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Are you sure you want to Yes No. Browse by Genre Available eBooks Chaiyatorn Limapornvanich at National Innovation Agency. No Downloads. Views Total views. Actions Shares. Embeds 0 No embeds. No notes for slide. Following Hart and Sharma , p. The collaborative approach of open foresight uses the potential of engaging externals to identify and assess future financial risks and opportunities.
The collaborative nature of open foresight can promote out-of-the-box-thinking, lower the risk of being limited to existing mental models or subjectivity , and help to form a clearer picture of the opportunities and threats presented by disruptive changes Gattringer et al. Nevertheless, most companies still tend to focus only on their internal capabilities and resources in identifying and assessing financial risks.
In acknowledging these challenges, we conceptualize collaborative financial risk assessment CFRA as a new approach to acquiring knowledge regarding future developments from various heterogeneous stakeholders. Eventually, financial risk identification and assessment cannot be restricted only to the actors within a company.
We conclude that those needs are addressed by risk governance literature and CFRA is an appropriate tool to please them. Despite a growing number of researchers focusing on inter-company collaboration, there are still lots of white spots, especially, when it comes to risk management.
Gattringer et al. The paper at hand tries to contribute by reducing the research gaps mentioned. Despite the importance of integrating all types of risks, the sources of uncertainty differ. Numerous categorizations and classifications exist for the purpose of considering all risks and distributing responsibility within a company Hampton, Categories are proposed by academics see, e. Analyzing existing literature, we identify four main sources of risk commonly distinguished Figure 1. While strategic risks result from wrong decisions of the senior management Mohammed and Sykes, , operational risks are caused by different sources.
According to the Basel Committee on Banking Supervision , p. Thus, operational risks are not taken to make more profit, but rather emerge automatically when doing business. Corporations have to make financial decisions dealing with investment opportunities, spending money and raising it Brealey et al. All decisions and actions may have an unexpected and unwelcome result that needs to be dealt with in financial risk management.
Financial risks can be further distinguished into risks that stem directly from changes in the market and those who do not. The former in particular arise from changes in interest rates, foreign exchange rates, commodity prices, and value of investments. These risks are also called financial risks in the narrower sense and are discussed most by academics and practitioners.
Those risks that do not directly stem from the market are liquidity risks and credit risks. They are also called financial risks in the broader sense. All of the risks mentioned here may have an influence on reputational risk. This risk category describes the uncertainty that the reputation also often called trust or reputational equity of a company is destroyed or damaged due to any event Atkins et al. The first and probably the most crucial step in the financial risk management process is risk identification and assessment.
Management literature offers a wide variety of methods for solving this tasks, which are often used in combination. On the one hand, there are qualitative approaches such as workshops, risk assessments, scenario analysis, employee questionnaires, checklists, brainstorming, Delphi-method, synectics, fault tree analysis, failure mode and effects analysis, hazard and operability studies, incident investigation, Political, Economic, Social, Technological, Environmental, Legal or Strengths, Weaknesses, Opportunities, Threats analysis.
On the other hand, quantitative tools try to detect risks by analyzing past or present data, including correlation analysis, trend analysis or complex mathematical models, e. Monte Carlo analysis and early-warning systems for more information on all of these tools see, Chapman, ; Moeller, ; Martinelli and Milosevic, ; Pritchard, ; McNeil et al.
Future Foresight and Strategic Governance
The result of this process should be a risk-management hierarchy, defining those risks with high priority, which should be managed first and those who are of less importance Bogodistov and Wohlgemuth, A notable aspect Dun and Bradstreet, or Horcher, is that both academic research and practice arguably see managing financial risks as more important than identifying and assessing them.
Even guidelines helping banks which are subject to numerous regulations to adjust their risk management to the requirements of Basel II only recommend to install adequate risk identification, assessment and management tools Oesterreichische Nationalbank and Austrian Financial Market Authority, All of those tools can be used to identify and assess financial risks, but they are characterized by several problems: Most methods are primarily based on past data and experience.
Quantitative tools need existing information and facts to detect future trends.
