Assignment:
Case Questions
PART A: ERM at Hydro
Introduction
You need to acquire the Harvard Business School "Enterprise Risk Management at Hydro One, Multimedia Case". After going over the case, you need to prepare a report that should be structured based on a number of questions.
Background information
Hydro One is an electricity transmission and distribution utility operating in the Canadian province of Ontario. It was established in 1998 when it's predecessor, Ontario Hydro, was broken-up into several companies. The main purpose was to first separate power generation (Ontario Power Generation) from transmission and distribution (Hydro One) and later pri- vatize these two businesses. In 2002, the government opened the market for electricity and prepared to sell Hydro One in an IPO. Hydro One prepared an IPO prospectus in April of that year. However, the unusually hot summer caused prices to increase substantially and together with the public controversy of privatizing public utilities led to the cancellation of the IPO in November 2002.
Nevertheless, one thing that remained from this effort was the Enterprise Risk Management (ERM) developed by Hydro One in their preparation of going public. As a response to a series of scandals, mainly Enron and WorldCom, the Toronto Stock Exchange as well as other stock exchanges had imposed the requirement for the listed companies to implement high-level, strategic risk management.
Task
The aim of this case is to first analyze the connection between a business strategy and ERM and see how such a system is used in a company facing several risks and conflicting objectives. Further, the case provides an example of how an ERM system can be used to avoid risks building up and taking value enhancing decisions. History has taught us that risks build up in organizations due to behavioral biases, not paying attention to early warnings, disregarding alternative views, not complying with regulations and standards and not being able to generate relevant information. As a result, in the absence of risk management the solution is only crisis management. Important! You should write a report with the structure below, in which each section you should address the outlined issues and questions. In your report you should not write what you think is expected of you but be critical and provide clear, concise and coherent arguments based on available information. You should draw from the data, ideas, concepts and arguments we covered in lectures 1 to 4. There is no single correct answer but there are strong arguments and weak arguments.
Structure:
(a) Introduction
- What is Hydro One's strategy?
- What is the company's ownership structure?
- What kind of conflicts does the company have to manage?
- How do you view the company's objectives in relation to their stakeholders?
(b) Risks
- How does the company define risks?
- Which risks does the company face?
(c) ERM Framework
- What is the objective of Hydro One's ERM system?
- What are the different stages/parts (3 to 4) of the ERM system?
- What are the steps they follow to assess a risk and how do they represent them?
- What do you think are the essential elements required for their ERM system to work?
(d) Value of ERM
- Why do you think the company kept the ERM system despite not being required?
- What are the essential problems of the silo approach that the company needed to break away from?
- How does the ERM create value for the company?
(e) ERM evaluation
- What do you think are the pros and cons of their ERM system?
- How does their ERM system fair with some of the lessons from disasters and successes we looked at in class?
- Do you have any recommendations for the CEO?
(f) Conclusion
- What do you think are the main lessons to learn from Hydro's One ERM system and experience?
- How applicable do you think their system is for a public corporation?