Adr approaches to_sensing_and_responding_to_emerging_risk[1]

2
From the RISK INTEGRATION STRATEGY COUNCIL™
of the FINANCE AND STRATEGY COUNCIL
www.risc.executiveboard.com
© 2010 The Corporate Executive Board Company.
All Rights Reserved. RISC5909510SYN
ROAD MAP FOR THE PRESENTATION
■ Forward Looking
Indicators
■ Scenario Planning
Responding to
Risk Events
Sensing Risk
Emerging
Risk Update
-CEB
Please note that the CEB program names referenced
in this document have changed since the time of publication.

3
A WAKE UP CALL
Select Risk Events
2007–2010
Control Overrides
Fraudulent deals characterized by
unauthorized trades and forged
documents led to $7.2 billion in
write-offs.
Political Instability
Nationalization of refining assets and oil interests by
the Venezuelan government resulted in concession of
operating control and ownership interests.
Bribery
The company was accused of
diverting funds to false contracts to
cover bribery payments. There are
$544 million in suspicious transactions
currently under investigation and
public sector projects in more than
200 countries in jeopardy.
Cash Skimming
Traders falsified profits to trigger
bonuses and speculated on currency
futures to cover fraudulent activities
costing A$360 million.
Source: Herald Sun; Financial Times; The Wall Street Journal; Economist.
Product Recalls
Nineteen million products were recalled as a result
of unacceptable levels of lead in paint used by
third-party manufacturers.
Labor Law Compliance
A $600 million class action suit was filed
against the bank for failure to compensate
employees for overtime worked.
IT Security Breach
A hacker infiltrated company computer system and
accessed 94 million account records, compromising
credit card and other personal customer data.
Data Privacy Violation
Disks containing bank account and other
personal information for 25 million people were
lost in interoffice mail.
Consumer Safety Risk
As a result of a gas pedal design flaw,
Toyota recalled 4 million cars, costing
the company an estimated $250–
$400 million.
Concentration Risk
Failure to fully understand and
manage a broad portfolio of risk
leads to a loss in confidence in the
institution and ultimately leads to
bankruptcy.
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1. 2.
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10.
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-CEB

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CHALLENGES TO SENSING EMERGING RISKS
Select Challenges
RISC Interviews
1 Expansiveness and Complexity of the Risk Environment
2 Inability to Identify Emerging Risk Trends
3 Overinvestment in Formalized Risk Management Solutions
4 Inability to Break Down Information Silos
Enterprise risk managers
encounter a number
of challenges scanning
for emerging risk in
a complex and ever
changing environment.
“When the music stops,
in terms of liquidity,
things will be
complicated. But as long as the
music is playing you’ve got to get
up and dance. We’re still dancing.”
Chuck Prince
Former Chairman and CEO
Citigroup
-CEB

5
As the complexity and
volume of risks increase,
unexpected risk events
occur more frequently
making it difficult to
accurately predict the
future. Not only are
fat tail events more
likely than assumed,
but organizations are
unprepared for them.
EXPECT THE UNEXPECTED:
VOLUME AND COMPLEXITY OF RISKS
Increase in Volume and Complexity of Risks Over the Past Five Years
AICPA Research Study, 2009
Operational Surprises Faced in the Last Five Years
AICPA Research Study, 2009
n = 701.
n = 701.
16%
A great Deal
29%
Moderate
46%
Extensive
2%
Not at All
26%
Minimal
46%
Extensive
16%
A great Deal
36%
Moderate
7%
Minimal
2%
Not at All
-CEB

6
We typically
underestimate the
likelihood and impact of
(supposedly) outlying
events.
■ When economic shocks or
rapid changes do occur,
managers are typically
caught off-guard because
the event seemed so unlikely
to them.
■ People in general tend to
assign low odds to things
that stray from “normal,” like
a bell curve suggests.
■ But many dynamics that
matter—e.g., market moves,
product demand—aren’t
“bound” by the limits that
make normal curves helpful.
■ The result—a surprising
number of events seen as
“outlying” that aren’t.
“FAT TAILS”
Normal Versus Mandelbrotian Distributions
Daily Moves in the Dow Jones Industrial Average
Suggested by Normal Curve Versus Actual 1916–2003
Source: Mandelbrot, Benoit and Richard L. Hudson, The Misbehavior of Markets, Basic Books:
New York, 2004; Taleb, Nassim, The Black Swan; Random House: New York, 2007.
Mean
Normal curves help model things
where there is a reason for
limited divergence from a norm—
like people’s height or life span. But many things have no such
limits—e.g., wealth, market returns,
Web hits—offering up extremes.
This means that “outlying”
events are more likely and
of greater magnitude than
we expect.
Frequency
Normal
Mandelbrotian
Greater than 3.4% Greater than 4.5% Greater than 7%
Suggested by
Normal Curve
58 days 6 days 1 day in 300,000 years
versus versus versus
Actual 1,001 days 366 days 48 days
-CEB

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Emerging risks are
generally viewed as high
impact, low probability
events.
CONVENTIONAL EMERGING RISK ASSESSMENTS
By source of the risk or theme e.g., per categories of the World Economic Forum Global Risk Network
■ Technological
■ Geopolitical
■ Societal
■ Environmental
■ Economic
In relation to objective types e.g., per the Committee of Sponsoring Organizations (COSO)
■ Strategic
■ Operational
■ Reporting
■ Compliance
By characteristic of the risk e.g., exogenous/endogenous
■ Predictability
■ Degree of control
■ Duration
By the manner in which the risk manifests e.g.,
■ Long-term changes
■ Sudden, unexpected events
■ Gradually deteriorating operating conditions
■ Local events with systemic impacts
■ Resulting from catastrophic events
Low
Low High
High
Likelihood
Impact
Source: “Exploring emerging risks in a global environment” 2009 and “Exploring Emerging Risks” 2008, PricewaterhouseCoopers.-CEB

