comprehensive approach to understand the pattern of their potential vulnerabilities and to design a portfolio of supply chain capabilities that will offset those vulnerabilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For more information about SCRAM™, please contact us at The Risk Institute.

 

Join us for the June 20th Executive Education Session

Growth through M&A is a high stakes game – every merger can have an impact on both the risk exposures and risk management strategies of the combined entity. Whether your company is seasoned in these types of transactions or embarking on its first acquisition, risk management plays a crucial role in providing the right risk due diligence, risk transfer solutions, as well as providing insight into the strategy, objectives, valuation, funding, costs, and integration.

Getting it right matters – there are large sums of money, time, and resources wrapped into each organizational change.

Join The Risk Institute and our experts from academia and industry for a lively discussion about the delicate balance of risk and reward in M&A.  Guest speakers include:

Isil Erel, PhD
Professor of Finance, The Ohio State University Fisher College of Business

Elizabeth A. Mily
Managing Director, Global Healthcare Group, Investment Banking Division, Barclays

Mike Repoli
Mergers & Acquisitions, Gallagher Bassett

Gavin Waugh

Vice President and Treasurer, The Wendy’s Company


This event has been rescheduled for Fall 2017. More details to come.

The One with The Risk Institute: SMF Student’s Success Story on Graduation and Employment

I landed in the U.S. less than a year ago. During this brief period, I completed my master’s degree (phew!) and got a job. Before joining Fisher’s Specialized Master’s in Finance program, all I knew was that I was interested in working in risk management. Ten months hence and I now know I am “passionate” about working in risk management. The SMF was an intensive course, but the professor’s class diversity and student consulting projects made it worthwhile. I chose Risk Management and Corporate Finance as my specialization tracks. As part of the Risk Management track, I signed up for Enterprise Risk Management 1 and 2. It was during ERM 2 that we did our first student consulting project for Abbott Nutrition. The Risk Institute, in collaboration with Abbott Nutrition and Prof. Daniel Oglevee, gave my class the opportunity to work on 3 risk-based projects for Abbott.

All 3 projects were focused on quality assurance. The teams worked on creating a risk model for enabling decision-making, a survey to better understand and improve the risk culture within the company, and risk-based market research. Welcome to the real world! We had learned VAR’s, derivatives and all other academics needed to complete the risk track, but now was the time to use them. The projects we did for Abbott gave us a unique perspective on how risk management was much more than what we learned inside the classroom. During all this, The Risk Institute, especially Executive Director, Philip Renaud, was a huge resource for insights regarding these projects.

During the time we were working with Abbott, we were also working with Vantiv, a partner of the Risk Institute, as part of SMF’s capstone project. For Vantiv, my teammates and I created a risk framework for their M&A activities. This framework added a risk-based dimension to the evaluation of a target for acquisition. It is a unique framework in that it disrupts the traditional valuation methods. I am big on disruptive innovation. I believe we are at a stage where simple innovation no longer gives you the upper hand. I gained an immense amount of experience from working these two projects, and hopefully, we were able to deliver results that were productive for the companies.

During this project, with help from Philip Renaud of The Risk Institute, I was able to connect with a recruiter from Vantiv. That connection went a long way to help me get a job at Vantiv on their lean Enterprise Risk Management team. I plan on staying in touch with The Risk Institute and furthering the work we did for Vantiv. Plus, it always feels good to be back on campus (GO BUCKS!!). I would like to thank Philip Renaud and Denita Strietelmeier for helping me during my year at Fisher and in my job search.

It is a good time to be in Risk management.

Absorptive Capacity: Achieving the Ultimate Balance for Effective Knowledge Utilization

Rapid changes in industry and technology are making it increasingly daunting for companies to develop new products internally. Often times, firms cannot generate the knowledge they need from internal sources alone. The essential question facing these firms is how can they most effectively assimilate new knowledge from external sources?

To answer this question we must first look at limits on absorptive capacity, the ability to absorb new knowledge, and how those limits can constrain the benefits of seeking alliances according to the study “Unpacking absorptive capacity: A study of Knowledge Utilization from Alliance Portfolios” by Jaideep Anand at The Ohio State University and Gurneeta Vasudeva at the University of Minnesota. The researchers studied data on alliances between firms engaged in fuel cell technology development. They studied the variations in alliance portfolios and the associated knowledge utilization outcomes among 120 publicly traded and private firms in 11 countries.

The study unpacks absorptive capacity into two parts: latitudinal and longitudinal absorptive capacity. Latitudinal absorptive capacity focuses on how companies process and use diverse knowledge, while longitudinal absorptive capacity focuses on distant or unfamiliar knowledge. Anand and Vasudeva found that a moderate burden on firms’ latitudinal absorptive capacity, corresponding to medium diversity in their portfolios, contributes to optimal knowledge utilization. However, increasing the demand on firms’ longitudinal absorptive capacity negatively affects this relationship.

