Tag Archives: ERM

Elephant Risk Management & Technology Innovations

With dwindling habitats and large appetites, Elephants are increasingly dangerous in countries like India. Elephants are increasingly entering cities, killing people and eating crops of coconuts, ginger and other valuables.  On December 29th, for example, they entered the Indian city of Bhubaneswar, attacking a honking car and injuring six people reports The Times of India.  This video of an Elephant rampage in Sri Lanka shows how hard they are to control.  This elephant plays with a minivan like it’s a toy.

[YouTube=http://www.youtube.com/watch?v=qnOkbVJNaYc]

If you’re a farmer, or just live in a city with a forest that contains wild Elephants, they represent a special kind of
Enterprise Risks to your business, not unlike the Monkey Marauders noted in a previous blog entry.

But in the case of Elephants, several noteworthy options are being tested for efficacy in thwarting the Elephant menace:

1) The man honking his horn was hoping to scare away the elephant, and that strategy backfired

2) Forest officials in Mochapallam brought two trained elephants to drive a wild herd of 13 elephants back to the forest.  They successfully persuaded 12 to follow, but one got away and chased officials and local citizens.

3) The officials in Mochapallam ultimately were successful in getting the remaining renegade Elephant to retreat to the forest by lighting firecrackers.

4) A Bengali inventor, Amunuddin Ahmed, invented an “Elephant Repellent“, that combines sirens, bulbs and wires connected to a battery, or solar power.

Each of these examples, is a real option – the investment, or partial investment, with an uncertain payoff.  In one case, there was not only no payoff – but the strategy backfired.

I’m continuously fascinated by the range of risks that need to be considered by different industries in different countries.  Clearly Elephant rampages are rare, but so are Enron scandals and both have terrible outcomes. Are you considering all the risks to your operations, even if they’re not as exotic as Elephants?  Do you understand your options, and what they’re worth to you?

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Steve Jobs Health Capital & Apple Stock

A simple rumor about Steve Job’s health sent Apple Stock lower today by 32 cents, December 30, 2008, reported many newspapers including the L.A. Times.  No objective facts, just conjecture about his health status suggested to enough investors that there was a human capital threat to shareholder value at Apple to sell shares.

It’s a high-profile example of the importance of one facet of Human Capital, that of “presenteeism” and poor health. Presenteeism is the presence of sick employees on the job, who are unable to perform at their normal peak because of health problems.  It’s a serious threat to the livelihood of a firm who, in Apple’s case, depend heavily on the leadership of their founder and current CEO, Jobs.  If Jobs is unable to perform fully – or horrifyingly – if he’s unable to work at all, it would have a material effect on Apple’s ability to continue to produce iPhones, iPods, iTunes and the plethora of profitable innovations released recently under his watch.

It’s also a special case example of why leadership due diligence is a necessary part of Enterprise Risk Management.  Jobs ability to work at full performance is a material risk to the longevity of the firm.

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$7.7 Trillion Increases Probability of Inflation: Skills Required for Enterprise Risk Management

In a move suggesting the U.S. Government is role modeling Zimbabwe, Bloomberg reports Fed Chairman Bernanke and Treasury Secretary Paulson are prepared to provide more than $7.76 trillion US Dollars – amounting to half the value of everything produced in the nation last year – to try to rescue the US financial system.  This includes the recent guaranteeing of $306B of Citigroup debt this week and $3.18 trillion already tapped by financial institutions.  The commitment eclipses the earlier $700 billion “Troubled Asset Relief Program”.  This inflation of the money supply – printing dollars out of thin air, and in large volumes – will likely devalue the currency and suggests future runaway inflation.

Human Capital & Risk Management
What skills are required by businesses and individuals to mitigate these risks?  While no one can know the future with certainty, The Scientific Leader speculates that for organizations, as part of Financial Risk Management, the management of money in different currencies becomes a crucial skill.  Financial Risk Management is a subset of the larger Enterprise Risk Management.  For larger firms, Financial Risk Management happens in the Treasury department.    As firms liquidate their dollars and switch to other currencies, and hard assets like gold, they will be more reliant on financial professionals with treasury expertise.  Similarly, the treasury department will likely be every more focused on hedging currency risk with financial futures and derivatives.  All of this sort of work could increase the demand for financiers with treasury expertise, and in the short run increase their salaries significantly if the demand outstrips the supply.  Firms that do not yet select financial professions with objective measures of prudence and conscientousness may also increase their use of pre-hire selection processes, such as our computer-adaptive Work Personality Inventory(TM).

