Risk Ventures

Advertisement by the CME Group (tagline = ideas that change the world): “A risk tamed is a reward captured“

Lion pictured with Michael Platt, CEO and Founder of BlueCrest Capital Management Limited.

As taken from the ad, the CME Group (which offers futures and options products on interest rates, equity indexes, foreign exchange, commodities and alternative investments) reduces the threat of risk through complete price transparency, liquidity and central counterparty clearing.

According to a October 24, 2007 IBM Global CFO study, “Balancing Risk and Performance with an Integrated Finance Organization,” in the past three years 62 percent of enterprises with over $5 billion in revenue encountered a major risk event. When a major risk event did occur, such as strategic, operational or geopolitical, 42 percent of these enterprises were not well prepared for the event.

The Global CFO Study was developed by IBM Global Business Services’ Financial Management practice and the IBM Institute for Business Value (IBV), with assistance from the Wharton School at the University of Pennsylvania and the Economist Intelligence Unit.  

Some excerpts:  

*The Rise of the Integrated Finance Organization (IFO).  “Another key component of the study is the emergence of Integrated Finance Organizations (IFOs) which are defined as entities that, at minimum, mandate standards enterprise wide with a standard chart of accounts, common data definitions and standard common processes. The study concludes that enterprise wide common data definitions, a standard Chart of Accounts, common standard processes and globally mandated standards are the components of good governance and what the study calls the Integrated Finance Organization (IFO). Fewer than one in seven enterprises govern and manage the integration of their Finance organization by the combination of these four criteria. The study finds that IFOs provide greater resiliency, better decision support and help to drive outperforming enterprises. Additionally, the study shows that enterprises with IFOs are more likely to perform better financially than non-integrated finance organizations and are more likely to proactively manage risk.” 

*Who owns Risk?  “CFOs are increasingly becoming “owners” of risk management within their enterprise and sharing ownership with the CEO. The study found 61 percent of CFOs are expected to lead risk management within their organization, followed by CEOs (50 percent), Chief Technology Officers (27 percent) and Chief Risk Officers (19 percent).  The study lends credence to observations that globalization opens up significant opportunities for companies but exposes more risks for the enterprise. The IBM Global CFO Study found that in the past three years enterprises encountered a range of risks including strategic (32 percent), geopolitical (17 percent), environmental/health (17 percent), financial (13 percent), operational (13 percent) and legal and compliance (8 percent).” 

*Formal Risk Management is Immature.  “While risks are prevalent, many companies do not have a formal risk management program in place. At many organizations formal risk management is still fairly immature. By their own admission, only 52 percent acknowledge having any sort of formalized risk management program. Moreover, only 42 percent of respondents do historic comparisons to avoid risk, just 32 percent set specific risk thresholds and only 29 percent create risk-adjusted forecasts and plans.”

Ernst & Young’s recent report on “Risk Management in Emerging Markets,” arrives at some interesting conclusions with respect to emerging markets and how companies manage their risks in doing business there.  Perhaps unsurprisingly, for companies based in developed markets, and with business interests in emerging markets, political risk looms large.  The survey defines political risk and goes on to address what companies are doing about it. 

Some key findings from the survey: *The main goal in emerging markets is growth. Companies have moved on from the traditional view that the primary objective of investment in emerging markets is cost saving.  *Risk priorities differ by location. Developed markets focus on political, operational, and supply chain risk. Emerging markets are more likely to focus on market, competitive, and pricing risk.  *Board focus does not always translate into strategy. There is a consensus that Boards are giving enough attention to risk in these markets. However, only 41% of developed market companies have a risk strategy for emerging markets. *Opinion differs on risk communication. While 71% of emerging market subsidiaries feel they provide sufficiently regular and robust information on risk, only 44% of the parent companies would say the same.  *Opinion also differs on internal audit. Developed market companies have less confidence in the quality of the internal audit testing of their subsidiaries than the emerging market subsidiaries themselves do.

See Michael Rasmussen’s blog: Governance, Risk and Compliance Intelligentsia; he’s a prolific writer on enterprise risk and compliance at Forrester.  

A great corporate ad from Zurich, under its “Because Change Happenz” tagline — What if you’re facing a risk, risk, risk, reward situation? 

“We work like a good caddie. A challenging golf course can be a lot like the business world. Avoiding the hazards that can eat your ball, or your business, takes special skill, and a whole lot of confidence. As one of the top three insurance providers for businesses in the country, we can provide insurance specialists that work like good caddies, helping your company find a safer approach, or at least a way forward that feels sensible. While we can’t protect you from everything, we can at least enable you to focus on more important things, like your bottom line, or perhaps overcoming that wicked slice.”  

Allanz’s print ad, “Financial Solutions from A – Z” 

Annuities in Boston? Construction in Dubai? Equity fund in Frankfurt? Gain sharing in Houston? Investing in Jaipur? Knock-out option in New Delhi? Office space in Pittsburgh? Quick selling in Rome? Samurai bond in Tokyo? Upsiding in Vancouver? Windfall tax in Xuzhou? Yield curve risk in Zurich? 

