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October 22, 2013

Westchester Distributions
1. Joe Roberts VP Sales, 6 yrs experience
2. George Pavlov Sales Mgr. 8 yrs experience
3. Carlee Mario Salesman, 8 yrs of experience

1. Segregation of duties Separate sales from AR, make a company credit
available to salesperson to avoid cash transactions
2. Authorization Legit authorization levels
3. Written Procedures Have a detailed SOP and outline all activities and
functions in a role.
4. Physical Security Install a security person at the inventory and
someone to manage records
5. Adequate acct. systems how to account for broken bottles?
6. Documentation
7. Independent Audit

Joes financial bonuses for the entire year were given away.
Mario was fired eventually after 2 months for stealing beer. CEO had a friend at ABC to whom he
explained the situation
Attempted bribery is illegal but was not the case with ABC.
Now the VP was doing random spot checks with customers to find out relationships with suppliers/sales,
installed safeguards with storehouse but could not much with segregation of duties
These are preventable risks which were controlled.
3 types of risks preventable risks, strategic risks and external risks
Societe Generale
- Star trader
- Culture is autonomous trading, winning, making profits
- JKs motivation was to prove himself ahead of his peers and superiors who came from fancy schools.
- SGs motivation was to beat international banks such as the American and British banks
- Red flags were not followed up on; vacations were not mandatory (JK took only 4 days in a year)

Fraud triangle

Who is to blame?
- Top management
- JK as a trader
- Jeromes supervisor and his assistant
- Trading assistant
- Control agents
- Internal auditors are to blame
- External auditors are also to blame
- There were about 100,000 people in the company and it is possible that the CEO did not get a full
sense of JKs transactions consequences.
- External regulators like Eurex are to blame

Belief Systems become a leader at all costs, that culture perpetuates throughout the company
Boundary systems they had some guidelines which set the boundaries.
Diagnostic systems there were huge amounts of money moving in and out. This is used only when red
flags are raised.
Interactive systems a tool which we use for day-to-day operations

Robert Day What does he stand to lose by insider trading?
- His reputation as a board member he has privileged information
- Jail time, penalty fines
- he abandoned all the positions in his own corp. and his affiliated corps so it seems like he consulted
people in high places.
- If he knew is it possible that top management did not know? - does it mean that corporate governance
was incompetent???? OR was it just a BIG co-incidence that Robert sold everything 2 days before
Jerome Kerviel got caught.

CEO of Societe Generale resigned in 2008. JK was jailed but later released in 2012 on good behavior and
permanently banned from financial institutions. He had to pay a fine of $5 billion. The rest of the
management stayed put.

The litigation was ineffective. Litigation was dismissed. SHs lost a lot of money. Share prices fell by half.
Citigroup downgraded the share from buy to sell. There was a huge write-down.

Was this preventable risk?? OR was this strategic risk?
- The company took a position gambling- keeping costs down as part of strategy so whats lose if we
stand to gain multiples of that? DO WHAT YOU NEED TO DO TO MAKE MONEY
But there was a preventable component also.
When we talk about strategic risks there is a risk management component that must evaluated

Midterm more focus on post-midterm but it is cumulative.
October 29, 2013
Ontario Hydro One
- Responsive to environmental issues/ regulatory
- Because IT risk has increasing, they want to deal with that using the SAP system
- They want to maintain their reputation with the aboriginal groups
- They want to increase efficiency, reduce costs
- Maintain high credit rating A rating
- Increased customer satisfaction 90% target
- Ensure adequate electricity supply to meet increasing demands
- Upgrade and expand aging systems
- They want to be the most reliable
Goals to be best in the world in terms of safety

Risks Govt. regulations uncertainty
- Reputation uncertainty
- Union risks
- Aging equipment
- Transmission network
- Credit rating risk
- Increasing demand for electricity
- Safety risk
- Supplier risk
- Not enough work force
- Political risk
- Alternative wind technologies competency risk how store and distribute energy
- Customers selling back electricity back into the grid competency risks
- Land shortage for infrastructure development and expansion
- Environmental risk carbon emissions
- Internal audit risk
- Resource allocation risk
- Employee accidents safety risk
- Changing operating environment increasing competition
- Liquidity risk
- Outsourcing risk
- Nuclear station owned by UK which will not be served.
- Natural disaster risks
- Pricing systems
- High turnover or turnover risk

Risk Management System
- Is very comprehensive
- Is very scalable/adaptable
- Has a matrix system which helps to prioritize risks
- Has lot of subjectivity included in it high vs. very high.how do you quantify the difference?
- They have SMEs to classify risks; you cannot look at the end results and try to understand the
numbers, because there is an involved process behind the numbers.
- They go through a process of filtering the number of risks generated by each risk officer and
prioritizing the risks based on certain parameters it seems like they ultimately agree at the
end. Are they agreeing too soon??

Matching risks to objectives

Customer Satisfaction

Go back and forth on setting objectives and risk profiling there is no one way to do this right.
Management controls are very dynamic and are subject to several iterations.
Risk Map
- Probability X impact subject to stress test is done to give a rough idea
- Relative probabilities should be concentrated on. There is no need to pinpoint probabilities
- The two sided objectives of risk profiling
is to list out my risk
- and how to determine which is important
- A risk assessment process helps in the event of litigation the justification is we investigated into
this but it was beyond our control.
- Whats our response if this risk happens???
- Companies concentrate on risks which will potentially shut them down.

Hydro One is a monopoly and is protected and is not so terribly affected by pricing changes we pay
although we complain.
Who can afford? 30 interviews, 60 meetings, biannual risk assessment meetings. I mean which other
company can do this???