In principle, there is nothing wrong with that and it works well as long as the future behaves like the past and there is enough data. Unfortunately, disruptive change forces companies to rely not solely on past data or, as Stulz , p. Bell , p. Sometimes, though, we must forget the past and transcend the present, if we want to create a new, different, more desirable future. Some qualitative approaches try to overcome this problem by trying to leave the past behind. Managers of a company or, at the most, a small team of risk managers try to predict the future. Subjectivity results in leading a company with blinders on.
Most instruments are not able to or simply do not consider the long-term future but rather focus on the short-term future. Although it could be calculated for any period of time, it is most often compiled for a time period of 24 hours Best, Again, there is nothing wrong with the tool as such; instruments such as value-at-risk are necessary and help to predict the near future.
None of them, however, take into account changes, problems and trends that may or may not arise in 5, 10 or 15 years. Companies from outside the US relying on oil, for example, do not only have to hedge the oil price itself but also as oil is priced in US-dollar they have to hedge currencies at the same time maybe disregarding the interaction of the US-dollar against other currencies and the oil price Jackson, ; for other examples see The Economist, and Jankensgard et al.
This does not necessarily imply to dismiss all existing methods of risk identification and assessment but rather the necessity to choose and combine the appropriate risk management techniques Bogodistov and Wohlgemuth, The question remains as to which tool is able to help financial managers in which situations to perform their task properly. In this regard, Rohrbeck et al. Foresight as a proactive approach to detecting weak signals and future developments earlier, and thus, gaining time to prepare for them is not a recent invention, being rooted in both the military and macro-economy Gattringer, The very general understanding of foresight as phrased by Van der Heijden can be specified from two different perspectives.
Strategic foresight: strengthening long-term risk management policies
A process understanding Gattringer, ; Martin, ; Horton, that Martin , p. Corporate foresight is an ability that includes any structural or cultural element that enables the company to detect discontinuous change early, interpret the consequences for the company, and formulate effective responses to ensure the long-term survival and success of the company Rohrbeck, , p.
Our understanding in this paper is in line with Rohrbeck , who sees foresight as a dynamic capability, which enables a systematic identification and assessment of trends and weak signals and their potential influence on the corporation. The use of foresight should not only sensitize companies to weak signals and trends but also develop scenarios for the future, and thus, support companies in preparing for the future risks and chances and — ideally — be part in shaping these developments to their advantage Cunha et al.
In this context, Keller and von der Gracht , p. Beside these promising benefits of corporate foresight, this approach has also its limitations, e. This can lead to misinterpretations in case the future does not behave like the past. Furthermore, corporate foresight relies on internal capabilities and know-how Heger, ; Ruff, As a result, companies tend to run the risk of being narrow-sighted, myopic and blind toward external change Day and Schoemaker, ; Heger, Companies today face demanding, new conditions of increasing complexity and disruptive changes Christensen et al.
Thus, the future bears the risk of unseen challenges as shown by the following examples: How many people would have predicted Brexit, the intention of Great Britain to withdraw from the European Union, 10 or 20 years ago? Probably not many, although there have been early signs Drummond, Its consequences on financial risks are harsh. Pound Sterling lost a large part of its value, for example, against EUR or USD, which made importing goods for UK-based companies more expensive and exporting them cheaper. Companies that saw the possibility and consequences of Brexit coming, trying to hedge those risks, would have profited.
In , Nobel Prize winner Paul Krugman wrote an entry in his blog about interest rates. Predicting commodity prices is, due to the volatility of some commodities, rather difficult. In times of unexpected change, it is even more difficult. Take, for instance, the subprime crisis and price for Brent crude oil. The examples mentioned above have in common: that they are new and unusual;.
Therefore, it is highly possible;. Furthermore, the examples also show the complexity of risks and the interconnectedness of developments. Thus, it is not enough to focus only on, e. Indeed, the complexity of risks often extends beyond the capabilities of individual organizations and forces them to reshape organizational practices Carlile, In other words, as Chesbrough remarked, companies can no longer rely on having all the smart people working for them, making it a necessity to collaborate.