September 6, Insurance broker Marsh & McLennan launched a new non-profit group called group called the Marsh Center for Risk Insights in order to educate business leaders about risks that can threaten their business.  

Headline: “Fortune 1000 Companies Making Limited Preparations for Risk.”

Highlights of the findings include: *A lack of access to fresh water would have catastrophic affects on nearly 50% of the businesses surveyed. However, few businesses have taken steps to prepare for a water shortage. *Half of senior executives surveyed do not believe it’s likely global climate change will result in long-term environmental and economic impacts. *Less than one-third of the respondents see a pandemic disease outbreak with a high worldwide mortality rate as having a severe impact on their business. 

Its initial report is based on a survey of 101 executives and managers from Fortune 1000 companies on their perceptions of the biggest risks their companies face. The top risks executives said they are worried about are such natural disasters as earthquakes, hurricanes and floods, along with terrorist attacks, rising oil prices, and global climate change. More than 90% said their companies have taken some steps to prepare for one or more of the crisis situations.

Type T Behavior: Thrill Seekers Article highlights by David Crary from Associated Press, September 8, 2007, “Risk-Takers: What Makes Them Tick?”

Temple University psychologist Frank Farley is a past president of the American Psychological Association who has extensively studied risk-taking. He says it is an aspect of human nature with both positive and negative sides. For example, he said a significant amount of crime is motivated by thrill-seeking impulses. “Often the people who are not the thrill seekers look at that behavior and say, ‘They’re crazy,’” Farley added. “In fact, it’s the impulse that created the modern world — it’s the force of inventiveness, creativity, individuality, change and survival.” 

Farley says researchers who categorize people at Type A or Type B personalities should add a third category — Type T — for thrill-seekers. Many psychologists have linked contemporary risk-taking to patterns of social change. Those who perceive today’s world as too predictable and safe may be tempted to seek an outlet in the form of extreme sports such as parachuting off cliffs or snowmobiling on avalanche-prone mountainsides. Others take risks in a quest to set records — to be the youngest, oldest or first of a certain category to accomplish a particular feat, such as circumnavigating the globe alone. 

“In our modern world, we’ve eliminated a lot of risks and threats that our ancestors faced,” said Daniel Kruger, a research scientist at the University of Michigan’s School of Public Health. “People might seek these thrills because their current environment is so safe it’s not giving them the same stimulation.” 

Both Kruger and Farley suggested that risk-taking, in its positive form, can correlate with business and financial success. Recalling a talk with Fossett about adventuring, Dunn summarized his friend’s attitude: “If you do these kinds of things and you do them well, it’s the same sort of philosophy you need to succeed in business or to succeed in life or to succeed in marriage or to succeed in anything, because you have the tenacity and you have the focus and you have the direction to do that.” 

“Infrastructure 2007: A Global Perspective” report by the Urban Land Institute, and sponsored by Ernst & Young LLP. 

“In recent years, the flood of private capital available for investment in commercial property has driven up prices globally. At the same time, the world’s public infrastructure markets have been starved for capital — governments have not had nearly enough funds to meet growing needs for infrastructure development, modernization, and maintenance. Seeing opportunity, more private equity funds, investment banks, commercial banks, and other global investors are beginning to invest in infrastructure. Australia was among one of the first countries to develop models such as public/private partnerships and infrastructure funds to link private capital and infrastructure. Now Europe has widely adapted such models, and they are starting to come into greater use in Asia, and, more recently, in the United States.”

Protiviti is a leading provider of independent risk consulting and internal audit services, and is a wholly owned subsidiary of Robert Half International Inc. Protiviti’s 2007 U.S. Risk Barometer is in-depth analysis of the risk profiles and risk management practices and strategies being employed today by the country’s largest organizations, and includes survey responses from 150 C-level executives. The objectives of the global study are to (1) identify the nature of the risks undertaken by leading corporations worldwide, (2) understand the appetite for risk and concerns with regard to risk of senior executives, and (3) understand the current state of these corporations’ risk management capabilities.  

Among the key findings from the 2007 U.S. Risk Barometer:

*Nearly half of executives rated their organizations to be less than “very effective” at identifying and managing their significant risks, thus leaving them vulnerable to unanticipated losses, reduced productivity and business disruptions.*Of the top 10 risks identified for 2007, competitor risk ranked highest overall, followed by customer satisfaction, the regulatory environment, information systems and IT security, and changing markets.*Views about the benefits of risk management are evolving toward an increased appreciation of the potential organizational impact. In the 2006 survey, “lower insurance premiums” were the top-ranked benefit; however, this year, “quicker identification of risk” was the most oft-cited benefit.

While competitor risk ranked highest overall, the Risk Barometer study found the top risk varied by industry groupings:

 *Manufacturing, distribution and technology – Competitor*Financial services and real estate – Financial markets*Healthcare and life sciences – Regulatory environment*Media, hospitality and services – Customer satisfaction*Consumer products and retail – Competitor*Energy and utilities – Regulatory environment