What will be the consequence of this sort of runaway inflation on employees?  The lowest paid employees are likely to suffer the most.  An inflated dollar will purchase fewer goods and services, and the least skilled employees will likely suffer the most.  Employers that are still in business can attract and retain these sorts of employees by providing different sorts of benefits that help them survive the crisis, such as firm-subsidized food and housing. 

How severe do you expect the current recession to get?  What human capital risk mitigation practices are you employing now personally to weather a potential sequel to the great depression?  Confession – I’m moving my assets to Peter Schiff’s Euro Pacific Capital.  What are you doing?

Surreal Risk Management: Zimbabwe Inflation at 516 Quintillion Percent

Professor Steve Hanke’s inflation calculations sound like science fiction, but to business people in Zimbabwe they’re a real life risk nightmare. The Johns Hopkins professor notes that as bad as official statistics on inflation are, they’re mild in comparison to the truth.

The Zimbabwe government’s official inflation figure is a massive 231-million percent; but is substantially overstated according to Hanke.  As of November 7th, the real figure is 516 Quintillion Percent.  At independence in 1980, the Zimbabwe dollar was worth more than the US dollar.

Government restrictions allow only $50,000 Zimbabwe dollars per day to be withdrawn from bank accounts, enough to buy two bananas from street vendors. Zimbabwe police, to supplement their salaries, are reported to be targeting foreigners, and stopping people on their way to the airport to seal foreign currency, cellphones and any other valuables they may have.  Zimbabwe police are notoriously vicious, as this picture shows from early 2008.

Government exchange rates for gold mining companies force them to sell gold at $0.06, or six US cents per ounce, when the international market rate is more than US$850 dollars per ounce, according to South African newspaper, Businessday.  In Zimbabwe’s case, it appears that the ultimate mother of all risks to your business is the government.

Zimbabwe Risk Management

In response, shop owners have stopped accepting payment in Zimbabwe dollars, and only accept US dollars and South African Rands.  While this makes life difficult for all but the most affluent customers, it keeps the shop keepers from loosing their shirts.  Those who can survive must understand the dollar or rand exchange rates, and have the facilities (e.g. currency exchange) to continue to run their operations.  Even so, the government charges a sales tax of 75% and doesn’t accept Zimbabwe currency to pay the tax itself.  Because inflation is caused by central banks printing money, one Zimbabwean businessman was quoted by the UK’s Telegraph newspaper as, “The Reserve Bank is looting, that is what caused this end-of-game crash.  The Zim dollar lost three zeros in a week. Now you can fly from Harare to Victoria Falls for US 20 cents.”  The Zimbabwe Stock Exchange (ZSE) rises and falls by hundreds and thousands of percent daily, mostly from domestic savings trying to maintain value, as few foreigners care to brave Zimbabwe’s risks.

Zimbabwe business’ people who will be able to make it will have to possess unique capabilities – skills mixed with physical and technology assets to either generate wealth from other currencies (e.g. the internet); or as is traditional in Middle Eastern and Indian cultures, store gold or silver that retains its value no matter what funny money the central banks print.  Other strategies for mitigating these sorts of currency risk would require Zimbabweans to have bank accounts in other countires, or incorporations and systematic currency conversion in other countries.  But the physical assets aren’t sufficient.  One still has to have the skill to know what the going rate is for these assets, and to effectively influence barters or convert a sufficient amount to fiat currencies, as needed to keep the enterprise running effectively.