Problems built into risk assessment:
- People just agree too quickly on the risks and move on
- People interpret risks differently wrong assessment of importance
- Complacency comes over time having meetings 60 times makes it lose the importance
- With changing environments comes changing/evolving risks and there is a problem of
information overload and not being able to anything about it.
- Just missing out obvious risks.
- Are we putting too much emphasis on risk?? At the cost of objectives and bottomline?
o Preventable risks are easy to manage. The idea is to figure out how much risk we can
tolerate and not

Lecture 7 slides Risk

3 categories of risk
1- Preventable risks
a. Internal risks, preventable and ought to be avoided (unethical, illegal behavior)
b. Companies should have zero tolerance for preventable risks
c. No strategic benefit from taking risks
d. Over time these risks diminish companys value
Molex case, Westchester, societe generale
2 Strategic risks
Company takes this on voluntarily
Not inherently undesirable
High expected return strategy usually requires strategic risk undertaking
Requires risk management system designed to reduce the probability of risk materialization and
improve the companys ability to manage/minimize the effect if the risk materializes

3-External risks
- Natural disasters, macroeconomic issues
- Can outsource these risks
- Cannot prevent from occurring

Risk Management

Role of risk management is to:

- Identify and evaluate risks
- To communicate to seniors
- To monitor and manage risks
Effective risk management does NOT provide a guarantee against failure
How much can we tolerate and stay within that threshold

Ways to manage risk

1. Preventable risks
a. Clear guidelines
b. Strong IC
2. Strategic risks one size doesnt fit all
a. Have independent experts to assess risks
b. Regulatory efforts to control risk
c. To have facilitators/ embedded experts working side by side with line managers
3. External risks
a. Difficult to anticipate
b. Stress test
c. Scenario planning

Why is risk management difficult?
- Too much forecasting involved
- Difficulties in allocating resources
- Most companies (like those that are listed on the stock exchanges) have to abide by regulatory
policies to have a formal process for risk management (not required by US companies)
- Often implemented after the fact
- Risk management is counter-intuitive to management leadership style of being risk takers. It is
forcing management to look at the all possibilities

Of the top 100 companies 19% have full developed systems, 25% have it in the air and is
communicated as a function but not as part of the business, 16% have it developed but not
communicated, 22% are in the process of development

Lecture 8 slides
- Former shoe company, now a clothing company
- Their biggest quality is customer service oriented.

- Union complaints
- National labor relations
- 15 million reserve against earnings for back pays
- Class action law suits by employees
- Class action law suit by shareholders
- Wall Street Journal Front page
- 60 minute TV story
- Publicity campaign

Salespersons at Nordstrom are one of the highest paid.89
- Highest sales productivity
- Earnings >80K
- Compound growth is sales and earnings/ SQE
- Highly motivated and educated work force

Define good customer service:
- Dont like the pressure of service
- Meet the customer needs
- Professional help with design help
- Honest feedback
- Catering to customers with different colors and sizes

Is there a direct relation between sales and customer service?

On the Balance score card, there would be
Customer loyalty
Employee attitude
Sales per hour
Sales per sq.footage (is a good benchmark for leasing and renting)

What makes the salespersons motivated?
- Public fanfare
- Decentralization
- Empowerment/ entrepreneurial
- Highly motivated workforce

Is there anything good about sales per hour??
- Prone to manipulation
- It is not objective
- The extra effort that we put in the current period (example customer service, the employees
clock in extra selling hours in the denominator, which brings down the SPH now. However the
effort pays off in the next period, which raises the SPH. So the sales person is evaluated over a
quarter or annually its not clear in the case.

What is selling and non-selling hours?
Selling Non-selling
Inventory/stocking Yes
Record keeping Yes

What about Nordstrom?
It seems like Nordstrom follows evolution theory cultural thing survival tactics
At the lower level the employees feel pressured to appear more efficient. So it seems

Business strategy:
N was competing on
Customer loyalty
Good quality/ reputation

They had 4 components 4 levers of control
1. Delegated decision making and authority
2. They had a planning system in place
3. They had a performance measurement and evaluation system
o These were linked very closely to their key performance variable SPH (sales per hour); is
an objective measure and fairly complete measure of customer loyalty and is a
responsive measure because employees can influence the sales and therefore there is a
problem too, because they can be manipulated.
o Linking it to customer loyalty
o Good measures not impossible to meet and not too easy to achieve
4. It ties into an incentive compensation system

- Mostly people did not think there was an issue.
- Decentralization has a downside because incentive compensation system puts pressure on
employees to bring down their hours.
- As much as management systems are supposed to contribute to business strategy, there are
problems with its implementation.
- It is decentralized and therefore has a wide span of control
- Reputation risk is potentially too high because they did not affect the share prices of the
company. But on the other side Nordstrom is competing on quality, premium goods and
customer service and also the fact they hire good employees (as opposed to Walmart who is
price leader which competes on price/cost)

Analysis of Nordstroms different systems

Belief systems N had a great mission, vision, credo which was about customer service

Boundary systems the ones at Nordstrom were faulty because it was open to interpretation, no
guidelines, managers and employees should have been evaluated on different criteria, because the
managers were pressured on employee efficiency. There is therefore continued and cyclical pressure.

Performance systems they had a measurement system which was supposed to applicable to all levels
of employment. Perhaps they should have a different set of criteria for managers, employees based on
their level of contribution to the company performance.

Final exams
Bullet point answers
Examine the exhibits in detail and reference it in the answer
Q. Short questions seeking focused answers eg. Figure out major risks it will be all those risks which
are related to their key performance variables, their key objectives the most critical.
Q. Incentive compensation system
Bonus Q. How would a BSC differ for a manager who managed franchise hotel as opposed to that hotel
owned by the company?

Excellent answers step outside the box, very creative application of principles.