ENTERPRISE RISK MANAGEMENT:

PRINCIPLES AND METHODS

Professor Stavros A. ZENIOS
University of Cyprus
Senior Fellow, The Wharton Financial Institutions Center
Non-resident Fellow, Bruegel

Course objective
“The revolutionary idea that defines the boundary between
modern times and the past is the mastery of risk: the notion that
the future is more than a whim of the gods and that men and
women are not passive before nature.”

Peter Bernstein,
Against the Gods: The Remarkable Story of Risk, 1998.

Ten years after these words were uttered by an industry leader, the world
economy faced its worst crisis in almost a century. We are far from mastering risk!
Of course today’s gurus view risk management as a modern phenomenon, and so
it is, considering the range of analytics and data collection capabilities we
developed since the mid-twentieth century. However, risk analysis has a very long
history, dating back to Mesopotamian priests who dispensed advise based on a
risk-balancing scorecard.

We are not passive before nature any more. But in the modern highly
interconnected world of constant innovation, risk and uncertainty are prevalent.
And as we chose not to remain passive, our actions create new risks as they
eliminate others. We recognize that our actions are partly responsible for creating
those exact risks that our forefathers attributed to the whims of gods. Risks are
endogenous. Think, for instance, the risks from “clean energy” in the aftermath of
Chernobyl and the Fukushima-Daiichi nuclear station catastrophes.

Learning outcomes

The course will familiarize students with the principles of (i) risk identification
and measurement, and (ii) risk management, as applied in diverse business
settings in financial institutions, supply chain management, power planning and
the environment, software and industrial projects. Students will become familiar
with the latest analytics, corporate governance policies and regulatory tools. The
aim is to learn how to effectively implement an enterprise-wide risk
management program in order to hedge various types of business risks, allocate
capital, and evaluate risk-adjusted performance.

After completing the course students will understand the principles, corporate
governance policies, regulatory tools and principal analytics available to
corporations and policy-makers for mitigating risks. They will be able to explain
the principle of duality that states that risk management entails either removing
the risk or hedging its costs, and compare its application in different business
settings. They will learn to list and describe the major sources of risk in modern
business environment and how to effectively implement an enterprise-wide risk
management program. They will also learn to report on the use of financial
derivatives and insurance to mitigate the adverse impacts of risk. Students will be
able to analyze the tradeoffs between eliminating risks or hedging their impact in
diverse business settings in financial institutions, supply chain management,
shipping, energy planning and the environment, software and industrial projects.

The above course ILOs are linked with the MBA Program’s ILO’s:

Strategic thinking: Students will develop a strategic level of thinking in order to

integrate the key functions of business: accounting, finance, international business,
management, management information systems, marketing, operations, and statistics
within the broader economic environment.

Communication: Students will develop abilities of communication in order to learn

effectively, express ideas and concepts clearly, and apply knowledge to newly
encountered situations.

Ethical Leadership; Students will understand the cultural and ethical complexities of
conducting business on a global scale and the importance of and techniques for
measuring the impact of firms on people and their natural environment.

Critical Thinking; Students will identify, analyze, and evaluate arguments as they
occur in their own and others’ work as well as develop alternative well-reasoned
arguments to predict implications and consequences and construct conclusions with
fact.

Entrepreneurship; Students will develop a critical understanding of entrepreneurship

and its role in the economy and society. In addition, they will understand the
entrepreneurial process – from idea generation to the commercialisation and
implementation of new business venture and the development of entrepreneurial
behaviors.