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A RISK ASSESSMENT FRAMEWORK FOR EMERGING
RISKS
Business Value at Risk
What are the company’s value drivers (brand, product, supply chain etc.) at risk?
■ Tangible threat (revenue loss, breach of contract, regulatory penalties, market share loss, insurance costs, etc.)
■ Intangible threat (damage to brand, customer, employee, and investor confidence, etc.)
Threat Magnitude
How serious is the threat?
■ Potential impact on business value (insignificant, low, substantial, catastrophic)
■ Speed of onset (0–3 months, 3–6 months, etc.)
■ Level of oversight required (board, senior management, business unit leaders, middle management)
The degree of uncertainty around the risk could also increase relative magnitude of risk.
Company Defences
How well defended is the company against the threat?
■ Strength of process, technical, and physical protections
■ Speed of company response (staff competency, process/systems change, capital reallocation)
Mitigation Responses and Cost
What responses are available?
■ Accept the risk
■ Implement a process to mitigate the risk
■ Adjust pricing to cover potential losses
■ Transfer risk through insurance or contracts
■ Avoid risk through significant change/redirection
What is the cost of mitigating the threat?
■ Solution cost
■ Implementation cost
■ Ongoing cost
Leading Companies are
focusing on gauging
the potential risk
consequence rather than
trying to determine risk
likelihood.
-CEB

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CONSIDER VELOCITY AND DURATION
A Conceptual View of Risk Velocity and Duration
Risk Integration Strategy Council
Speed of onset and
duration of risk
impact are two factors
increasingly included
in emerging risk
assessments.
Time
Time
ImpactImpact
Risk A: High Velocity but Short Duration
For example: Unexpected key personnel
attrition has a rapid onset but the impact is
relatively short-lived as the company up-skills
current employees and hires new talent.
Risk B: High Velocity but a Longer Duration
For example: Supply chain disruption leads
to extensive operational efficiencies that
continue to impact the organization over the
medium turn.
-CEB

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■ Forward Looking
Indicators
Responding to
Risk Events
Sensing Risk
Emerging
Risk Update
-CEB

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Companies are employing
a range of activities
and tools to identify
emerging risks.
A RANGE OF APPROACHES TO SENSING EMERGING RISK
Questions
What other methods are you using in your organization to surface emerging risks?
What are the best information sources for identifying emerging risk?
Management risk councils/committees: Use a forum for surfacing emerging risk from a diverse
collection of senior leaders across the organization.
Employee led: Dedicated employees in ERM, strategy, or Internal Audit with the responsibility of tracking
key trends and events.
Hired “Guns”: Specialist organizations contracted to monitor and track industry trends and provide on
ongoing status updates.
Internal pulse: Behavioral surveys to understand senior and middle management commitment to risk
and compliance practices
Collective wisdom: Prediction markets aim to tap into the group intelligence of employees on projects to
identify underappreciated events (limited overall applicability)
-CEB

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To rapidly identify
emerging risk issues
and to drill down into
the root causes, RTI
builds a leading risk
indicator dashboard
based on existing
granular metrics.
■ The risk dashboard consists
of Key Risk Indicators (KRI)
spanning all major risk areas,
capturing the entire risk
proﬁle of the organization.
■ Underlying granular metrics
form the basis of each KRI.
The use of predictive metrics
provides a forward-looking
view of risk and allows
for the easy identiﬁcation
if the root causes of KRI
performance changes.
DIGGING INTO THE FUTURE
Key Risk Indicator Dashboard
Illustrative
Source: RTI.
Unacceptable and
Immediate Action Required
Acceptable but Continuous
Monitoring Required
Acceptable and Being
Managed Appropriately
Root Causes
Performance against the underlying metrics
impacts the performance of the KRI. Here a
shaded metric translates into a shaded KRI
highlighting the need for immediate action.
Ethics Financial
Human
Resources
Market Operational
Regulatory
Compliance
Reputation
Safety and
Security
State of
Science and
Technology
Domestic
Ethics
Internal
Controls
Recruiting
B/U
Summary
Business
Continuity
Import
Export
Media
Relations
Domestic
Security
Resource
Environment
KRI
Financial
Reporting
KRI
Strategic
Planning
Data Privacy
IT Systems
Compliance
Client
Satisfaction
Lab
Management
Thought
Leadership
KRI
Revenue
Concentration
KRI KRI KRI OSHA/EPA KRI KRI KRI
KRI KRI Retention KRI KRI KRI KRI KRI KRI
Attrition
Goal: Less than 15%
Actual: Less than 10%
Number of Issues
Raised with HR
Goal: Less than 50 pcm
Actual: 30 pcm
Promotion Rates
Goal: High
Actual: Below average
Training Level
Goal: More than 75%
involved in monthly
training
Actual: 80%
-CEB

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RTI screens possible
operational metrics using
a clear set of decision
criteria designed to ensure
an accurate and forward-
looking view of risk.
■ Once the breadth and depth
of available information
has been uncovered, the
executive leadership team
decides which metrics
should be selected to build
the KRIs.
■ The use of these decision
screens allows RTI to focus
on those metrics that will
provide a true and forward-
looking view of risk across
the enterprise.
MEASURING WHAT MATTERS
Metric-Screening Decision Tree
Illustrative
Relevance
Is the metric
aligned with
a deﬁned
KPI at the
group level?
The metric is rejected immediately if it
does not satisfy one of these three criteria.
Reliability
Is the metric
reliable, with
any inherent
biases
known and
predictable?
Availability
Is the metric
sourced
from within
the ﬁrm or
inexpensively
from a third
party?
Metric
Selected for
Inclusion
In Key Risk
Indicator
YESYES
NO NO NO
YESYES
Leads,
Not Lags
Is the metric
a leading
indicator of
future risks?
YESYES YES/YES/
NONO
Metric E
Metric C
Metric D
Metric B
Metric D
Applicability
Is the metric
operational
or a true
indicator of
risk?
Source: RTI.
Metrics that are not leading but
are applicable are still included.
YESYES
-CEB

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SNAPSHOT OF THE RISK NETWORK MAP
Goodson Bank’s1
Network Risk Map
Goodson Bank extends
the concept of social
network mapping beyond
its traditional scope
to visually represent
interdependencies
among high-financial-
impact risks across the
institution.
■ The map displays “swans,”
defined as high-impact
risk events, which have
been identified by staff
through “swan hunting”
(risk detection) sessions.
■ Risk events are represented
by points that are either
circles or triangles. The
shape represents the
severity of the risk event,
while the color of the point
represents the risk category
of the event. Arrows track
interdependencies among
risks, and the weight of the
arrow represents the degree
of cause and effect.
■ Goodson uses the map
to identify trends among
sources of high-financial-
impact risks and prioritize
the development of
solutions.
Government
Political Climate
Reputation
People
Other
Black (Massive-Impact Risk That Is Difficult to Predict)
White (High-Impact Risk That Can Be Reasonably Foreseen)
Weak
Medium
Strong
Category of Risk Strength of Relationship Color of Swan
1
2
3
4
5
6
7
8
9
15
11
14
13
12
10
Network maps typically
display the relationships
between a series of
people or events, which
are represented by
individual points on the
map. The placement
of points is randomly
determined by map-
generating software.
1 Pseudonym.
Source: Goodson Bank.
-CEB

