Chapter 13 – Managing Strategic Risk
-Strategic risks are managed primarily by communicating effective boundaries – both business conduct and strategic – and installing good internal control
-Boundary systems are designed to communicate risks to be avoided and to remove any ability to rationalize actions that could expose the firm to
undesirable levels of risk
-Internal control systems are designed to protect assets and to remove the opportunity for inadvertent error or wilful wrongdoing in transaction processing
and performance me asurement.
BELIEFS AND BOUNDA RIES
-To ensure employees engage in the right type of activities, managers must first inspire commitment to a clear set of core values (the beliefs that define
basic principles, purpose, and direction)
-Core values provide guidance about responsibilities to customers, employees, local communities, and stockholders. They explicitly define top
management’s views on trade offs, and provide guidance to employees where rules and standard operating procedures alone cannot suffice.
-Inspirational leaders: (1) articulate a vision that addresses the values of the participants, (2) allow each individual to appreciate how he or she can
contribute to the achievement of that vision, (3) provide enthusiastic support for effor t, and (4) encourage public recognition and reward for all successes.
-In small companies, communication of core values can be accomplished informally, but large companies must for malize this process by articulating and
communicating formal beliefs systems.
-Belief systems are the expl icit set of organizational definitions that senior managers communicate formally and reinforce systematically to provide basic
values, purposes, and direction for the organization.
-Managers should never delegate the preparation of missions and credos, they should personally reinforce core values and their importance.
-Two ways to control human behaviour is to (1) tel l them what to do (and not to do), and (2) hold them accountable for outcomes.
-Managers inspire their employees to maximum effort and innovation by (1) creating shared beliefs and missions, (2) setting challenging goals, (3) linking
incentives to accomplishments, (4) declaring certain actions off limits.
BUSINESS CONDUCT BOUNDARIES
-Boundary systems commun icate specific risks to be avoided. The most basic business conduct boundaries are those that define and communicate
standards of business conduct for all employees.
-The greater the performance pressures and temptations in their bus iness, the greater the need for business conduct guidelines
Incentives for complianc e
-Instead of rewarding good behaviour, mangers generally punish the instances of incompliance.
Business Conduct Boundaries and Organizationa l Freedom
-Constraints provides the freedom in which creativity can flourish
-Because of inevitable risks, managers must install internal controls (the policies and procedures designed to (1) ensure reliable accounting information
and (2) safeguard company assets)
-Internal controls can be segregated into 3 categories:
-Designed to ensure clear definition of authority for individuals handling assets and recording accounting transactions. They include:
oSegregation of duties – one person to check or reconcile the work of another
oDefined levels of authoriza tion – individual’s access to funds are proportionate to their level or responsibility
oPhysical security for valuable assets – valuable assets should be protected
oIndependent audit – examine the integrity of the firm’s internal controls
-Designed to ensure adequate procedures for transaction processing, as well as timely management reports. They inc lude:
oComplete and accurate record keeping – all transactions recorded accurately
oRestricted access to infor mation systems and databases – restricted to only people who have a legitimate right to change or view account ing
oTimely management reporting – receive accounting reports timely.
-Designed to ensure that accounting and transaction processing staff have the right level of expertise, training, and resources. They include:
oAdequate expert ise for accounting and control staff – CPA, CMA, etc