Essay on Risk Management

Words: 10229
Pages: 41

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
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This article presents a managerial overview of integrated risk management, using a series of examples to illustrate the range of management decisions that it can influence and the benefits for the firm from its implementation. By applying integrated risk management, managers will benefit from new insights about the interplay among different types of risk and traditional financial decision areas, connections easily missed without a comprehensive framework. Because the three ways to manage risk are functionally equivalent in their effect on risk, their use connects
seemingly-unrelated managerial decisions. For instance, because capital structure is one component of a firm's risk management strategy, effective capital structure decisions cannot be made in isolation from the firm's other risk management decisions.
Consequently, a firm's capital structure choice is inextricably linked to its capital expenditure plans, along with many other operational decisions. This paper's discussion of the integrated risk management framework emphasizes the connection between the ternary mechanisms to alter the firm's risk profile, and offers guidance on their practical application. There are those that question whether firm-wide risk management can add value to the firm. Certainly in the hypothetical Modigliani-Miller world of