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STEP 1: IDENTIFY RISK EVENTS
Overview of Goodson Bank’s1
Swan Hunting Initiative
To identify overlooked
high-impact risks,
Goodson Bank develops
a lighthearted approach
to risk detection in the
form of a swan-hunting
program.
■ Goodson applies the
management principle
of “black swans”—defined
as low-frequency, high-
financial-impact risks—to
create an organization-
wide “swan hunting” risk
detection program.
■ Participation in the
program is voluntary, and
risk detection sessions
are informal and highly
interactive.
■ Learn more about the
swan hunting initiative by
reading the “Grassroots Risk
Detection” case study on the
Council Web site.
Results of Swan Hunting Sessions
Sample White and Black Swans Detected by Goodson: February–June 2009
White Swan
A low-probability, high-
financial-impact event that
can be reasonably foreseen
if looked for carefully
Sample White Swan: Power Outages
Recent experience has shown that power outages
can severely impact business operations. However,
power outages (while not common) are foreseeable
and the impact can be prevented.
Sample Black Swan: Government Intervention
In any industry that benefits from government-
mandated savings schemes, government intervention
to utilize those savings to fund a growing national
deficit would be a true black swan; high impact, off
the radar, but wholly explicable were it to happen.
Black Swan
A low-probability event
with massive impact that
is unexpected but whose
occurrence can be explained
after it has happened
Hold a Swan Expo.
Participants in the program
come together to present their
findings to one another and to
senior executives.
Detect White and Black Swans.
Goodson holds interactive swan
hunting sessions to equip staff
with the knowledge and tools
to detect high-financial-impact
risks.
Recruit Swan Hunters.
Employees who participate in
the initiative are all volunteers
who have an interest and
enthusiasm for risk detection.
1 Pseudonym.
-CEB

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STEP 2: CATEGORIZE IDENTIFIED SWANS
Categorization of Identified Swans
A dedicated network map
team uses its discretion
to place each swan
identified in the hunting
sessions into a specific
risk category.
■ The network map team is
formed proactively by a
small group of participants
from the swan hunting
initiative.
■ The team identifies more
than 15 different risk
categories that span
products and functions
across the organization.
■ After placing each swan in a
category, the team compares
the top categories for white
and black swans to see
which categories are likely to
include risk events with the
largest financial impact.
Swan #3
Swan #7
Goodson uses risk
categories developed
during the swan hunting
sessions and combines
categories and adjusts
language where needed.
See p. 11 for a full list of
Goodson’s1
categories.
Assessment of Key Categories
Black Swan Top Five Categories
Number of Swans
White Swan Top Five Categories
Number of Swans
Government
Process
PoliticalClimate
Regulation
Clients
Reputation
People
People
Technology
Technology
35
20
15 14
6
70
62
51
26
19
The top risk
categories are
different for white
and black swans,
showing that the
origin of a risk likely
affects its impact.
Government
Political Climate
Reputation
People
Other
1 Pseudonym.
-CEB

17
STEP 3: ESTABLISH INTERDEPENDENCIES AMONG
SWANS
Charts to Show Swan Interdependencies Within and Between Categories
The team holds a
brainstorming session
to identify and chart the
influence swans have on
one another within and
between categories.
■ The team prints individual
lists of swans by category
and affixes all the lists to a
whiteboard.
■ Using their own experiences
and instincts, the team draws
arrows between swans. Each
arrow conveys two pieces of
information:
1. The direction of the
relationship: Which
risk events (swans)
can potentially affect
other risk events due to
their source, impact, or
approach for resolution?
2. The strength of the
relationship: Where
association exists, how
strong is the degree
of cause and effect?
Category: Government
Swan 1: Forced Removal of
Public Official
Swan 2: Treasury Fraud Exposed
Swan 3: Diplomatic Tensions with
Trade Partners
Category: Political Climate
Swan 4: Citizen Protest of
Banking Reform
Swan 5: Local Terrorism
Swan 6: Government Takeover
of Failing Bank
Category: Reputation
Swan 7: Customer Anger with Banks
Swan 8: Bank Earnings Leaked to Press
Swan 9: Scandal Involving Board
Member
Swan 10: Attempted Hostile Takeover
by Market Competitor
1
2
3
4
6
2
8
7
■ The direction of the arrow shows which swan
influences another.
■ The number above the arrow signifies the relationship
strength (1–3 = weak, 4–6 = medium, 7–10 = strong).
(Strong)
(Medium)
(Medium)
(Strong)
(Weak)
(Weak)
(Weak)
(Weak)
-CEB

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Swan 1 Swan 2 Swan 3 Swan 4 Swan 5
Swan 1 0 0 0 0 0
Swan 2 7 0 0 4 0
Swan 3 0 0 0 0 0
Swan 4 0 0 0 0 0
Swan 5 0 0 6 0 0
From
To
Swan Number Swan Type Category Symbol Color
Swan 1 White Government 10 1
Swan 2 Black Government 20 1
Swan 3 White Government 10 1
Swan 4 White Political Climate 10 2
Swan 5 Black Political Climate 20 2
STEP 4: TRANSLATE RELATIONSHIP DATA TO TABLES
Table to Capture Relationship Data
Once relationships
among swans have
been identiﬁed, the
team enters relationship
information into tables
and uses a statistical
program to generate
network maps.
■ The ﬁrst table contains the
two pieces of relationship
information from the
charting exercise: the
direction of the relationship
between swans, and the
degree of cause and effect.
■ The second table establishes
legend codes for the
network map, and the team
assigns codes to swans
based on their color and risk
category.
■ The team inputs the tables
into a program that is
available for free download
on the Internet, and the
output of the program is the
network risk map.
Table to Assign Legend Codes for Network Map
The numbers in these
tables are taken from the
charting exercise and
represent the degree
of cause and effect
between two swans.
■ Color codes show the
swan’s risk category.
■ Symbol codes show
the swan type (white
or black).
The open-source network software used to create network maps is available for free download at www.r-project.org.
1 Pseudonym.
Source: Goodson Bank.1
-CEB