Let’s take a closer look at latitudinal absorptive capacity and how it allows firms to use diverse knowledge to develop technological innovations. According to the study, an alliance between a company that concentrates on automotive technologies and a company that has technological capabilities in hydrogen conversion and storage technologies will aid the automotive company by providing a research alternative for automotive fuel technologies.

In contrast, longitudinal absorptive capacity is utilized by firms seeking knowledge distant from their primary technology. For example, an alliance between a firm that develops a phosphoric acid-based electrolyte and a firm that focuses on a hydrogen storage technology. This alliance provides the knowledge necessary to innovate and compete successfully outside of the firm’s area of expertise.

There are important trade-offs between the extent of learning related to the two types of absorptive capacity. The study found that knowledge utilization is optimized when the demands on firms’ latitudinal absorptive capacity are neither too high nor too low. It also finds that as firms venture into less familiar technological domains, their longitudinal absorptive capacity constraints inhibit knowledge utilization. Consequently, the level of latitudinal absorptive capacity constraint at which knowledge use peaks varies according to the demands on longitudinal absorptive capacity.

In conclusion, a firm’s knowledge can only be effectively expanded within the limits of their absorptive capacity. View the original research below to learn more of the implications of firms’ external knowledge and discover how external alliance portfolio-based capabilities can interact with firms’ absorptive capacity to determine their knowledge utilization.

Unpacking Absorptive Capacity: A study of Knowledge Utilization from Alliance Portfolios

The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.

Unprecedented volatility adds new urgency and complexity to old risks, reports Aon’s 2017 Global Risk Management Survey

Aon, a founding member of The Risk Institute, released their 2017 Global Risk Management Survey today. Conducted in the fourth quarter of 2016, the bi-annual survey gathered input from 1,843 respondents at public and private companies around the world. It finds that trends in economics, demographics and geopolitics, as well as technology advancements, are transforming traditional risks and adding new urgency and complexity to old challenges.

Top discussion points of the survey include:

  • damage to reputation/brand as a top concern
  • political risk/uncertainties entering the top 10 risk list
  • Cyber Crime ranking the number one risk to North American businesses
  • disruptive technologies/innovation predicted to rise in risk
  • risk preparedness at its lowest level since 2007

Damage to reputation/brand is consistently the top-ranked risk by businesses. Companies have become vulnerable due to the amplified negative impact social media has on cases of defective products, fraudulent business practices, and corruption.

Cyber Crime is now the top concern among businesses in North America, jumping from number nine to number five on the top risk list. Cyber breaches are increasing and incident response plans have become more complex, making Cyber Crime a costly business interruption.

Political risk/uncertainties have recently re-entered the top 10 risk list at number nine. The survey finds that developed nations that were traditionally associated with political stability are becoming new sources of volatility and uncertainty. Additionally, according to Aon’s latest 2017 Risk Maps, trade protectionism is on the rise while terrorism and political violence ratings are the highest they have been since 2013.

“We are living in a challenging new reality for companies of all sizes around the world. There are many emerging influences that are creating opportunity, but at the same time, creating risks that need to be managed,” said Rory Moloney, chief executive officer for Aon Global Risk Consulting. “As the risk landscape for commerce evolves, businesses can no longer rely solely on traditional risk mitigation or risk transfer tactics. They must take a cross-functional approach to risk management and explore different ways to cope with these new complexities.”

Disruptive technologies/innovation is a concerning risk emerging for the future. It is currently ranked number twenty but is expected to jump to the top ten within a few years. New technologies such as drones, driverless cars, and advanced robotics have caused an increased awareness of impacts for businesses.

The top 10 risks are:

  1. Damage to reputation/brand
  2. Economic slowdown/slow recovery
  3. Increasing competition
  4. Regulatory/legislative changes
  5. Cyber crime/hacking/viruses/malicious codes
  6. Failure to innovate/meet customer needs
  7. Failure to attract or retain top talent
  8. Business interruption
  9. Political risk/uncertainties
  10. Third party liability (including E&O)

The full report can be accessed at www.aon.com/2017GlobalRisk.

 

The Art of Balancing Your Eggs Between Baskets

Strategizing your portfolio of real options for the win.

What factors make your real options portfolio valuable? How do you analyze the nature of the interactions among real options and their effects on portfolio value? Ultimately, how can your firm be most strategic in managing this in your industry’s unique market?

To begin, firms must consider growth and switching options in developing a portfolio of strategic options. Growth and switching options represent the trade-off between flexibility and commitment, according to the study, “Managing a Portfolio of Real Options” co-authored by Ohio State researcher Jaideep Anand and with researchers Raffaele Oriani in Italy and Roberto S. Vassolo in Argentina.   While growth options relate to early commitment in growth opportunities, switching options give firms essential forms of flexibility to handle different sources of uncertainty. Too much commitment could create vulnerability; too little could hinder competitive advantages.

So how do you determine the right balance for your unique market? Let’s consider the sources of uncertainty within growth opportunities and switching opportunities. Some sources generate growth opportunities while others might induce switching opportunities, according to the study. For example, when market demand is the main source of uncertainty, growth opportunities may dominate the strategic decision. These elements are applied to different strategic situations of technological and market uncertainty. Managers must consider what is unique about their portfolio and how they can incorporate that when assessing its value. They must first understand how market and technological uncertainty can have different effects on the value of switching and growth options.

