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Copyright © 2002 Lisa K. Meulbroek

Working papers are in draft form. This working paper is distributed for purposes of comment and

discussion only. It may not be reproduced without permission of the copyright holder. Copies of working

papers are available from the author.

Integrated Risk

Management for the

Firm: A Senior

Manager's Guide

Lisa K. Meulbroek

Harvard Business School

Soldiers Field Road

Boston,MA 02163

The author gratefully acknowledges the financial support of Harvard Business

School's Division of Research. Email:


This paper is intended as a risk management primer for senior managers. It discusses the

integrated risk management framework, emphasizing the connections between the three

fundamental ways a company can implement its risk management objectives: modifying

the firm's operations, adjusting its capital structure, and employing targeted financial

instruments. "Integration" refers both to the combination of these three risk management

techniques, and to the aggregation of all risks faced by the firm. The paper offers a

functional analysis of integrated risk management using a wide set of illustrative

situations to show how the risk management process influences, and is influenced by, the

overall business activities and the strategy of the firm. Finally, the paper provides a risk

management framework for formulating and designing a risk management system for the

firm, concluding with a perspective on the future evolution of risk management.



Managers have always attempted to measure and control the risks within their companies.

The enormous growth and development in financial and electronic technologies,

however, have enriched the palette of risk management techniques available to managers,

offering an important new opportunity for increasing shareholder value. "Integrated risk

management" is the identification and assessment of the collective risks that affect firm

value, and the implementation of a firm-wide strategy to manage those risks. For some

managers, "risk management" immediately evokes thoughts of "derivatives," and

strategies that magnify, not reduce, risk. Derivatives, as a risk management tool, are only

a small part of the integrated risk management process. Moreover, a proper risk

management strategy does not involve speculation, or betting on the future price of oil,

corn, currencies, or interest rates, and indeed is antithetical to such speculation. Instead,

the goal of integrated risk management is to maximize value by shaping the firm's risk

profile, shedding some risks, while retaining others.

Companies have three fundamental ways of implementing risk management objectives:

modifying the firm's operations, adjusting its capital structure, and employing targeted

financial instruments (including derivatives). "Integration" refers both to the

combination of these three risk management techniques, and to the aggregation of all the

risks faced by the firm. While managers have always practiced some form of risk

management, implicit or explicit, in the past, risk management was rarely undertaken in a

systematic and integrated fashion across the firm. Integrated risk management has only

recently become a practical possibility, because of the enormous improvements in

computer and other communications technologies, and because of the wide-ranging set of

financial instruments and markets that have evolved over the past decade. A sophisticated

and globally-tested legal and accounting infrastructure is now in place to support the use

of such contractual agreements on large scale and at low cost. Equal in importance to this

evolution in capital markets is the cumulative experience and success in applying modern

finance theory to the practice of risk management. Today, managers can analyze and

control various risks as part of a unified, or integrated, risk management policy.


Integrated risk management is by its nature "strategic," rather than "tactical." Tactical

risk management, currently more common, has a narrower and more limited focus. It

usually involves the hedging of contracts or of other explicit future commitments of the

firm such as interest rate exposures on its debt issues. Consider a U.S. dollar-based firm

that buys steel from a Japanese firm for delivery in three months. The U.S. firm may

decide to "tactically" hedge the dollar price of its steel purchase. By using forward

currency contracts, the firm locks-in the dollar cost



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