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NETWORK MAP RESULTS AND INTERPRETATION
Emphasis on Key Interdependencies Among Risks
The network map team
presents the network
risk map to senior
executives and highlights
interdependencies
among swans for further
discussion.
■ The map presentation
sparks a discussion among
executives on why the
observed interdependencies
occur, and how the network
map may differ if other
groups undertook the same
exercise.
■ Goodson1
is currently
replicating the mapping
process with different groups
across the organization to
understand how results will
vary depending on employee
perspective.
1
2
3
4
5
6
7
8
9
15
11
14
13
12
10
Discussion Point
The network map highlights
how an unexpected
government takeover of a major
competitor could trigger a
series of events that will harm
the institution’s reputation and
create tension in relationships
with the government.
Questions to Consider
How does the scenario
presented in the network
map compare with
our conclusions using
a traditional risk detection
approach?
What events or actions
could be signs that this
scenario will unfold?
Are we looking out for those
signs?
If the worst-case scenario
does happen, what can
we do now that will help
us to better manage the
consequences?
1 Pseudonym.
The network map team emphasizes
areas on the map where a single
node has a high number of arrows
going toward and away from it,
as those nodes represent risks that
most strongly inﬂuence other risks.
1
2
12
4
6
8
-CEB

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KEY DISCUSSION QUESTIONS
■ Where can we strengthen our risk management efforts to prevent a similar type of failure?
■ How much time should we invest in risk detection versus risk response?
■ In 20/20 hindsight, what would your ERM group/Risk Committee have advised senior management to do
differently a year ago?
-CEB

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■ Forward Looking
Indicators
Responding to
Risk Events
Sensing Risk
Emerging
Risk Update
-CEB

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TYPICAL SCENARIO PLANNING APPROACH
Representative Otput: Eli Lilly’s Pharma Industry Scenarios, c. 2004
Illustrative
Scenario planning often
begins with several
driving forces and ends
with a 2x2 matrix.
Rationing Innovation
■ Tight formularies and utilization
controls
■ Innovation “rationed” to patients
judged most
likely to benefit
■ Restrictions on off-label prescribing
by MDs
■ Right drug to right patient through
accepted treatment algorithms
developed by credible thought
leaders
■ Companies must demonstrate big
improvements
over current therapies to obtain
price premium
for new products
■ Products in new therapy most likely
to command price premiums
Haves and Have-Nots
■ HSAs in widespread use; patients
pay out-of-pocket for many Rx drugs
■ Middle class and rich can supplement
employer HSA contributions (pre-tax
and after tax) to ensure access to
new therapies; poorer consumers
cannot
■ Increased consumer price sensitivity
and access inequities create pricing
pressures on new therapies
■ At same time, very expensive biotech
products covered through high
deductible catastrophic insurance
plans, so pricing pressures on these
products is less acute
Payers Rule
■ Rx prices regulated by government
(price ceilings)
■ Very tight formularies and
utilization controls
■ Even with price regulation,
companies must offer big discounts
to “play” on formularies
■ Restrictions on promotional
spending and programs
■ FDA focus on safety increases cost
of clinical trials
■ Massive pharma industry
consolidation
Price Sensitive Patients
■ Employers continue to pass ever
larger share of health care costs onto
employees, so patients are price
sensitive
■ Most seniors still have significant
out-of-pocket drug costs
■ Heavy use of generics, OTC products
(FDA speeds Rx to OTC switching
in many categories) and alternative
medicines
■ Small share of population willing to
pay premium for branded products
based on heavy DTC marketing
efforts; most not
■ Companies focus on NILEX and
promotional efforts to drive sales
R&D Output
Breakthrough Innovation
1 Define the Focal
Issue P
Z
S
T
2 Identify Key
Driving Forces
A
B
3 Craft Potential
Scenarios
A
B
4 Determine
Resulting
Strategic Options
A
B
C
5 Set and Monitor
Tripwires
Individual
(Patient/
Prescriber
focus)
Centralized
(Public or
Private)
Process Steps
Incremental Innovation
Source: Eli Lilly & Co.; Corporate Strategy Board.
-CEB

23
THEY MATRIXES
Scenario Matrix Overview
Strategy executives
push the limits of
comprehensibility to
better reflect increasing
complexity.
Source: Corporate Strategy Board research.
1
Classic 2x2
2
Classic 3x3
3
Three Dimensional (2x2x2)
4
Nested (2x2 in a 2x2)
X
Y
Z
2 variables
2 values
4–5 scenarios
2 variables
3 values
9 scenarios
3 variables
2 values
8 scenarios
4 variables
2 values
4 major and
16 minor scenarios
Benefit
Clear in range
of possibilities
Benefit
Adds richness to range
of possible outcomes
Benefit
Elegantly captures
multiple dimensions
Benefit
Adds more dimensions
yet still suited to a flat file
Risk
Rejected as too simple a model
Risk
Still only captures two
dimensions
Risk
Hard to visually display in a flat
file
Risk
May overcomplicate matters
-CEB

24
RISK SCENARIO PLANNING CRITERIA
1. Plausibility—Selected scenarios must be logical, falling within the limits of what might conceivably occur
2. Differentiation—Scenarios should be structurally different to avoid repetition or slight variation of a
single case
3. Consistency—Scenarios must be internally consistent; the combination of the scenario’s logics must not
have any intrinsic inconsistencies that would undermine its credibility
4. Decision-Making Utility—Individual scenarios, and all the scenarios as a set, should contribute speciﬁc
insights into the decision on which the scenario planning process is focused
5. Challenge—Scenarios should challenge the organization’s conventional wisdom about the future
-CEB

25
Senior managers work in
teams to document and
then analyze competing
visions of the future
success—and failure—of
their company’s strategy.
■ This enables the teams to
identify the crucial issues
for executive focus and
resourcing.
LESSONS LEARNED IN ADVANCE
Three Steps to Pre-Mortem Analysis
Source: Corporate Strategy Board research; Government
Finance Roundtable research.
Fortune Fortune
Working teams create articles
projecting success (and failure) of
company ﬁve years hence.
Teams are shuffled and then tasked
with identifying the issues driving
each scenario.
Common issues are identiﬁed
for monitoring and resourcing.
1 2 3
-CEB

