Honeywell's integrated risk management program and shareholder value objectives

Honeywell

Restructuring Risk Management at Honeywell

As a large, multinational manufacturer and distributor of a variety of commercial and consumer products, Honeywell faces a large number of varying risks in its operations. Ranging from financial risks such as changing exchange rates combined with fixed-price future payments to risks more directly associated with operations such as employee liability and a variety of product flow interruptions, the variety and degree of risk exposure Honeywell has necessitates a comprehensive and careful risk management system and strategy that promotes the control of risks and the mitigating of damages (Case, n.d.). The following pages detail a proposed change in risk management strategy at Honeywell, assessing its objectives, its apparent degree of success in achieving those objectives, and an estimation of the cost difference between the old and new risk management programs, concluding with a recommendation for Honeywell as it moves forward in its risk management strategy.

Program Objectives

The primary objective of the proposed new risk management program at Honeywell is, of course, to properly and comprehensively manage the company's risks at least as effectively as the old program; no other change in risk strategy would make rational sense given organizational constraints (Case, n.d.; Lam, 2003). While this is not a very specific assessment of objectives, it does provide some insight into the more definitive and sought after objectives of the new program being proposed. The objectives quite clearly align with creating greater shareholder value.

One of the problems with the old risk management program at Honeywell was its lack of coherency and comprehensiveness. The new program seeks to integrate many areas of risk management into a single risk insurance system, making the program easier to value, track, implement, and maintain (Case n.d.; Lam, 2003). It also seeks to lower the cost of risk management and, in certain specific actions not necessarily directly related to the insurance change, seeks to lower overall risk exposure (Case, n.d.). All of these risk management objectives can create shareholder value in any firm through the creation of lower-cost and higher-efficiency actions and systems, and through the lowered exposure of profits to mismanaged risks (Lam, 2003). Value is also created for shareholders in a less direct manner; as the risks at Honeywell become better managed, investor and lender confidence in the organization ought to improve (not that it was bad to begin with), which in turn leads to a decrease in the cost of capital and an increase in the value of ownership (Lam, 2003).

Aggregate Risk

The type of comprehensive integration Honeywell is seeking in the proposed new risk management and insurance system is one example of risk aggregation, by which firms compile various risks and attempt to quantitatively assess these risks in a pooled fashion (Case, n.d.; Lam, 2003). At first glance, such approaches might seem prone to inaccuracies and generalities -- different areas of business are affected differently by internal and external factors, after all. Honeywell's new proposed risk management system is far from generalized, however.

In the case as described and with the attention to detail incorporated in the risk insurance plan, the risk aggregation strategy being considered by Honeywell in this new proposed risk management program makes a great deal of sense. Though there is a pooling of different risks and the assignation -- as identified by the deductible and the policy limits -- of a quantitative value to this pool of risks, this integration and analysis was not conducted on a loose or superficial basis (Case, n.d.). On the contrary, a great deal of care seems to have been taken in measuring each of the components of risk both in terms of the degree of exposure the company experiences and the likelihood of certain risks actually causing negative consequences to the firm (Case, n.d.). With certain portions of the risk insurance plan reassessed regularly and with the entire plan covering a relatively brief period, Honeywell also maintains a great deal of flexibility when it comes to its risk management under this new proposed program, and flexibility is never a bad thing around risk (Lam, 2003).

Cost Difference

The new program is estimated to cost approximately 15-20% less than the old program, with substantial savings coming in the form of reduced premium payments (Case, n.d.). The estimated retention of thirty million on an annual basis, which is the contracted deductible that is part of the new proposed risk insurance plan, represents a potential light increase, however this is more than offset by premium differences (Case, n.d.). The old program included gross overpayments for limits many times higher than necessary (Case, n.d.).

Summary and Recommendation