Following this mindset, various authors claim that, to identify disruptive changes, knowledge outside of the organization is required Hart and Sharma, ; Macher and Richman, We follow this proposal and suggest adopting the open foresight concept as a promising approach in financial risk governance. In alignment with the open innovation paradigm Chesbrough, , foresight has recently been opened up for collaboration with externals and developed into so-called open foresight. Opening-up organizational boundaries is not only a change in the process design itself but also based on a different mind-set.
While the assumption in closed innovation is that all the smart people within the field work for the respective organization, the proponents of open innovation take a more critical view and assume that not all the smart people work for them Chesbrough, As the complexity of the above-mentioned examples shows, it is hard for organizations to screen and gain access to all relevant information on their own, which increasingly pushes companies to cooperate with others Krystek and Walldorf, Through a joint view on the future and exchange of know-how, companies can use synergies and, based on that, create added value Wiener, a.
There exist various forms of open foresight, depending on the number and kind of actors included. For structuring an open process, we refer to the frameworks from Gattringer , Rau et al. There is a consensus among foresight scholars that there is no one-size-fits-all approach on how to design an open foresight process Georghiou and Cassingena Harper, Nevertheless, they agree on various tasks to consider within the phases. The pre-foresight phase is mainly conducted by the initiator and comprises the following tasks: partner selection, the definition of a common goal, which all participants agree on and to conduct initial preparations Crespin-Mazet et al.
Research results in the field of open innovation Baum et al. While some authors argue that if competences and knowledge are too similar, there is little to learn. Han et al. A low diversity of the knowledge bases can have a negative impact on the ability to innovate Nooteboom et al. The collaboration of the various participating organizations starts with the open foresight phase. The organizations jointly identify trends systematic scanning of the environment , interpret these detected trends and weak signals discussion of the trend effects and interrelationships and based on that generate future scenarios Gattringer et al.
Rau et al. In the output phase, the organizations are encouraged to feed the joint developed open foresight outcome into a strategy. Knowledge about future developments and the influence and interaction of detected risks can be created together Daheim and Uerz, ; Gattringer et al. Furthermore, open foresight approaches no longer rely on past data as a single source, but use the expert knowledge of people from different backgrounds to identify and assess risks and interpret their interconnections.
Based on these findings, we assume that adopting open foresight is also an appropriate approach to identify and assess financial risks, leading us to conceptualize CFRA. In summary, conventional financial risk management in general and risk identification and assessment methods, in particular, have serious problems. These problems need to be addressed. A solution could be to inherit strategies of collaborative open foresight to identify and assess, financial risks as an important part of all risks faced by an organization.
Following Gattringer et al. A discussion and analysis process of a few organizations concerning future developments in specific search fields which are relevant for the participating organizations and wherein issues related to future individual strategy and innovation options are collectively considered. The results are used by each organization for further individual deliberations. Although many people associate risk with a negative outcomes, a broader view of risk also includes opportunities, simply indicating that the future is different better or worse than predicted Coleman, Risk identification, on the other hand, is characterized as the process of identifying all relevant risks a company is facing Sanchez-Cazorla et al.
We, therefore, define CFRA as:. A systematic process of identifying and assessing financial risks conducted jointly by representatives of a few companies. The main objective of this process is to create future knowledge about substances, processes, action, and events that help each participant to reduce the risk of experiencing a loss of economic value, yet increase the chance of achieving a gain in economic value effectively. Thus, CFRA can be characterized along the following lines: It is a process wherein past, current and predicting trend- reports, quantitative data and qualitative data from inside the participating companies and outside are used as a basis for discussion and analysis.
It thus, no longer solely relies on past data, but combines it with opinions of various experts from different fields and backgrounds. This process stimulates discovering new disruptions instead of confirming already established future trends Daheim and Uerz, Neither a single person nor a single organization has enough know-how to create the future on their own Stout, As open foresight and CFRA are about including representatives of a few companies, and thus, people with different backgrounds, out-of-the-box-thinking is fostered Heger and Boman, ; Heger and Rohrbeck, ; Rasmussen et al.
Nevertheless, the right composition of the CFRA team is a key factor. On the one hand, various authors argue that diversity is essential as too much similarity among actors lead to a smaller potential of learning from each other, and thus, may also have a negative effect on the ability to think out-of-the-box Capaldo and Petruzzelli, ; Han et al.