26
Participants answer,
“What did we start doing,
stop doing, keep doing to
reach each future state?”
■ Participants provided
a broad framework of
elements to consider to
ensure comprehensive
analysis of possible causes
of failure or success.
LINKING THE FUTURE TO THE PRESENT
“Start Doing/Stop Doing/Keep Doing” Exercise
Source: Corporate Strategy Board research; Government
Finance Roundtable research.
“START DOING” “STOP DOING” “KEEP DOING”
ENVIRONMENT
External
• Legislation
• Litigation Pending
• Community
Involvement
• Industry Leadership
Internal
• Innovation
• Values
• Alignment
• Teamwork
FINANCE
• Stock Price
• Return onAssets
• Debt/Equity Ratio
• P/E Ratio
• Systems
OPERATIONS
• Structure
• Number of
Restaurants
• Market
• Quality Systems
• Safety Systems
• Information Systems
“START DOING”
“STOP DOING”
“KEEP DOING”
ADAPTABILITY
• New Products
• New Market
• New Customers
• ResourceAllocation
• Organizational Structure
• Technology
MARKET
• Customer Satisfaction
• Market Share
• Customer Retention
• Competitors
PEOPLE
• Key Capabilities
• Satisfaction Ratings
• Turnover of Key
Contributors/Strong
Performers
• Source ofTalent
– Buy
– Build
– Borrow
– Bind
– Bury
• Leadership Style
• Internal Learning
• Career Development
Invest in high-tech
restaurant equipment.
Focus technology on
information systems.
Focus on retaining key
technology people.
Provide intensive training
to restaurant managers.
Improve speed of service.
Maintain “friendly” image.
“Our management has
been around for such a
long time, they know
one another so well, they know
the business so well. Turning
them into consultants was a
creative way to use their talent
and knowledge and allow them to
be more critical of the company’s
strategy, though in a constructive
way. The ‘consulting hat’ created
a third-party feel which was very
important.”
Vice President, Planning and Analysis
Jack in the Box, Inc.
-CEB

27
READINGS FROM THE FUTURE
‘Chainsaw’ Al Tries to Take
Jack Back
into the Black
“You had all these
peoplesaying great
things about us
and a sense that
our management
cared about
leadership and
continuous
improvement.
It’s just not the
same company I
started working for
in 1998.”
–Houston-area
employee
“The company stock, which in March 1999 reached a high of $31 per
share, currently languishes in the $6 to $8 range. Dunlap regularly raises
the specter of additional layoffs as a do-or die incentive for employees
to fall in step.”
“‘Everyone knew Dunlap’s reputation,’ one Jack in the Box employee
told Business World. ‘People immediately began putting their resumes
together. It was pure chaos. Now, they (Jack in the Box executives)
don’t think anything they do will make a difference, so they’re not even
trying. It’s like a morgue in here most days.’”
“We’ve been able to negotiate the
obstacles and deliver consistently
superior products at a time when
other companies are faltering.”
–Bob Nugent
“Since 1998, the 52-year old chain has nearly doubled in revenue, having
added 675 new restaurants for a system total of 2,300. And the growth
spurt is far from over. At press time, the company’s stock was trading
$46 per share, more than twice its value at the close of 1998.”
“Jack in the Box restaurants are busy changing the face of fast-food and
astounding analysts and investors. Jack in the Box’s success becomes
all the more impressive when you consider its industry has been hit
hard from all sides.”
-CEB

28
War games exercises
enable assurance
partners to capitalize
on different perspectives
in mutual efforts
to surface risks that
individual functions
may have missed
or misjudged.
THE ART OF WAR (GAMES)
Case in Point: A Perfect Storm
Situation: Converging industry
consolidation, a soft market, and
an economic downturn strain
both employees and customers.
■ “What if” situations
■ Regulatory changes
■ State/federal legislation
■ Current events
Compliance
Role: Tests likelihood of risk
occurrence in the business.
Example: The last recession marked
a measurable rise in employee fraud.
ERM
Role: Tests potential size and
financial impact of risk.
Example: The company must take
immediate mitigating action if the
estimated loss exceeds $2.5 million.
Internal Audit
Role: Tests ability to uncover or
confirm risk.
Example: In Q2, the audit function
uncovered a spike in instances
of overstated expense report
submissions.
Quality Assurance
Role: Conveys the business units’
perspectives of risks.
Example: The businesses are
unwilling to spend too much of their
time on compliance issues.
Setting the Agenda Assessing Inputs Building Consensus, Taking Action
In 2
Years
Timeline of Risks
Options for Response
In 5
Years
In 10
Years
■ Discuss long-term likelihood and
the severity of risk’s financial and
reputational impact.
■ Determine appropriate risk
mitigation strategy.
■ Shelve the risk.
■ Consider alerting regulators
to possible deficiencies.
■ Assign ownership to
appropriate function for
direct mitigation.
■ Escalate to Risk and Control
Committee for further action.
YELLOWSTONE
1
1 Pseudonym.-CEB

29
Sabre avoids the
“bottom of the
bookshelf” fate of
typical scenario-planning
exercises by emphasizing
competitive dynamics
and actionability.
NOT THE SAME OLD SCENARIOS
Differentiation from Typical Scenario Methodologies
Sabre
Focused on Disruptions in
Competitive Dynamics
■ Method defines plausible
industry disruptions with
implications for near-term
positioning decisions.
■ Scenarios explicitly
articulate potential shifts
among players in the value
chain, including current
and potential competitors,
customers, and suppliers.
Scenario Issue Prioritization
1. List drivers of change in industry dynamics; i.e., match time horizon to planning timeline (three to five years for
Sabre’s history)
2. Distinctions between scenarios highlight different outcomes for highly uncertain high-impact drivers
3. High-impact drivers with high certainty define the base case that is uniform across all scenarios
Actionable for Planning
and Resource Allocation
■ The executive committee
reviews all initiatives against
scenarios as part of the
annual planning cycle and
selectively reevaluates
project robustness in
quarterly pull-ups.
■ Executives use scenarios to
proactively influence Sabre’s
position in the marketplace.
Refreshed by “Early
Warning Signal” Monitoring
■ “Early warning signals” are
reviewed quarterly by the
executive team to reassess
likelihood of each scenario’s
occurrence and revise plans.
■ Predefined signals emphasize
concrete events and
measurable trends.
1 2 3
A
B
C
D
Sabre
Competitors
Disrupters
BuyersSuppliers
Robustness
Scorecard
A B C D
- C E B

