When one company merges with another, common business wisdom suggests that the newly combined firm has a lower risk of going into default, because the transaction gives the merged corporation greater diversity than the two individual participants. But according to a study by Craig Furfine, a clinical professor of finance at the Kellogg School of Management, and Richard Rosen, of the Federal Reserve Bank of Chicago, that common wisdom is wrong. “On average,” Furfine says, “acquiring firms become riskier post-merger.”

“The natural intuition that many people would have is that when you combine two firms, the differences between the two firms would tend to make the combined firm safer through diversification,” Furfine explains. “This is not what happens in practice.”

The study goes beyond that counterintuitive conclusion. It also highlights possible reasons for it. “Our evidence suggests that managerial motivations may play an important role,” the two researchers write. “[T]he increased default risk may arise from aggressive managerial actions affecting risk enough to outweigh the strong risk-reducing asset diversification expected from a typical merger.”

Business models help support strategic goals, but too often executives don't inject them with the necessary dose of creativity to bring about real success, according to new research by INSEAD professors Karan Girotra and Serguei Netessine.

How rational managers came to be seen as reckless risk takers...
...but have been behaving sensibly all along

Conventional risk management has focused on avoiding the risks to a business strategy, rather than understanding and managing the risks of the strategy itself. While the protection of existing assets is necessary, a diet of pure risk aversion likely will lead to extinction.

To avoid swinging between over-exuberance and excessive caution, set a disciplined target for your desired investment outcomes.

High performance requires a keen understanding of not only a company’s appetite for risk but also its capacity to manage that risk effectively. Companies that walk that fine line between the two can better protect themselves and pursue new marketplace opportunities.

Businesses collect mountains of data and spend vast sums storing and protecting them. Yet excess data carry a steep price tag for storage, maintenance, and protection, and incalculable potential costs in terms of liability. Similarly, most companies guard their intellectual property at great expense. Yet many efforts to safeguard intellection property are ineffectual or even counterproductive – depressing the value of that which they hope to protect.

Risk-assessment processes typically expose only the most direct threats facing a company and neglect indirect ones that can have an equal or greater impact.

How can today’s leaders become more adept at predicting, assessing and managing risk? The answer lies in enhancing one’s risk intelligence – reducing uncertainty by making strategic choices based on knowledge developed through observation, exploration, learning and sharing.

This publication provides information on the board's role in risk oversight and includes six areas of focus coupled with action-oriented steps to take, along with questions for management, and tools that may help a board execute on its risk oversight responsibilities.

When this regular Ivey Business Journal contributor recommends a certain book, executives can be assured that they will derive value from the book. Even if it is a black swan.

You needn’t be a seer or sage to perceive risk. It’s as predictable and as devastating as a Florida hurricane and as far-reaching as a corporate scandal. But you do need to be a visionary to see the opposite side of the risk coin, the one that lands face down after you flip. The underside represents opportunity, competitiveness and growth.

What do these things have to do with risk? Quite a bit, in fact.

Evaluating country risks is a crucial exercise when deciding where to set up operations in a foreign country. While some risks can be managed with insurance or hedging strategies, others can be measured with a risk-analysis. Though uncertainty will remain in either case, it can be transformed into planned uncertainty, with no surprises in store and contingency plans in place. The author discusses the analytical frameworks a business should examine as it evaluates risk and creates a strategy to manage the uncertainties.

Why are we constantly surprised by the emergence of crises such as the current financial meltdown, and what are the lessons that we can apply when tackling these? According to INSEAD professor Mike Pich, it all boils down to risk and uncertainty - or at least a lack of understanding of the fundamental principles of risk.

Risk managers armed with the most sophisticated quantitative tools available did not foresee the biggest development in a generation -- the systematic breakdown and global contagion of financial markets. In an interview with Knowledge@Wharton, John Drzik, president and CEO of the Oliver Wyman Group, Richard J. Herring, a finance professor at Wharton, and Francis X. Diebold, a Wharton professor of economics, finance and statistics, discussed how to build a more informed risk management model. All three took part in the recent Wharton Financial Institutions Center and Oliver Wyman Institute 12th Annual Financial Risk Roundtable 2009.

This year, companies are reluctant to make predictions about their financial performance in the months ahead. The problem, according to the companies, is not that they don't want to present a gloomy picture; it is that they just don't know how the economy will perform. Risk management models have been criticized for failing spectacularly to predict or prepare firms for the crisis now shaking the world. According to experts from Wharton and elsewhere, the trouble lies less in the models than in the decisions that get made based on them.

Risk—particularly supply chain risk—has become ubiquitous as globalization causes supply chains to lengthen. Accenture and Oracle combine forces to provide a point of view that will help companies understand the nature of supply chain risk—and what they can do to mitigate it.

Companies compete in a multi-polar world—an environment characterized by a new and more complex phase of increased economic interdependence across multiple centers of economic power and activities. Accenture research into global operations reveals that succeeding in this environment demands a new way of thinking about global operations. In particular, it points to five guiding principles that can position companies for high performance on this new global stage.

Why the risk of wrongdoing has migrated from senior executives to middle management — and what to do about it.

The Spring 2007 issue of Rotman magazine contains 124 pages of varying quality articles and other information. I personally recommend reading the following:
- Thought Leader Interview: Daniel Kahneman
- Countering the Biggest Risk of All by Adrian Slywotzky and John Drzik
- Bounded Awareness by Dolly Chugh and Max Bazerman
- Hull's Laws: What we can learn from derivatives mishaps by John Hull
- A Primer on the Management of Risk and Uncertainty by David Robinson
- Questions for: David Apgar

Uncertainty is a business perennial, and making decisions in uncertain times is a staple on the manager’s agenda; it comes with the territory. But decision-making can be made easier, particularly when a manger has a framework to analyze the uncertainty and determine how he or she should go forward. This author describes a dynamic, highly useful framework managers can use.

Complacency, complexity and strained legacy systems are conspiring to raise the risk of an unexpected IT disaster to alarming levels. Standard backup policies and redundant systems are no longer enough. What's needed now is a strategic emphasis on rapid and well-rehearsed recovery.

Michael Regester talks about managing situations that may turn into crises and handling crises once they occur.

"Shadowed by peril as we are, you would think we'd get pretty good at distinguishing the risks likeliest to do us in from the ones that are statistical long shots. But you would be wrong." Despite its misleading title, this article explores the human (not just American) tendency to get calculations of risk wrong.

You're insured and hedged against many risks-but not the greatest ones, the strategic risks that can disrupt or even destroy your business. Learn to anticipate and manage these threats systematically and, in the process, turn some of them into growth opportunities.