Corporate Social Responsibility as Risk Management: A Model for Multinationals

Kytle & Ruggie

Ideas:

Globalization

Large Enterprises

CSR – what you do with your money

How you make your money

Conceptual Framework

Greater interdependencies

Hidden vulnerabilities

Significant shift in market power

Social risk

Own behaviour or actions of others create vulnerabilities

CSR Programs

Global operating environment: networked operations, empowered global stakeholders, dynamic tension between stakeholders

Supply chain components bring their own individual vulnerabilities. Risk in one can ripple through supply chain

Being large being global makes you a platform for stakeholders

Other country issues – weak regulatory frameworks, means of enforecement, high levels of corruption inadequate provision of local service.

Social issues stakeholder interests are not profit motivated\

A Framework for Risk Management

Froot, Scharfstein, and Stein

The purpose of risk management for an organisation is to ensure availability of funds for financing investments.  Risk management does not create new wealth; investment does. Wealth-creating investment is only possible if there are funds available to finance it. Risk management must be used to ensure the organisation has enough funds to finance its wealth-creating investments should events arise that threaten the availability of funds.

The best funds to use for funding investments are funds created internally.  Funds obtained through debt make the company less attractive for further debt, which may result in a dangerous spiral where it cannot obtain debts when it needs them.  Funds raised from equity raise the problem of investors knowing that organisations sell equity when they know it is overpriced.  So despite Modigliani and Miller, who posited that how the funds are obtained is generally irrelevant, internally generated cash is best for funding further investments.

Hedging is one way to insulate the organisation from fluctuations of funds availability.

To determine what to hedge, think about events you wish to hedge against, and understand the impact of that event to your cashflow requirements for funding wealth-creating investments.  For example, if your company manufactures in Europe (Euro) and sells in the USA. Suppose the Euro appreciates thus making sales in the USA slower. Then cashflow is lessened because a) there is less product demand in the USA and b) the value of dollar sales has decreased comapred to Euro, therefore, there is little incentive to further increase production capacity in Europe, therefore there is lessened need for cashflow during the time.  Thus there is little need to hedge.

However, if opposite occurs, and the Euro depreciates, then sales to the US can be expected to increase (cheaper products), however,

Risk management “lets companies borrow from themselves” by shifting funds to when they are more needed.

The goal is to align the internal supply of funds with the demand for funds. The goal is not to insure against the events (such as exchange rate fluctuations) but to ensure the company has the cash it needs during such times.

The company shouldn’t need to worry much about its own stock prices.  That is a problem for individual investors. They can mitigate that risk through diversification.

Choices of which financial instrument to use must not be left to financial engineers. Managers must align the instrument to the corporate goal – which is to ensure availability of cash appropriate to the environment it is hedging against.

Two key issues in derivative features is mark-to-market vs over the counter. In the former, you need to top up daily to compensate for short term losses. In the latter you only need to pay at maturity date.  The other feature is linearity vs non-linearity. Futures and forward contracts may have no floor. There is symmetry in your gain or loss. Options allows setting a floor to loss, while keeping the option to benefit from the event.

The Risk-Return Effects of Strategic Responsiveness: A Simulation Analysis

Torben Juul Andersen and Richard A. Bettis

Summary:

Companies in turbulent dynamic markets experience volatility in their performance. The turbulence described here is not only a case of going back and forth, or cyclical changes, but a case of structural changes.   Companies need to undergo learning about the new changes, devise new strategies to adapt to the changed market and implement those strategies.  This is called strategic responsiveness.

The paper creates a simulation model to determine the risk and return effects of being strategically responsive.

Organisations learn in at least three ways. One, they gain new knowledge (perhaps a better mental model) and notice that current peformance can be improved.

First order learning involves improving current processes. Second order learning creates new knowledge which changes practices.  Continuous improvement may lead to very efficient processes that are no longer required.

Competitive advantage arises from knowledge creation which increases range of strategy options.  Market learning which is about acquiring insights about market conditions prepares the way to taking steps to capitalise on the market condition.

The simulation model finds that strategic responsiveness does play a part in improving performance in a dynamic environment.  It does not require perfect learning since perfect learning costs more and the extra cost offsets the improvement in cashflow.  Strategic responsiveness is a way to achieve higher performance at lower risk.

When to trust your gut

Alden Hayashi, Harvard Business Review

Summary:

Many decision situations do not lend themselves to quantitative analysis.  For one thing, the situation may be so complex that quantitative analysis simply cannot be applied. Examples include areas in public relations, which person to hire, research, marketing, and strategy.

In other cases there just is not enough data to perform quantitative analysis.

