“Risk Management: Corporate Perspectives in light of the global economic downturn”

Introduction and Objectives

This paper analyzes the threats and opportunities with which Risk Management is facing in the context of
current global economic and financial downturn. The fact that the destructive effect of current economic crisis
impacts on the worldwide economy is true supported by significant amount of researchers and experts from
different areas of the world economy. It is necessary to derive lessons learned from financial crisis in order to
prevent such situation in the future; also causal factors precipitated a financial crisis need to be considered.

This paper divided into two parts: one part focuses on financial crisis causes, its impact on economic
welfare and new perspective of Risk management. The second part explores the Risk Management strategies
within the Paramount Studios, tools and techniques are being implemented to respond to the threats and
opportunities.

Part 1
Common explanations of the Financial Crisis
The first omens of the global financial crisis was felt in the middle of 2007, when banks were facing with
large quantity of withdrawals by depositors leading up to contagion and financial panic. These financial
institutions began to recognise that it is difficult to them to pay all deposits back because they lent money to
potential home owners without being sure about the solvency of population. In the years leading up to the start
of the crisis in 2007, in the U.S. subprime loans (which is to say unreliable loans) were easy to obtain due to
requirements for borrower were reduced. At the same time, assuming that even if consumer can not pay the
debt on time, the apartment could be deleted, sell and capitalize on higher prices. In turn, by that time property
prices began to increase result in housing bubble which eventually burst and caused the decline in U.S
mortgage market.

A period when negative Gross Domestic Product (GDP) lasts more than two quarters is called a recession.
Many market analysts argued that financial crisis caused many recessions. As an example, Great Depression
showed how banks runs and stock market crashes can decline the world's economy. However, some economists
doubted that high mortgage default led to a financial crisis. For example, the Chairman of the Federal Reserve,
Ben Bernanke (2007) in his speech at the conference in Chicago, stated “we do not expect significant spillovers
from the subprime market to the rest of the economy or to the financial system”.

Nevertheless events moved on and for several months, the U.S. government, without much success
struggled with a sharp slowdown in the economy occurring against the backdrop of recession in the mortgage
market. In March, 2008 U.S. Federal Reserve lowered the benchmark interest rate from 3% to 2.25%, hoping
thereby to improve the liquidity situation. However, the actions of the monetary authorities have produced the
opposite effect. Notwithstanding that this parameter was not a key of U.S economy it caused a new wave of
investor panic: they decided that something wrong with economy in the United States. As a result, in Europe
and Japan's leading share indexes collapsed and the dollar rate crashed down to $ 1.59, and 96.76 yen per € 1.

One of the authoritative financiers of the world, the former Chairman of the Federal Reserve of the
United States Alan Greenspan added the confidence to investors that the global economic catastrophe is almost
inevitable. In his article in the Financial Times, published on March 17, 2008, he called the coming financial
crisis "the most painful since the Second World War." With hindsight, it may seem apparent that financial crisis
2007-2010 included stock market crashes and mortgage default.

The current global economic crisis has largely been blamed on Wall Street bankers and businessmen by
the government. President Obama also blamed bank leaders for causing the Great Recession in lieu of their
unscrupulous practices and large bonuses. Significantly, the economic crisis created a domino effect that led to
bankruptcies and unemployment that did not only affect financial institutions and bank depositors as food
prices also increased with the economy suffering from high inflation rates. The crisis emphasized that
America’s capitalist economy is highly interconnected which requires a collective monitoring effort from the
national government and private sector. Keynesian economic policies were applied in order to prevent a similar
event in the future. More importantly, today’s events highlight America’s financial fragility and over
confidence in times of economic booms. The crisis deteriorated America’s economy with massive
unemployment and business bankruptcies. The capital strike of investors prevented the macro economy from
progressing as high bank lending rates and financial sourcing became a rarity being detrimental to all of
America’s industries (Foster and Magdoff, 2009).

Gradually, financial institutions began to decrease lending activity, which impaired the reputation of
financial systems. These activities affected the volume of liquidity in global credit market which started to
decrease then and all this led to “credit crunch” (credit squeeze) which later transformed to world economic
downturn.
An adequate explanation of the causal factors of credit crunch was considered in report published by ACCA,
namely:
Key factors:
 There was a failure of organizations to properly asses and monitor risks in business performance;
 Weaknesses in risk management departments which was not embedded in corporate governance;
 The failure of information on financial risk which was not provided and reported.

