Subject category:
Finance, Accounting and Control
Published by:
IESE Business School
Version: 27 June 2013
Length: 41 pages
Data source: Published sources
Abstract
Lehman Brothers' September 2008 bankruptcy was the largest in US history, with worldwide repercussions that persist today. The case takes an uncommon approach: it assumes a general management perspective and provides a unique 360 degree description of the firm's internal risk management system (RMS), ie, the formal structures and processes managers had designed and were using to manage risk. This description serves as a vehicle for providing students of management with basic knowledge about the fundamentals of RMSs. It also facilitates a vivid discussion about relevant issues such as how Lehman's RMS might have contributed to its demise; the promises, perils, and 'do's and don'ts' of RMSs; the problems associated with managing risk using generic risk measurement models; how managers could devise a simple tool to measure the risk of a given business strategy; and why RMSs should be a top management priority and be integrated into the corporate management control system. The case comprehensively covers the many specific management challenges associated with delegating risk-taking in a decentralised firm: the organisation of risk governance, risk control and risk-taking responsibilities; the performance measurement framework employed to budget, measure and monitor risk-taking over time; and the provision of incentives to empowered, risk-taking frontline staff. It also helps students become acquainted with a financial firm's day-to-day practices and confronts students with a specific, non-trivial decision situation of applied risk management.
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Abstract
Lehman Brothers' September 2008 bankruptcy was the largest in US history, with worldwide repercussions that persist today. The case takes an uncommon approach: it assumes a general management perspective and provides a unique 360 degree description of the firm's internal risk management system (RMS), ie, the formal structures and processes managers had designed and were using to manage risk. This description serves as a vehicle for providing students of management with basic knowledge about the fundamentals of RMSs. It also facilitates a vivid discussion about relevant issues such as how Lehman's RMS might have contributed to its demise; the promises, perils, and 'do's and don'ts' of RMSs; the problems associated with managing risk using generic risk measurement models; how managers could devise a simple tool to measure the risk of a given business strategy; and why RMSs should be a top management priority and be integrated into the corporate management control system. The case comprehensively covers the many specific management challenges associated with delegating risk-taking in a decentralised firm: the organisation of risk governance, risk control and risk-taking responsibilities; the performance measurement framework employed to budget, measure and monitor risk-taking over time; and the provision of incentives to empowered, risk-taking frontline staff. It also helps students become acquainted with a financial firm's day-to-day practices and confronts students with a specific, non-trivial decision situation of applied risk management.
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