MBA Program’s ILOs
Course ILOs

ILO_1 ILO_2 ILO_3 ILO_4 ILO_5

Familiarize students with the principles X X X X

of risk identification and measurement,
and risk management in diverse business
settings
Become familiar with the latest analytics, X X X
corporate governance policies and
regulatory tools
They will learn to list and describe the X X X
major sources of risk in modern business
environment
Learn how to effectively implement ERM X X X X X
program in order to hedge business risks
and evaluate risk-adjusted performance
Analyze and present complex real world X X
X X X
case studies incorporating all of the above

 The ILOs of this course and how they are achieved through the assessment
methods are given below:

Class Case Write- Case Final Exam

Participation up presentation

Familiarize students with the x x x x

principles of risk
identification and
measurement, and risk
management in diverse
Become familiar with the x x
business settings
latest analytics, corporate
governance policies and
regulatory tools
They will learn to list and x x x x
describe the major sources
of risk in modern business
environment
Learn how to effectively x x x x
implement ERM program in
order to hedge business risks
and evaluate risk-adjusted
Analyze and present complex
performance x x x
real world case studies
incorporating all of the above

Course outline
Part I. Principles.
1. Introduction to enterprise risk management: culture, corporate governance,
compliance.
2. Endogenous and exogenous risks and identification of risk factors
3. Risk and uncertainty: perceptions and communication.

Part II. Methods.

4. Measuring risk. Risk adjusted capital allocation
5. Hedging risks. The use of financial derivatives and insurance
6. Regulations: Basel III, Solvency II, Environmental Legislation, Software
engineering, EU Directives.

Part III. Applications and case studies.

7. Risk management for financial institutions
8. Supply chain risk management
9. Risk management in shipping
10. Environmental risk management
11. Risk management for energy systems
12. Cyber security and technological risks
13. Project risk management and software engineering

Part IV. Case studies and breaking news

Case studies, such as those below from Harvard Business School, will be used as part
of the student assessment process.

Managing Risk to Ensure Business Continuity at Maryland & Virginia Milk Producers
Enterprise Risk Management at Hydro One: How risky are smart meters?
JP Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009
Environmental Risk Management at Chevron Corp.

We also use press coverage of major catastrophes to study failures of risk

management. Past examples include the Vasiliko Power Plan Explosion in Cyprus, the
crash of AF447, the September 11 attacks. Students will be following breaking news
from major international sources such as World Economic Forum, Wall Street Journal,
Reuters Risk, Risk, Financial Times. There will be frequent tweets from the instructor
@StavrosZenios under hashtag #enterpriserisk.

Textbooks
• Covello,V.T. and Mumpower,J., “Risk analysis and risk management: An
historical perspective”, Risk Analysis, 5(2):103-120, 1985.
• Crouhy,M., Galai,D. and Mark,R. The Essentials of Risk Management,
McGraw-Hill, 2007. (Chapters 1-5, 7-8, 13-15)
• Doherty,N. Integrated risk management, McGraw-Hill, 2000. (Chapters 3, 6-8)
• Zenios,S.A., Practical Financial Optimization: Decision making for financial
engineers, Blackwell-Wiley Finance, 2008. (Chapters 1,2,9.)
 • Rosen,D. and Zenios, S.A. “Enterprise-wide Asset and Liability
Management: Issues, Institutions, and Models”, Handbook on Asset and
Liability
• Albertijn,S., Bessler,W. and Drobetz,W., Financing Shipping Companies and
Shipping Operations: A Risk-Management Perspective, Journal of Applied
Corporate Finance, 24(4):70-82, 2011.

Supplementary reading
• Hopkin,P. Fundamentals of Risk Management: Understanding, evaluating and
implementing effective risk management, The Institute of Risk Management,
2012. (Chapters 28-29).
• Kammen,D.M and Hassenzahl,D.M., Should we Risk it? Exploring
environmental, health and technological problem solving, Princeton
University Press, 2001. (Chapters 8, 10).
• Beck,U., World at Risk, Polity Press, 2009.
• Bernstein,P.L. Against the Gods: The remarkable story of risk, Wiley, 1998.

Computer requirements / tools

Basic Excel, Word, PowerPoint

Teaching
Teaching will consist of lectures (85%) and cases (15%) and maybe a guest lecturer
from industry.

Requirements
Students will be required to successfully complete two mandatory homeworks
(pass/fail). Details will be given during the course.

Course evaluation
The final grade will consist of a written final exam (50%), submitted case study
(20%), in class presentation of case study (20%), contributions to class (10%). The
exam language is English and all answers need to be in English as well.