30
Suppliers Competitors Disrupters Buyers
Intermediaries Drive
Transformation
New Entrants Drive
Transformation
Socioeconomic
Retrenchment Drives
Transformation
Airlines Drive
Transformation
Scenario
Description
Implications
Portal Power
Airline alliances
stabilize through
equity ownership
or asset sharing.
■ Defend against
airline strategies
that adversely
impact non-direct
channels.
■ Invest
aggressively in
operational and
marketing CRM.
1 Solidarity
Alignment of
agencies and
reservation systems
increase customer-
centric services.
■ Operational
efficiencies enable
intermediaries to
lower distribution
and marketing
fees.
■ Regulatory
environment
constrains airline
consolidation.
2 Newcomers
Nontraditional
marketing
powerhouses enter
travel retailing.
■ Create new
business models
and align with
innovative
intermediaries
to meet customer
service and
distribution needs.
3 Global Cocooning
Economic, political,
and social turmoil
reduce appetite and
ability to travel.
■ Reservation
systems and
travel agencies
consolidate
and survive on
signiﬁcantly
reduced revenue
streams.
■ Improve ease and
comfort of travel
experience.
4
Industry
Pressure
Driver of
Disruption
Sabre’s scenarios analyze
implications of disruption
by different industry
players.
CREATING PATTERNS OUT OF CHAOS
Competitive Dynamics Modeling Exercise
Sabre
-CEB

31
Best practitioners work
within the strengths
and limits of scenario
planning.
■ Adhering to some
straightforward tips can
boost the impact of using
scenario planning.
DO’S AND DON’TS
Tips for Using Scenario Planning
✔ Develop scenarios in small teams.
✔ Allow sufficient time for the exercise.
✔ Distinguish between drivers that are mostly
uncertain and those that have some degree
of certainty.
✔ Push yourself to make each scenario feel like
an uncomfortably extreme caricature; go
beyond the limits of what you think is likely
or even possible.
✔ Recognize that the future will likely possess
elements of all your scenarios.
✔ Use your scenarios as “wind tunnels” to
pressure test decisions and plans; how well
does your decision hold up in each scenario?
✘ Use scenario-planning for forecasting.
✘ Expect it to predict the future.
Do: Don’t:
-CEB

32
■ How have you incorporated scenario planning into your risk assessment process?
■ What black swans are you and your executive team considering?
■ How does an increasing amount of uncertainty impact scenario planning?
-CEB

33
■ Forward Looking
Indicators
Responding to
Risk Events
Sensing Risk
Emerging
Risk Update
-CEB

34
Realign Audit Committee
Charter
The Audit Committee
adapts its charter
to formally include
alignment with risk
management and
changes its name to
the Audit and Risk
Committee.
Create Enterprise Risk
Function
The Audit and Risk
Committee supports the
creation of an Enterprise
Risk Management (ERM)
function to coordinate
risk management across
the company.
Define Risk Tolerance
The Board of Directors
approves risk policies
which include tolerance
levels for most risk
categories.
Key Idea: Define clear
thresholds for when
Management should raise
issues with the Board.
Assign Risk
Accountability
ERM assigns individual
senior executives (risk
stewards) responsibility
for specific categories
of risk.
Identify and Categorize
Business Unit Risk
Business area managers
assess risk based on
their individual operating
strategies and business
environment.
Oversee Risk
Management
The Audit and Risk
Committee engages in
quarterly discussions
with ERM and executive
management on risk
issues.
Synthesize Risk for
Board Review
ERM synthesizes
and standardizes the
language and format,
and prioritizes risk
assessments in periodic
reports for executive
management and
the Audit and Risk
Committee.
Key Idea: Combine risk
information to gain
holistic view of company
exposure.
Report Mitigation
Progress
Risk stewards and line
management report back
on progress made against
defined mitigation
approaches.
Set Response Strategy
Business area managers
and risk stewards create
plans for responding to
risks.
Identify and Evaluate
Corporate Risk
Partly from the business
unit assessments,
ERM and risk stewards
identify corporate-wide
risks worthy of Board
attention.
Key Idea: It is possible to
apply qualitative criteria
to evaluate subjective
risks.
ENSURING TIMELY BOARD CONSIDERATION
Capital One’s Risk Management Process
Capital One establishes
a system to set clear risk
definitions and tolerances
and thereby ensure the
Board and Management
discuss risks at the right
juncture. 1 2 4
5
678910
3
Strategic Imperative
2002—The CEO and
Board decide to
establish a formal risk
management process
to enable continued
growth.
Source: Capital One Financial Corporation.
-CEB

35
DEFINING EXPECTATIONS
Capital One’s Risk Management Policies
Capital One’s Board,
Management team,
and Audit and Risk
Committee establish
clear policies for each
category of risk to reduce
surprises.
Roles of Capital One’s Management, Board,
and Audit and Risk Committee Regarding
Risk Policies
Management
In addition to overall risk management responsibilities,
Management:
■ Proposes and manages risks to comply with risk
policies
■ Notifies the Audit and Risk Committee when risks
exceed policies
Audit and Risk Committee
■ Actively oversees the management and
development of the risk management process
■ Oversees company risk positions and responses
■ Monitors other Board committees’ risk oversight
responsibilities
Board
■ Factors risks into corporate decision making
■ Develops responses for specific corporate-wide
risks
■ Monitors overall efficacy of risk management
process
Risk Limits
Defined risk limits provide thresholds for when
Management should raise an issue with Audit
and Risk Committee or Board.
Subjective Risk
Thresholds
Quantifiable Risk
Thresholds
■ Determined by using
risk-return type
calculations
■ Provide guardrails for
positive risk taking
■ Factored into
corporate decision
making on the basis
of which risks are
unacceptable
■ Reduce exposure to
specific risks
-CEB

36
Many risks are difficult
to quantify.
QUANTITATIVE AND QUALITATIVE
RISK EVALUATION
Capital One’s Risk Summary
Illustrative
“Our goal is to make
sure we’re aware of risk
and doing what we can
to mitigate it. You don’t need
numbers to accomplish that—you
need a conversation that brings
to bear the collective experience
and wisdom of the Board and
Management.”
Ron Dietz
Audit and Risk Committee Chair,
Capital One Financial Corp.
Risk Category Current Risk Level
Credit $ XXX,XXX
Liquidity $ XXX,XXX
Market $ XXX,XXX
Compliance Number of Units1
Operational Activities $ XXX,XXX
Operational Functionality H/M/L
Strategic H/M/L
Reputation H/M/L
Legal H/M/L
Quantiﬁable
Risk Thresholds
Subjective
Risk Thresholds
1 Trackable units related to compliance activities..
-CEB