Even if data could eventually become available, there are times when decisions have to be made quickly, or else the opportunity is gone. There is no time to gather and analyse data in a systematic and rational manner. Situations like this can be expected to become more common in today’s increasingly turbulent and globalized economy, where things can change at the drop of a hat.

Executives in the strategic positions of organisations often face these types of situations.  They have to rely on gut instinct to make their decisions.  Although in some cases they are provided the results of quantitative analysis, the numbers are often biased to show why something is a good thing.  For example, mergers and acquisitions often show why the merger would succeed (from a quantitative point of view).  The executives have to rely on their instinct to tell them why it might not work.

The question for a decision maker then is how to tune in to your inner instincts and how to tune your inner instincts.

Executives and researchers discover that you need to have your subconscious knowledge emerge and connect with your conscious knowledge.  This can be done through meditative activities such as driving, day-dreaming, showering, and so on – it all depends on what works for you.

Our emotions assist in the decision making process by filtering out patterns that do not apply and by emphasising patterns that apply. In a sense, our emotions sort out and shortlist the considerations that our rational part of the brain can work with. When making decisions, be aware of your emotions and take them into consideration.

Gut instinct is simply based on rules and patterns we have within our subconscious. Some patterns may be built-in (true instincts).  Some are acquired through experience.

The quality of our gut instinct depends on the number of patterns our subconscious stores, the variety of patterns, and how it is able to interconnect those patterns.  The number of patterns come from our experiences, the variety comes the variety of experiences.

Instincts do not guarantee correct decisions. We need to continually self-assess our decisions and ‘train’ our instincts.  We can do this be reviewing our past decisions, reviewing why they were wrong, or why they were right.

Finally, it is important not to fall in love with your original decisions, but to keep flexible and adjust it as new information becomes available.

Contemporary Enterprise-Wide Risk Management Frameworks: A Comparative Analysis in a Strategic Perspective

Per Henriksen and Thomas Uhlenfeldt

Summary:

Many risk management frameworks claim to be holistic and ‘enterprise-wide’.  Henriksen and Uhlenfeldt argue that for a risk management framework to be truly holistic and strategic, it must address the strategy creation process and not just the strategy implementation arena.  It is in the area of strategy process where many strategic risks are created. Hence, an enterprise-wide risk management system that does not lend itself to be used in the strategy creation process falls short of the mark. 

The authors investigate 4 ERM frameworks that claim to be holistic: DeLoach EWRM, COSO ERM, FERMA (a precursor to the current IRM Risk Management Standard), and AS/NZS 4360:2004.  Their study reveals that while these frameworks claim to be applicable at the strategic level, they fall short of providing actionable guidance on how risk management can be performed concurrently with the strategic processes.

A key weakness lies in the frameworks’ treatment of consolidating, prioritizing, and communicating key risks.  The very point of ERM is to consolidate the key risks faced by the organisation so that it can allocate scarce resources most effectively. The frameworks provide little, if any, guidance on how this consolidation, prioritisation, and organisational communication can be done.

The frameworks also acknowledge that risks can result in positive opportunities for the organisation but provide little guidance on how to take advantage of this.  Since the frameworks are not integrated with the strategy creation process - where the biggest opportunities to identify and seize opportunities exists - the frameworks’ take on positive risks are not that helpful.  The authors recognise that in the real world, preventing losses is the focus of management and identifying opportunities is generally the remit of strategy. 

Hence, while risk management in theory helps in identification and grabbing of opportunities, this is seldom done in practice.  The orientation of the frameworks in the process steps is still heavily slanted toward negative risks.

The frameworks add some value in that they pave the way for common risk language and processes across an organisation.

“Communicating Risk”, Dickson Chapter 9

A. Introduction

B. Communicating Risk Information

C. Reports

C.1 Preparation for Report Writing

C.2 Know Your Reader

C.3 Purpose

C.4 The Parameters of the Report

C.5 Management Support

C.6 Timing

C.7 Format of the Report

C.8 Writing the Report

D. Oral Presentations

Kelly, P. (2007) Risk Decisions, Unit 2

Mod 3/2
A. Decision Makers
B. Personality
C. Attitudes
D. Beliefs
E. Perception
F. Judgement
G. Heuristics
H. Risk Behaviour – Propensity and Perception
I. Predictors of Risk Behaviour

I.1 Individual Characteristics

I.2 Organisational Characteristics

I.3 Problem Characteristics

J. Risk Taking Culture
K. Risk Philosophies
L. Organisational Risk Philosophy
M. Activity – Assess Your Own Personality
N. Culture and Practice
O. Risk Thinking Models
P. Activity – Managing Telecoms Risk
Q. Risk and Uncertainty

Q.1 What is Risk?