This is particularly true for projects that require new perspectives, differing knowledge, new ways of doing things and a broad data basis Heger and Boman, On the other hand, a certain degree of proximity is also necessary, to ensure that the organizations can create a joint knowledge basis to facilitate learning Baum et al. Even though working in teams has a lot of advantages and can lead to outputs that are superior to individual outputs, this might not always be the case Du Chatenier et al. Groupthink, the risk of creating routines and assumptions that make the team blind for new ideas and developments, could occur and may lead to a loss in objectivity Bergman et al.
A CFRA team involves people from a various organization with a great heterogeneity of interests among each other. Regarding the time horizon for CFRA, we again rely on experience from open foresight Ruff, ; Wilhelmer and Nagel, and propose a typical timeframe of years. This timeframe is necessary to enable companies to prepare for the detected changes and identified risks; it thus addresses the risk of being too short-term-oriented in terms of the risk horizon.
As the foresight definition from Makridakis , p. CFRA incorporates a heterogeneous group of different members of companies P2. CFRA helps to identify and to assess risks, whereas the individual risk management and monitoring remains the ultimate internal task of a company. This makes it easier to consider the interconnectedness of financial risk categories.
Finally, risk literature states a growing need to study risk in dynamic interacting groups and across the total organization Frigo and Anderson, ; Lam, ; Beasley and Frigo, In this regard, Asselt and Renn , p. Open foresight is a managerial instrument that opens up organizational borders, paying :. Tribute to the increased socio-cultural and socio-technical dynamic resulting from the emergence of the networked society, where almost everything is interconnected and the separation of spheres of life, like technology, economics, politics and culture, has come to an end Daheim and Uerz, , p.
We assume that those interacting networks are in a better position to generate future knowledge, and therefore, also to identify and assess financial risk properly. Thus, we propose: P1. CFRA is a promising managerial instrument of risk governance helping to overcome the problems of current financial risk identification and assessment tools.
Existing literature offers no one-size-fits-all-approach for the operational implementation of open foresight and its processes Georghiou and Cassingena Harper, Nevertheless, we agree with Rau et al. First of all, there needs to be an initiator who pushes the idea of CFRA forward. Participating companies need to be selected and internal decisions like who participates in a CFRA team need to be made. Then the CFRA team makes decisions about where and how often to hold the workshops and who is responsible for organizing them.
In this regard, we follow Gattringer who proposes an accompanying project management team. This team can comprise of members of the financial risk management organization of each participating company. The CFRA phase is the main process of identifying and assessing risks in workshops. Afterward, the different members use their new knowledge to implement financial risk management methods in their companies. Further details about actors, roles and company selection are discussed henceforward. To adopt the ideas of open foresight, some adaptions to the organization and actors of financial risk management within an organization are necessary.
Soler Ramos et al.
They divide an organization into two general areas: First, a strategic structure consisting of the board of directors and risk committee s is responsible for ensuring the resources and defining a financial risk management strategy. Second, an operational structure consisting of all other areas of the company is responsible for executing the strategy and communicating information that might result in an adaptation of the existing strategy to senior management.
However, recent developments in risk management, risk governance, and corporate governance stress the importance of appointing a Chief Risk Officer CRO , an independent senior-level position actually responsible for risks and responding to risk factors Culp, Nevertheless, top management commitment is not enough according to Boer and During , who point out that top-management involvement is also needed to enable decision-making.
Furthermore, from a risk management perspective, top management in particular the board of directors is ultimately responsible for risk oversight Lam, Even though first findings in open foresight literature argues for a top-down initiation Wiener et al. In both ways — top-down and bottom-up — it seems that a device factor is a top-management support and commitment. Beyond top-management involvement, various scholars propose heterogeneity, in the sense of different educational and professional backgrounds, among the participating actors as beneficial Du Chatenier et al. In addition, a good internal network is necessary for spreading the gained knowledge within the company and sharing it with many others Enkel, Boe-Lillegraven and Monterde furthermore consider a certain readiness to reach consensus and a shared mindset a necessity.