When the market has inconsistencies between demand and the need for new products, it affects the market size and ultimately, sales. In this case, growth options could limit firms’ losses to their initial investments. However, potential gains from future growth opportunities are unlimited.

When the market has technological uncertainty, firms must choose the “right” technology. Here firms can apply switching options that allow them to hedge against the risk of being locked out of the market because they have not invested in the right technology.

Based on your industry’s unique market and focusing on the opportunities available, these are important considerations to keep in mind in a world of quickly advancing technologies and ever shifting markets. To dig deeper into this topic, view the original research and its translation here.

 

Four things you need to be doing with risk capital

Photo curtesy of iStock

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Risk capital gives financial firms the cushion they need to protect liability holders from unexpected losses. Simply put, risk capital is your home-run money — funds that are invested in high-risk, high-reward investments. It reduces debt overhang that could limit borrowing capability and makes the costs of bankruptcy or firm distress more remote.

But there’s a catch — adding risk capital can only benefit firms’ balance sheets if it is allocated efficiently, according to a study co-authored by Isil Erel, Academic Director of the Risk Institute and Distinguished Professor of Finance at The Ohio State University Fisher College of Business.

The study, “A Theory of Risk Capital”, was co-written by Erel, Stewart C. Myers at MIT Sloan School of Management, and James A. Read Jr. at The Brattle Group Inc. in Cambridge, Mass. In the study, Erel, Myers, and Read focus on diversified firms with safe and risky businesses in their portfolios. The firms have customers and counterparties who are not willing to bear significant default risk.

Know if your company’s risk capital really working for you — here are the four things you need to know and be doing.

1) Risk capital must be allocated

  1. To assess profitability,
  2. To make investment decisions,
  3. To price products and services, and
  4. To set compensation.

2) Efficient risk capital allocation has to do two things: 1) there can be no risk that changes in the business portfolio that would affect the credit quality of the firm’s liabilities, and 2) firms have to avoid shifting risk capital from one business to another.

3) Of course, your business is doing all that already, so what do you really need to focus on? Your marginal default rate in order to allocate the risk capital.

The marginal default rate is the derivative of the value of the firm’s option to default with respect to a change in the business size, according to the study. The required amount of capital depends on the target credit quality and on the risk of the business portfolio. Businesses with the largest marginal default values should receive the most risk capital and be charged most of the costs of the risk capital.

4) Risk capital can help expand your business, but keep in mind that riskier businesses need free passes to expand, which will increase the default risk. These risky businesses might also operate at a lower credit quality.

To mitigate the effects on credit quality of the overall business, businesses shouldn’t use risk capital that’s fixed in the short term.

Remember, any asset or activity with uncertain returns requires risk capital. By focusing on marginal default values, credit quality, and risk within the business portfolio, firms can us risk capital efficiently to help improve their bottom lines.

If you want to dig deeper into this (and other) of the latest risk research, the full paper and accompanying translation are available on our website.

Show me the money

Are private equity investments worth the risk?

investment-trees

Question: Do private equity returns and diversification benefits adequately compensate investors?

This is the debate swirling in investment circles, and it’s the question that researchers Berk A. Sensoy from The Ohio State University Fisher College of Business and Nicholas P.B. Bollen from Vanderbilt University work toward answering in their paper, “How much for a haircut? Illiquidity, secondary markets and the value of private equity.”

Private equity investments have illiquidity and market risks related to the timing of capital flows and require management fees that are usually two percent of investors’ capital commitments per year, plus performance fees typically equal to 20 percent of the profits. According to the researchers, the returns and diversification benefits do justify the risks and costs borne by investors.

The drawback is that secondary sales could result in discounts from fund net asset values of as much as 50 percent during financial crises. During other times, the discount could be 20 percent. Despite these discounts, the study finds that the historical performance and diversification benefits of venture capital and buyout funds, the main types of private equity firms, are sufficient to justify their risks and fees. For example, buyout funds have on average outperformed public equities by about 3% per year.

So what percentage of your portfolio should you allocate to private equity?

If you’re an extremely conservative investor with an extreme risk aversion, the researchers recommend that you should allocate no more than about 10 percent of your portfolio to private equity investments.

If you’re an investor with low to moderate risk aversion, you can comfortably allocate up to 40 percent of your portfolio.

To set yourself up for the best chance of success, the study notes that you should be particularly willing to take the risk of private equity investments if you can access average-performing funds.

While this study will certainly not end the debate, Bollen and Sensoy’s study shows that the returns and diversification benefits of private equity appear sufficient to compensate for the risks and costs for limited partners who have a broad range of risk preferences at portfolio allocations typically observed in practice. The findings offer limited partners a guide in making their portfolio allocation decisions.

If you want to dig deeper into this (and other) of the latest risk research, the full paper and accompanying translation are available on our website.