Energy giant Hydro One is looking into the possibility of new threats and opportunities which is common in its line of business which faces issues on climate change and carbon legislation, and many more. Hydro One's CEO, Laura Formusa, is faced with the question of whether the company's strategy was tenable considering that it seems like Hydro One's risk profile had shifted.
Harvard Business Review (109001-PDF-ENG)
July 03, 2008
Case questions answered:
Case study questions answered in the first solution:
- Why did Hydro One decide to implement ERM, and what approach did they follow?
- How did Hydro One benefit from using Enterprise Risk Management?
- What is the effect of using ERM on the company’s business strategy and continuity?
- How would you describe Hydro One’s strategy? What type of risks and uncertainties does Hydro One face?
- Consider the three stages of Hydro One’s enterprise risk management (ERM) process: What are the strengths and weaknesses of this process?
- What recommendations would you make to CEO Laura Formusa about the process?
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Enterprise Risk Management at Hydro One (A) Case Answers
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Evaluation of Enterprise Risk Management at Hydro One
Hydro One Inc. is considered the most prominent electricity distribution organization in Ontario, Canada, and is among the biggest organizations in North America. The company and its affiliates implemented the use of a business-extensive portfolio program for the management of significant business risks in the organization.
The Enterprise Risk Management approach implemented by Hydro Ones supports the needs of business management and the due attentive roles of senior management. At the same time, they aimed to strengthen their management approaches in a way clear to the key external stakeholders.
The company’s workers functioned in dangerous situations and were always affected by the vagaries of the extreme weather existing in North America. The company predicted the possible occurrence of new threats and opportunities in the industry that is faced with carbon legislation and climate change, increased adoption of emergent technologies, and the deregulation of the electricity markets.
The CEO of Hydro One, Laura Formusa, felt that the risk profile of the company had shifted (Aabo, Fraser & Simkins, 2015). Therefore, she decided to lead the formation of the enterprise risk management approach.
The company presented a three-phase enterprise risk management plan. In the first phase, the employees were given an opportunity in various workshops to acquire a collective understanding of the key strategic goals of the company and the risks that may derail the achievement of the objectives.
The second phase of the ERM program is conducted during the yearly planning process. Resources were allocated to investment project proposals of priority with regard to the identified risks. In the third phase, the principal risk officer performed a chain of interviews twice a year with leading management officials to assess the firm’s corporate risk report.
Based on the ERM approach created, it is noted that the company treats risk management as a collective obligation from the Board of Directors to the respective workers. Everyone is expected to have a clear understanding of the risk that falls within the confines of their responsibilities and is required to manage such risks within the allowed risk acceptance.
The company tends to manage the substantial risks through a portfolio program, which enhances the trade-offs amid risks and returns in all the business operations (Fraser & Simkins, 2016). The optimization process ensures that the company consents to relative risk levels to help achieve the objectives of the business.
Hydro One’s Enterprise Risk Management approach would be very effective because it expects every division or line of business to perform a risk assessment every year for the whole business and locally determined for elements that are below the subsidiary level.
The company’s ERM is integrated into many of the critical business processes like business planning, strategic planning, investment decisions, and operational management to ensure that there are consistent risk considerations in all processes of decision-making.
It can also be noted that Hydro One’s enterprise risk management is a well-organized, continuous, and comprehensive process where risks are recognized, assessed, and intentionally accepted or lessened within the accepted levels of risk tolerance (Fraser & Simkins, 2016).
From a financial perspective, ERM has benefited Hydro One through the positive change in credit ratings and the resultant decrease in the debts of the company.
Additionally, the ERM program led to the improvement of the company’s capital expenditure process through the use of the mitigation prioritization index. It should be noted that the benefit considers the positive impacts of risk reduction in all risk categories by proper allocation of capital expenditures in accordance with the highest overall risk decrease for every amount the company spends.
On top of the lower cost of capital and improved capital allocation, there have been…
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