Given the physical violence of Zimbabwe police and the likely increasing desparation from ordinary people, skill in self defense becomes an essential part of the operational risk management plan.  Both physical security devices, but also martial art self defense skills can be useful.  With the US Government Bailouts signalling an increased interest in US inflation, and devaluation of the dollar, what risk management strategies are you taking?  Do you think it could ever get as bad as Zimbabwe is today in the US or Europe?  Is this what the Chinese government fears as it attempts to ensure steady Chinese growth, for fear of loss of political stability that will inevitably overthrough Zimbabwe’s current regime?  What human capital skills do you need to invest today to ensure your people can handle currency conversions, asset liquidations, and personal self defense?  Do you, like The Scientific Leader, have a systematic strategy to mitigate these sorts of risks in a holistic way?

Psychometrics to Assess Priest Risks: Human Capital Valuation at the Vatican

Did you ever think that the Pope would rely on psychological science to improve his priests’ performance?  Is there any doubt that the recently uncovered longstanding horrible clerical abuse scandals are materially damaging to the Catholic Church?

The Catholic Herald reported yesterday that the Vatican recently blessed the psychometric assessment of seminary candidates for priesthood, some of which have already been used by various groups for a number of years.  Unlike most pre-hire selection procedures, the Vatican’s approach intends to screen out psychopathology, sexual orientation and predict the probability of leading a celibate life.  Each group within the Catholic church, known as a diocese will be allowed to use different forms of psychological assessment within broad guidelines from the Vatican.

Clearly, this is an attempt to avoid the sorts of child abuse uncovered in the last few years.  While the Catholic Herald doesn’t report on what types of assessments, or psychometric methods are to be used, it does reference a need for skilled practitioners to be involved to avoid misuse.  It made me wonder whether they’ve developed specific instruments for uniquely Catholic inqueries (e.g. knowledge and skill about their own doctrine) and whether they reuse known instruments of psychopathology. 

Like other forms of Risk Management and Real Options, the Vatican is proposing the use of a form of Human Capital risk assessment to mitigate downstream risks to reputation and potentially, tithes (monthly church donations, often at the rate of 10% of income).  The option to continue a seminarians studies, and make him a priest is their right, but not obligation to exercize.  Detecting risks early, and either intervening or preventing a prospective candidate to enter the priesthood altogether is also a special-case example of classical personnel selection in Industrial-Organizational Psychology.  Anyone else like to see the item bank for the Computer-Adaptive Test of Homogenous Orthogonal Liturgical Informative Content (CATHOLIC) 😉 ?

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Standard & Poor’s Taking Closer Look at Enterprise Risk Management

Standard & Poor’s, the famous business rating firm, has announced that they will begin applying their assessment of Enterprise Risk Management to their traditional ratings of companies, even for non-financial institutions.  They report that they won’t establish any type of rating system until they get some experience assessing risk management, which is unlikely to occur before 2009.

S&P Views ERM as:

  • An approach to assure the firm is attending to all risks;
  • A set of expectations among management, shareholders, and the board about which risks the firm will and will not take;
  • A set of methods for avoiding situations that might result in losses that would be outside the firm’s tolerance;
  • A method to shift focus from “cost/benefit” to “risk/reward”;
  • A way to help fulfill a fundamental responsibility of a company’s board and senior management;
  • A toolkit for trimming excess risks and a system for intelligently selecting which risks need trimming; and
  • A language for communicating the firm’s efforts to maintain a manageable risk profile.

S&P’s actions are likely to stimulate many companies to take ERM seriously, according to Laura Taylor, a consulting director at Aon.  But S&P and Aon aren’t the only Risk Management experts that are taking note of the increased interests of all forms of Enterprise Risk Management, including leadership, culture and human resources sources.  Other consultancies authoring additional ERM resources include Ernst & Young and Accretive Solutions.

I was especially pleased to see specific consideration of human resource and “cultural” risks, even though the actual listing was a bit dry.  In my view, culture reflects that attitudes, beliefs and values about how people behave in the workplace, and ultimately resides inside employees and leaders.  While traditional Risk Management firms do a good job with probabilistic models of uncertainty and downsides, they do a very poor job of applyin modern Psychometrics, Rasch Measurement, to quantify the likelihood and severity of leadership and cultural risks.  Is your ERM approach informed by the science of human behavior at work – Industrial/Organizational Psychology?

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