Risk management in context of the current economic conditions.

Risk management is a business analytic technique that is the foundation for critical organizational
decision-making. It is the management of various environmental factors a business operates in such as political
and economic, which is utilized to make informed decisions to direct business objectives. Risk management is
at the core of every enterprise and its importance in the corporate world has risen in recent years mainly
because of the global financial crises wherein many practices by the organizations were challenged to change in
order to adapt to current adverse markets. Risk management transcends in its importance and application as the
acquisition of good analytical skills enables one to maximize returns and minimize risks at the same time
(Fraser and Simkins, 2010).
Corporations utilized risk management in order to optimize its use of economic resources such as with
cash and capital funds. It is an activity that requires expertise wherein corporations can attain increased
efficiency throughout its operations. Significantly, risk management harmonizes motivation and goals allowing
the creation and fulfillment of action plans. Ultimately, risk management is attaining goals while providing the
tools necessary to build these objectives in the first place. Certainly, it requires analytical thinking and research
especially with the monitoring of market and economic trends but more significantly it is maintaining the
balance between risk and profitability. As they say, the higher the risk the higher the returns however, risk
management creates the necessary balance between risk and return. This is achieved through a hybrid of sound
theories of managerial and corporate finance. Today risk management drives the economies of the 21st century
but more importantly, it empowers corporations to take charge of their own destinies (Fraser and Simkins,
2010).
 Part 2
The recent global events have triggered organizational changes in industries most notably in America’s
film industry. Hollywood remains to be the movie capital of the world. Located in the green hills of the Los
Angeles area, this small parcel of land of which the American film industry was named after holds a majority
stake in the global film theater going audience. A large player in the industry is Paramount Studios, as they are
engaged in a corporate risk strategy to mitigate the many challenges brought on by the crisis. Paramount has
engaged in an active role against piracy especially with the birth of the Internet that allowed a free flow of
information. This included an easy file sharing technique, which allowed users to exchange data over the
Internet. The sharing of data included films, television programs and music. The company views piracy to be a
great risk as one of their revenue streams on VCD and DVD sales dropped more than fifty percent. Other risks
are the diverse and changing consumer trends especially with decreasing profits earned from merchandise sales.
More importantly, Paramount is widely engaged in risk management especially in the production of its films
since previous strategies have failed to work. The previous formula was simple a high tech filled movie with
digital effects coupled with well-known actors practically guaranteed a box office success for the studio.
However, today the movie going consumers have become savvier and the old formula of hitting the jackpot has
not worked. This is especially dire as film production costs can exceed hundreds of millions of us dollars. The
new American generation has diversified its taste as the surge of information influenced the public, a side effect
of globalization that has been exacerbated by a decrease in purchasing power of American consumers (Pokorny
and Sedgwick 2010).
Paramount realizes that film production is no longer an easy gold mine that has led the company to
include strategic innovation in its corporate risk management. Paramount’s risk management strategy is to
become innovators. This means pushing the envelope of technology to attract the audience back such as the use
of 3D animation. The success of the film, Avatar is a testament to the renewed interest in Hollywood. It was
unheard of for audiences to return and watch a film all over again just after seeing it. But many did, multiple
times. 3D has enabled the industry to gain a niche over the market. It is worth mentioning that Avatar had a
large $350 million budget but as calculations are still being done, the film is nearing its $1 billion mark of sales
return. A remarkable feat from James Cameron who ten years earlier did the same with his other box office
smash Titanic. Now most films that are coming out in 2010 and succeeding years will be done in 3D. A good
example is Iron Man 2 and the fourth installment in Pirates of the Caribbean. The 3D experience is so far
technology wise impossible to duplicate at home, giving Hollywood and Paramount Studios an edge over
piracy and risks associated with the global crises. More importantly, it has promoted synergy in the
organization allowing it to optimize risk management tools that place its resources in key areas of film
production (Pokorny and Sedgwick 2010).
 References

Fraser, J. and Simkins, B. (2010). Enterprise Risk Management: Today's Leading Research and Best Practices
for Tomorrow's Executives. Wiley: New York

Foster, J. and Magdoff, F. (2009). The Great Financial Crisis: Causes and Consequences. Monthly Review
Press: New York

Pokorny, M. and Sedgwick, J. (2010) ‘Profitability trends in Hollywood: 1929

to 1999’, Economic History Review, vol. 53, pp. 56-84

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