Therefore, we propose: P2. A CFRA team should be made up of heterogeneous actors regarding personal backgrounds e. To include top-management participation, a board director at best the Chief Risk Officer should also take part. Figure 2 summarizes the actors in CFRA. The operational risk structure can be categorized into the three lines of defense IIA, ; Doughty, The first line of defense includes all operational managers who own and manage risks.
They are responsible for an effective day-to-day risk management and executing all implemented risk control procedures. Regarding financial risks, this includes, for example, the sales department when thinking about selling goods in foreign currency foreign exchange risk or to new unknown customers credit risk , the financial department when thinking about new investments investment risk or the buying department when thinking about buying goods commodity risk.
Unfortunately, one line of defense is not enough in the real world. In our understanding, both the first and the second line of defense should be part of the CFRA team to provide sufficiently different perspectives on financial risk IIA, ; Doughty, The third line of defense refers to the internal audit. This department is responsible for risk assurance of the whole organization.
It must be pointed out, however, that the actors in CFRA teams mentioned in Figure 2 refer to large companies.
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In contrast, many economies worldwide are characterized by small- and medium-sized enterprises Ayyagari et al. Nevertheless, only minor changes to the internal selection of representatives for CFRA teams are necessary in small and medium-sized companies. We propose that small and medium-sized enterprises SME equally nominate actors with different functional and personal backgrounds and a top-management person, probably the owner manager, to participate in CFRA. It is a challenging task to manage cross-company teams and to understand the interactions of the heterogeneous actors involved Ollila and Elmquist, Especially, motivating the employees to engage in collaborative projects and awakening their curiosity and willingness to experiment are not simple tasks Giannopouou et al.
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As the board of directors is ultimately responsible for risk oversight in an organization Lam, , we, therefore, propose that: P3. The board of directors is responsible of initiating CFRA. It identifies proper organizational members and associate companies. The board of directors is thus not only in charge of initiating CFRA but also responsible for committing resources time, budget and selecting the participating actors.
With regard to human resource management, directors are also required to provide an environment conducive to foresight and a culture in which creative and innovative behavior is a core value. Given this, the likelihood that participants will actually think out-of-the-box and provide unconventional but promising suggestions is greater Herzog, Finally, the roles and tasks of all CFRA team members needs to addressed.
As already indicated in Figure 2 , an operational risk structure is characterized by the tasks of identifying, assessing and managing risks, collecting information and detecting weak signals and trends. Therefore, we propose: P4. Members of CFRA teams have to collect information, detect weak signals and trends and share their professional experience within CFRA teams to identify and assess risks that might occur within their organization and help implement risk management methods relating to their line of defense.
Therefore, another aspect worth discussing are the companies participating in CFRA teams, as partner selection for collaborative projects is a very critical aspect Shah and Swaminathan, ; Holzmann et al. Collaborations ask for trust, commitment and complementary resources to benefit from the joint work Gattringer et al. Even though trust is a key aspect, an increasing number of collaborations are being formed between competing companies, particularly in sectors that are characterized by intense knowledge Contractor and Lorange, ; Ritala, On the one hand, various authors point out the benefits from coopetition, e.
On the other hand, with respect to intellectual property, coopetition may be also very risky Ritala, However, a counterargument is that the outcome of CFRA is meant as the foundation for individual financial risk management and thus, is not shared with the other participating companies. In the end, every company needs to assess the advantages and disadvantages discussed. Research shows that risk aversion and knowledge differs between companies. Hiebl shows that family firms are more risk-averse than non-family firms.
Falkner and Hiebl show that risk management strategies differ between SME and larger firms. Compliance and Governance standards differ between industries Hampton, and maturity in risk management and methods in use Pergler, In their work, they associate breadth with exploration and depth with exploitation strategies. Depth is achieved by collaboration with the same partners over longer periods, whereas breadth refers to collaboration with changing, new partners.
Drawing on such insights, we assume that to detect and identify truly unexpected risk as, for example, mentioned in Section 3 , it is necessary to involve a great breadth of different companies. We, therefore, propose that: P5. To gain different perspectives within a CFRA team, participating companies need to be of different size, ownership structure and from different industries.
We also assume that when participating companies are from different industries, their individual fear of losing industrial secrets decreases and their willingness to participate in CFRA-process increases.