R. The Risk Management Process
S. Traditional Approaches
T. New Approaches to Business Risk
U. New Simple Approaches
V. Structuring Risk Problems and the Problem of Prediction in Turbulent Environments
W. Sources and Consequences of Bias
X. Treating Risk
Y. Related Issues
Z. Summary
AA. Risk Decisions
BB. Activity – Read Article ‘Risk Management Risks’
CC. The Risk Management Process
DD. Telecoms Risk
EE. Findings
FF. Risk Decisions and Findings of Risk Professionals
GG. Risk Management Risks
HH. The Risk Management Risks
II. Concluding Remarks
JJ. Standards and Governance
KK. External Expectations for Risk Management
LL. What Does this Mean for Risk Decision Making?
MM. Activity – Research Risk Standards From Around the World
NN. Participation
OO. A

Technorati Tags: Module 3/2

Final Word

“Risk and Human Behaviour” Dickson Chapter 2

Mod 3/2

A. Introduction

B. Risk and Human Behaviour

C. Measuring Attitude Towards Risk

C.1 The Standard Gamble

C.2 Perception of Risk

C.3 Value of Measuring Attitudes Towards Risks

D. Risk in Decision Making

D.1 The Decision Making Process

D.2 Problem Recognition

D.3 Problem Definition

D.4 Structure of Decisions

E. Groups and Risk Taking

E.1 Risky Shift

E.2 Choice Shift

“Inter-Personal Barriers to Decision Making” Argyris Chapter 4

 

Mod 3/2

A. Introduction

B. Words Vs Actions

B.1 Practical Consequences

C. Why the Discrepancy?

C.1 Basic Values

C.2 Influence on Operations

D. Some Consequences

D.1 Restricted Commitment

D.2 Subordinate Gamesmanship

D.3 Lack of Awareness

D.4 Blind Spots

D.5 Distrust & Antagonism

D.6 Processes Damaged

E. What Can Be Done?

E.1 Blind Alleys

E.2 Value of Questions

E.3 Working With the Group

E.4 Utilizing Feedback

E.5 Laboratory Training

E.6 Open Discussion

“Humble Decision Making” Etzioni Chapter 3

Mod 3/2

A. Introduction

A.1 Incrementalism

A.2 Focused Trial and Error

A.3 Tentativeness

A.4 Procrastination

A.5 Decision Staggering

A.6 Fractionalizing

A.7 Hedging Bets

A.8 Maintaining Strategic Reserves

A.9 Reversible Decisions

“Risk Analysis” Dickson Chapter 8

Mod 3/2

A. Introduction

B. The Meaning of Probabilities

C. Derivation of Probabilities

C.1 A Priori

C.2 Relative Frequency

C.3 Subjective

D. Combining Probabilities

D.1 Alternative Events

D.2 Joint Events

D.3 Probability Trees

E. Probability Distributions

E.1 Discrete and Continuous Variables

E.2 Actual and Theoretical Distributions

F. The Normal Distribution

F.1 Using the Normal Distribution

G. Binomial Distribution

Kelly, P. (2007) Risk Decisions, Unit 1

Mod 3/1

A. A Beginning

B. Decision Making Theory and Models

C. Decision Making Strategies – An Introduction

C.1 Activity – Reading and Reflecting

1 Framing Risk Management Problems – Common Elements

2 Time Horizons

3 Externalities

4 Data Credibility

5 Interdependencies

6 Uncertainty Recognition

7 Measurement of Costs and Benefits

“Probability”, Dickson Chapter 8

Mod 3/1

A. Introduction

B. The Meaning of Probabilities

C. Derivation of Probabilities

C.1 A Priori

C.2 Relative Frequency

C.3 Subjective

D. Combining Probabilities

D.1 Alternative Events

D.2 Joint Events

D.3 Probability Trees

E. Probability Distributions

E.1 Discrete and Continuous Variables

E.2 Actual and Theoretical Distributions

F. The Normal Distribution

F.1 Using the Normal Distribution

G. Binomial Distribution

“Risk Analysis”, Dickson Chapter 1

Mod 3/1

A. Introduction

B. The Nature of Risk Analysis

B.1 Risk and Human Behaviour

B.2 Risk Analysis Methodology

B.3 Statistical Analysis

C. The Risk Management Standard

C.1 Risk Identification

C.2 Risk Description

C.3 Risk Estimation

C.4 Risk Analysis Methods and Techniques

C.5 Risk Profile

D. The Cost of Risk

D.1 The Cost to Individuals

D.2 The Costs to the Country

E. The Cost of Risk Analysis

F. Conclusion

1.1 Drucker, et al. (2001) The Effective Decision Chapter 1, Harvard Business Review

Paper Outline

A. Introduction

B. Sequential Steps

C. The Classification

D. The Definition

E. The Specifications

F. The Decision

G. The Action

H. The Feedback

I. Concluding Note