37
A STARTING POINT FOR
FOCUSED RISK DISCUSSION
Quarterly Audit and Risk Committee Dashboard
Illustrative
Capital One’s Audit and
Risk Committee is able
to quickly understand the
enterprise-wide scope
of key risks and discuss
mitigation efforts with
Management.
■ Top Company Risk—Capital
One’s Audit and Risk
Committee receive a one-
page snapshot for each
of the company’s top 10
or so risks.
■ Rating Rationale—A red,
green, yellow response
rating show the Audit and
Risk Committee the urgency
Management places on risk
mitigation efforts.
■ Mitigation Initiatives
Update—A snapshot
of initiatives underway,
Management quickly
brings the Audit and Risk
Committee up to speed
on mitigation efforts.
■ Risk Migration—Always
aware of “siloing” risk,
Capital One shows the
potential knock-on effects
of each risk across the
enterprise.
Top Company Risks–Credit Risk: Macroeconomic Credit Environment
Q1 2008 Top Company Risk Q1 2008 Description
Macroeconomic Credit Risk
Worsening credit environment could trigger issues with
excess spread, liquidity, and capital.
Response Strategy and Rating
Mitigate by 1st Half of 2009
Accountable
Executive
Mitigation Target
Capital levels are resilient to all realistic stress scenarios.
Rating Rationale
Yellow because, while internal mitigation activities are
on track, mitigation is also dependent on improvement
in the economic environment.
Mitigation Initiatives Update
■ Multiple projects underway as part of a companywide mitigation initiatives
■ Broad-based underwriting adjustments implemented and updated decision criteria rolled out
■ Credit Policy Committee changes heighten oversight of challenging credit programs
Challenges Risk Migration Risk and Mitigation Assessment
■ We have little ability to impact the
underlying drivers of worsening
credit.
■ External factors may impact on our
business.
in new or unexpected ways
■ Historical data to ground our
actions may.
not directly apply to current
conditions.
Impacted Risk Category: Credit
Potential Risk Category Migration:
■ Liquidity
■ Reputation
■ Legal (new laws)
Correlating Top Risks:
■ Liquidity Crunch
The mitigation actions intend
to drive down the impact and
likelihood of poor credit performance
undermining the ﬁnancial health
of COF.
Likelihood
Impact
-CEB

38
CASE IN POINT: MORTGAGE MARKET EXIT
Quarterly Audit and Risk Committee Risk Meeting
Capital One applied
its risk management
system to rapidly assess
the business risk in the
mortgage industry.
“By identifying the
points of intersection
between the key risk
areas, Management and the
Board focused the discussion
on the most pressing issues and
ultimately arrived at our decision.”
Ron Dietz
Audit and Risk Committee Chair,
Capital One Financial Corp.
Top Company Risks: Macroeconomic Credit Environment
Q1 2008 Top Company Risk Q1 2008 Description
Macroeconomic Credit Risk
Worsening credit environment could trigger issues with excess spread,
liquidity, and capital
Response Strategy and Rating
Mitigate by 1st Half of 2009
Accountable
Executive
Mitigation Target
Capital levels are resilient to all realistic stress scenarios
Rating Rationale
Yellow because while internal mitigation activities are on track, mitigation
is also dependent on improvement in the economic environment
Mitigation Initiatives Update
• Multiple projects underway as part of a companywide mitigation initiatives
• Broad-based underwriting adjustments implemented and updated decision criteria rolled out
• Credit Policy Committee changes heighten oversight of challenging credit programs
Challenges Risk Migration Risk & Mitigation Assessment
• We have little ability to impact the underlying
drivers of worsening credit
• Incomplete understanding of how external
factors impact our business
• Little relevant historical data to ground our
actions
Impacted Risk Category: Credit
Potential Risk Category Migration:
• Liquidity
• Reputation
• Legal (new laws)
Correlating Top Risks:
• Liquidity Crunch
The mitigation actions intend to drive down
the impact and likelihood of poor credit
performance undermining
the financial health of COF
Likelihood
Impact
Audit and Risk Committee
Mortgage Market Exit
■ Strategic Decision: Capital One recognized worsening credit conditions and competitive challenges
in the industry, and made the decision to close down part of its mortgage business (GreenPoint
mortgage unit).
■ Limit Market Exposure: As a result, Capital One took a one-time after-tax charge of $860 million
in August 2007 and was among the first financial services companies to reduce its exposure
to the mortgage market.
■ Initial Lessons Learned: Early analysis of the credit crisis by the President’s Working Group
on Financial Markets shows those financial institutions that set predetermined risk tolerances
and distributed information to senior Management and the Board in a timely manner avoided most
of the market turmoil.
-CEB

39
■ How are other companies setting their risk tolerances/thresholds?
■ How involved should the Board be in setting risk tolerances/thresholds?
■ What action steps did you put in place to overcome an emerging risk?
-CEB

1
From the RISK INTEGRATION STRATGY COUNCIL™
of the FINANCE AND STRATEGY PRACTICE
■ Forward Looking
Indicators
Responding to
Risk Events
Sensing Risk
Emerging
Risk Update
-CEB

2
EMERGING RISKS SURVEY
Survey Excerpt
The Finance and Strategy
Practice conducted
Emerging Risk Updates
for the past nine months,
leveraging the power of
our network.
■ There have been more
than 400 unique survey
responses.
■ The respondents commented
on the probability, velocity,
and impact of 21 preselected
risks with the opportunity
to input any risks unique
to their individual
organizations.
Please select your top ﬁve risks
for November in order of priority
Probability Velocity Impact
Note: Please scroll below for
deﬁnitions of options
Please assess the probability
of the risk occurring within
the next 12 months.
If this risk were to materialize in
November, how rapidly would it
impact your organization?
If this risk were to materialize,
what would be the impact on
your organization?
Risk 1: —Please Select— Low
Medium
High
Slowly
Rapidly
Very Rapidly
Minor Impact
Serious Impact
Very serious Impact
Medium
High
Slowly
Rapidly
Very Rapidly
Minor Impact
Serious Impact
Very serious Impact
Medium
High
Slowly
Rapidly
Very Rapidly
Minor Impact
Serious Impact
Very serious Impact
-CEB

