Ford does some Real ERM Thinking
Ford shifted their pension fund investment strategy to overweight in bonds. See Business Insider Story
This is a clear example of real ERM thinking.
For at least 40 years, pension plans have been investing in equities and they have claimes that since they have a long investment horizon, that they were immune to concerns about the fluctuations.
But what has happened instead is that company after company has built up a very large equity exposure. If they figured their real corporate risk profile, management would see how exposed that they are to stock market risk.
Ford did some real ERM thinking when they realized that their business risk was fairly highly correlated to the stock market. So by investing their pension plan assets in the stock market, they were assuring that investors would see their pension plan funding levels faulter just when their business was sputtering.
There are two aspects of real ERM thinking here. First, Ford looked past the fiction of the separate pension fund to realize that the company was really exposed to the risk of equity fluctuations. Second, they realized the true correlations that face their business and its risks.
Risk managers need to think outside the lines that we draw just like Ford did. The banks did not do that when they lent money to hedge funds to purchase Mortgage CDOs.
Risk managers need to look for risks that are likely to hit together and prepare to reduce the likely impact of the combined risk exposure by whatever means makes the msot sense.