1 presentation enterprise risk leadership. improving risk management we need to understand: how we...
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Presentation
Enterprise Risk Leadership
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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.
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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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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
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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
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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
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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.
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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
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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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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.
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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.
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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
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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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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 -
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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
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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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Presentation
1. Upside of Risk
Female Vice President
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Question
Do you agree that a missed opportunity a “risk?”
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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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2. Assign Risk Owners
Ford and Palladium:
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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?
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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 $1 billion.
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Question
How many risks should be assigned to a single risk owner in an ERM structure?
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3. Align with Business Model
Tata Motors
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Question
The third contribution is risk categories should be aligned with the business model of an organization. What is a business model? What is included in it?
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Answer
A business model is the strategy of a specific firm to be successful. It includes: Value to be Created. Benefits to be obtained
by customers or clients. Architecture of the Firm. Hierarchy to
deliver value. Relationships. Network of partners for
creating, marketing, and delivering value. Resources. Capital, assets, and other
resources to generate sustainable profits.
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Risk Owners in a Business Model
Functional Staff. C-level production, marketing, finance, administration, technology,
Business Units. Regions, autonomous operations, and subsidiaries.
Key Initiatives. Major activities reflecting highly visible goals.
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Question
Align with the Business Model
TATA was India's largest automobile company. It began to deliver the Tata Nano in 2009 with a starting price of US$ 2,200.
• Who were Tata’s potential customers?• What was the strategy to reach them?
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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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4. Central Risk Function
Grocery Acquisition
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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?
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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.
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Question
How does a central risk function enhance an ERM program?
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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.
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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?
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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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5. Technology
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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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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.
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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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Federal Express
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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
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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?
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Answer
A tracking number is not needed. A FedEx product called Insight allows a customer to see every inbound package.
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Question
Why does a customer even need to track a package?
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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.
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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.
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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.
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Question
Do you think the professor ever changed the grade?
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Risk Management in Baseball
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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.
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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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Presentation
Management or
Empowerment
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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?
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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?
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GM and Pratt & Whitney
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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?
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Answer
High potential. Big Markets for GM in China. P&W in Russia.
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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: ?
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Question
What is this?
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Answer
The GM Spark Car made in the Chinese joint venture.
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Question
What is this?
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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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Question
What are secrets with the following world-class: Compressors. Combustors. Turbines. Afterburners. Nozzles. Thrust reversers. Propellant pumps. Control systems for jet engines?
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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
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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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Presentation
Steps to Implement ERM
General Motors
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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
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Visualization (1)
High Costs
EVP Operations
Lagging Sales
EVP Marketing
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Visualization (2)
Legacy Costs
Chief Counsel
Dealerships
EVP Dealer
Network
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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.
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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.
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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.”
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Likelihood of Change
GM’s Wagoner said he would not resign. GM’s Wagoner said what? You have got to be kidding.
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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?
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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.
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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.
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Is GM Making a Comeback?
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Did you see Transformers?
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Is GM Making a Comeback?
What about 2012?• China. Three million vehicles.• U.S. 2.5 million vehicles
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ERM Leadership
Who do we Need?
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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
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Presentation
Peacetime and Wartime Leaders
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Two Leadership Styles
Leadership can be portrayed in two categories:• Wartime Leader. Action trumps planning.• Peacetime Leader. Planning trumps action.
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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?
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Question
Dwight D. Eisenhower was the Supreme Allied Commander in the European Theater in World War II. Was he a peacetime or wartime leader?
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Answer (1)
Compare him to George S. Patton.
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Question
Who believed the following?• Plans are nothing.• Budgets are nothing.• Planning and flexible budgeting are everything.
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Answer
Wartime and peacetime leaders believe:• Plans are nothing.• Budgets are nothing.• Planning and flexible budgeting are everything.
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Question
Would a wartime or peacetime leader be more receptive to implementing a program of ERM?
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Presentation
Hill A
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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.
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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.
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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.
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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?
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The Plan
Hill A
Hill B Hill C
Unit 1 Unit 2
Unit 3
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Move, Shoot, Communicate
Hill A
?
Hill B Hill C
?
Unit 1 Unit 2
Unit 3
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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.”
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Question
Is the implementation of ERM a tactic or a strategy for an organization?
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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.
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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?
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Question
Can an individual increase his or her intelligence quotient? Emotional quotient?
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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.
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Presentation
Alpha Behavior at JPMorgan Chase
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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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Financial Situation
In 2012 J.P. Morgan reported a $6 billion trading loss on credit default swaps. This is that story.
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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.”
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Bruno Iksil
Mr. Iksil:•Was a JPMorgan trader.•Took large risks to achieve large profits.•Was nicknamed “The London Whale.”
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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.
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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.”
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Question
Did Mr. Iksil explain what he was doing?
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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.”
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Question
Did the Senators understand Mr. Iksil’s testimony?
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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.
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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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Presentation
Jürgen Schrempp, CEO
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Question
What is the difference between strategic leadership and situational leadership?
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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.
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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.
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Question (2)
Is Mr. Schrempp an example of the failure of strategic leadership, the failure of situational leadership, or neither?
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Answer
Both. Failure of strategic leadership. Bad
acquisition Failure of situational leadership. Statement to
the German newspaper.
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ERM = Leadership Assess the Situation. Process to Implement? Wartime or Peacetime? Intelligence or Emotional Quotient? Strategy or a Tactic? Strategic or Situational Leadership?