3
THREE DIMENSIONS OF EMERGING RISKSAssessing probability,
impact,and velocity
of 21 risks since June
provides a robust data
set of emerging risk
information.
n = 208.
Source: Emerging Risk Survey, July 2009—April 2010.
Source Link: https://survey.executiveboard.com/mrIWeb/mrIWeb.dll?I.Project=AFINEMERGINGRISK
Slow
Impact of the Risk Would
Be Evident in a Year
Rapid
Be Evident in a Quarter
Very Rapid
Be Evident in a Month
1 Tax Regulations 11 Fraud 16 Third-Party Solvency
2 Inﬂation 12 Cost Reduction Pressures 17 Commodity Prices
3 Inadequate Staff Skills 13 M&A Risk 18 Lack of investment in
Product Innovation
4 International Operations 14 Continued Recessionary Pressure 19 Business Continuity
5 High Cost of Capital 15 Compliance 20 IT Risks
6 Talent Risks 21 Liquidity Risk
7 Strategic Change Management 22 Reputational Risk
8 Increased Competitive Pressure
9 Political Trends
10 Deﬂation
Low
High
Low High
Impact
Likelihood
1
2 4
5
6
7
8
9
1011 13
14
1516
17
18
19
21
20
22
12
3
-CEB

4
TOP FIVE BY CATEGORY
Impact Probability Velocity
Political Trends Cost Reduction Pressure Commodity Prices
Continued Recessionary
Pressure
Pressure
Pressure
Increased Competitive
Pressure
Political Trends Cost Reduction Pressure
Commodity Prices Increased Competitive
Pressure
Increased Competitive
Pressure
Strategic Change
Management
Commodity Prices Strategic Change
Management
Source: Emerging Risk Survey, July 2009—April 2010.
-CEB

5
Enterprise risk
management leaders
are tracking a range
of “other” emerging
risks.
OTHER RISKS WORTHY OF CONSIDERATION
Economic and Financial Risk
Risk Implications
China Asset Bubble The Issue: Much of Beijing’s $600 B stimulus has been spent building yet more plant and infrastructure so that
China can ship yet more goods, or has leaked into property and stocks?
Implications for You: A hard-landing in China could prove as traumatic for world markets as the US sub-prime
crash.
Canadian Housing
Bubble
The Issue: Canadian home prices and resales will grow to records this year, boosted by low interest rates.
Canadian new-home prices rose 0.4 percent in December from the previous month, the sixth straight gain.
There are fears of a housing bubble in that country.
Implications for You: A housing slump and associated recession could further slow U.S. economy, increase
bankruptcies, and further strain the global financial markets.
PIIGS Sovereign
Debt Default
The Issue: Fears of a sovereign debt crisis continues in Portugal, Ireland, Italy, and Spain (PIIGS). This is leading
a confidence crisis and the widening of bond yield spreads and risk insurance on CDS between these countries
and other Eurozone members.
Implications for You: With the economy on tenterhooks and the confidence levels around sovereign debt going
down, credit will become tighter.
US$ Devaluation The Issue: The US government may have to devalue the dollar under pressure from strong currency economies
in Europe and Japan. Otherwise it risks its creditors converting their dollar-denominated assets to other
currencies.
Implications for You: The dollar’s buying power is reduced and with more expensive imports comes inflation.
Chinese Currency
Revaluation
The Issue: The Big Mac index of The Economist suggests that the yuan is 49% below its fair-value benchmark
with the dollar. China has always kept its currency undervalued to boost exports which still constitute 39% of
its GDP.
Implications for You: Chinese imports (which have so far supported US’s consumerism) will become costlier
even though America’s exports to China will become cheaper.
Corporate Real
Estate Refinancing
The Issue: Concerns that corporate real estate is the “next bubble” and with the looming refinancing there
could be widespread defaults.
Implications for You: Defaults will lead to greater illiquidity, bankruptcies, and prolonged recession.
United States Junk
Bond Refinancing
2012
The Issue: More than $700 B in risky, high-yield corporate debt begins to come due starting 2012. The US
government alone will need to borrow nearly $2 trillion in 2012.
Implications for You: Questions abound on the financial system’s ability to absorb all that new debt, warning
that interest rates could increase and increased defaults.
-CEB

6
Enterprise risk
management leaders
risks.
Business and Operational Risk
Risk Implications
Supply Chain Disruptions The Issue: The global recession is placing unheard of strain on supply chains, and
corporations are vulnerable to supply chain disruptions.
Implications for You: By understanding risk within and external to the supply chain, an
organization can more clearly identify its options for optimizing the supply chain to ensure
viability and strength.
Supply Chain Up Scaling The Issue: The rapid and wide spread removal of capacity within the supply chain will take
months, if not years to be restored. Suppliers are unlikely to be able to respond as in the
past to increasing demand.
Implications for You: The ability to take advantage of early growth could be hamstrung by
suppliers inability to upscale and might require seeking out additional suppliers to diversify
the supply base.
Key Talent Dependency
and Attrition
The Issue: Today’s leaner organizations bring the risk of key person dependency. With
economic recovery key personnel could seek other employment or we could see “talent
raids” from competitors.
Implications for You: Essential institutional knowledge is at risk and could lead to operation
disruptions or greater costs hiring and training new employees.
Data Leakage The Issue: Dynamic and untraceable web pages (e.g., wikileaks.org) and employees using
social networking sites create unprecedented data breach threats for corporations.
Implications for You: An increased need to monitor usage and information ﬂow patterns
tends to overstretch the resource pool at the disposal of an organization.
Cyber Attacks (Organized Crime) The Issue: U.S. cyber crime loss complaints almost doubled in value from $265 M in 2008 to
reach $560 M last year, according to official ﬁgures.
Implications for You: Cyber attacks have to be regarded as serious threats and concrete
steps need to be taken to avert any such incidents in the organization.
Water Scarcity and Rising Costs The Issue: The combination of rising global populations, rapid economic growth in
developing countries, and climate change is triggering enormous water availability
challenges around the world.
Implications for You: Electric power generators, food producers, and other water-intensive
industries are especially vulnerable, both in their operations and their extensive supply
chains.-CEB

7
Enterprise risk
management leaders
risks.
Political and Regulatory Risk
Risk Implications
EU/U.S. Protectionism The Issue: The U.S. and EU have been using protectionist measures like quotas, tariffs and
subsidies within their geographies to give a boost to local businesses.
Implications for You: As the recent Boeing versus EADS fiasco shows, this kind of
protectionism gives rise to unhealthy competition and legislations and makes it difficult for
international trade in general.
Emerging Market Capital
Restrictions
The Issue: The IMF, reversing its past opposition to capital controls, urged developing
nations to consider using taxes and regulation to moderate vast inflows of capital so they
don’t produce asset bubbles and other financial calamities.
Implications for You: Capital restrictions make it difficult for investors to pull money from a
country quickly. finding a way around restrictions increases costs for investors and acts as
“sand in the wheels” of international capital.
-CEB

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