January 29, 2005
Contracts play a big role in managing risk. But risk management is something that a lot of companies are not good at. A new article from McKinsey (free registration required) finds that about half the financial problems in American companies come from poor risk management. The abstract:
Risk is a fact of business life, but many companies fail to manage it well. McKinsey looked at 200 leading financial-services companies and found 150 cases of significant financial distress between 1997 and 2002. In about half of them, poorly handled risk played a significant role. Unless companies improve their risk management, they expose themselves to unexpected and sometimes severe financial losses. On the other hand, they might be tempted to avoid risk as much as possible to protect themselves and the price of their shares—another costly mistake, since risk ultimately creates shareholder value.
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