harvard risk management

harvard risk management

Effective Strategies for Risk Management in Harvard University

1. Introduction to Risk Management in Higher Education Institutions

Therefore, the only strategies available to higher education institutions to support students and faculty’s work. While recognizing the difficulties and uncertainties accompanying their demand, and the moral and legal obligations of their objectives, the resources needed to attain them are predictable. Educational institutions will undoubtedly provide an education that equips students with valuable knowledge, abilities, enhanced opportunities open to them, ever-expanding learning units, and the ability to act effectively as responsible citizens to maintain the confidence of the students, the families, the other stakeholders, and the others, the college or university will rely on and take charge of its promises. With an umbrella risk management approach, it is in the best interests of higher education institutions to use sound business practices to ensure that the entire campus community is able to throw open the door to learning for as many as possible of those who call.

When colleges receive their students, they are expected to enable their intellectual, moral, and personal maturation – a role that the protection of academic freedom dictates should be performed at the will of faculty and students — while being required by the federal government, credited, and other stakeholders to ensure a variety of procedural protections. Included, faculty members are entitled to employ procedures and guidelines that are peculiar to their discipline and area of knowledge, and both new and experienced instructors should generally be allowed to determine how they can best use their time and resources to enable learning in the courses they teach. No one, including the leaders of the institution who are held accountable by trustees, creditors, and other external constituencies, has direct control over the process of education, but everyone believes that money can influence the quality and timing of the outcomes.

In higher education institutions, the president, the members of the board of trustees, and campus leaders are in the difficult position of needing but not controlling significant financial resources that are used to support the educational process. The amount of money received by colleges is largely determined by the number and characteristics of the students they enroll, and institutions have no control over the academic preparation of prospective students, currently their students’ background or future inclinations, the incomes of students or their families, or other characteristics that may affect their interests and abilities to receive, afford, and value higher education.

2. Key Risks Faced by Harvard University

Interest rate risk is a measure of the volatility in the market value of a loan or financial security as a result of changes in interest rates. It is calculated as the magnitude of change in a financial instrument’s value due to an instantaneous 100 basis point parallel shift in market interest rates. Changes in other types of interest rates (such as Treasury rates, borrowing rates, or benchmark rates) are evaluated to determine if experience with changes in value as a result of changes in these interest rates is similar in nature to the immediate market interest rate shift. Financial instruments with uncertainty as to timing of future cash flows or prepayments are evaluated based on future interest rate changes. Financial positions are netted under consideration of pass-through positions and offsetting positions in the university’s portfolio.

Harvard University is vulnerable to events and changes in the capital markets that can abruptly place significant financial pressures on the university. Key short-term and intermediate-term risks include operating deficits and debates regarding federal tax policies relative to higher education. Over the longer term, the potential for changes in the market for higher education, the increasing costs of science and technology, the changing public and philanthropic agendas that support research, and the level of competition between universities and the private sector for human capital present significant challenges. Harvard University has put in place a number of strategies to manage funding risk, maintaining considerable flexibility for its future management and governance.

3. Best Practices and Strategies for Risk Mitigation at Harvard

Harvard’s Financial Operations Model and Proactive Risk Management Given the complexity of Harvard’s finances and the large quantities of money in motion at any one time, it is notable that the University is effectuating its function. Financial operations are very decentralized, with numerous individuals and groups responsible for writing checks, obtaining payment, accounting for incoming revenues, obtaining cash from donors, paying vendors, and managing cash held in several locations. These individuals use a set of detailed procedures that ensure payments are generally consistent with policies and agreed-upon authorization levels. Disbursements and revenue accounting are also reconciled at various levels to ensure accuracy and reduce the possibility of fraud. Additional checks and balances are provided through the use of comparative financial reports that are issued monthly to all School officials. In fact, Harvard’s reports progress at month-end and provides actual-to-budget comparisons every single month, a considerable level of detail.

Harvard’s decentralized operating model provides clear accountability for business operations throughout the University. It is notable that while many processes and policies are managed locally, Harvard operates effectively and efficiently in terms of financial performance, banking relationships, and strong credit ratings. To enhance risk management, Harvard should consider several best practices that could help reduce both the number of operational failures and the financial impact of those that do occur. Harvard should also consider using insurance or funding reserve accounts to protect itself against very large risks that only occur once every several hundred years. Taken together, these initiatives could help increase confidence of all stakeholders that their interests and those of future generations will be upheld.

4. Case Studies and Lessons Learned from Harvard’s Risk Management Approach

Lack of understanding of a specific risk can be disastrous, especially in fields as specialized as real property title analysis, particularly where an independent review by attorneys is not obtained. The portfolio manager’s practical business understanding of the importance of title problems and the decision tree that followed this understanding led to effective risk management in real estate. Risk management, as distinguished from risk aversion, means that the real estate portfolio manager does not avoid all transactions with title problems. Instead, he focuses on finding and solving title problems that minimize the chance of loss while maximizing the opportunity for gain. The focus and resolution of title problems certainly improve expected performance for individual troubled properties, but concentrated problem-solving may also provide above-market performance for the entire portfolio.

This case focuses on real estate portfolio management and examines ways in which the portfolio manager used expertise and business insight to manage real estate portfolio risk associated with land acquisition activity. Participants will explore how risk was managed in a particular real estate transaction, enabling Harvard to avoid a significant financial loss. The presentation enables participants to understand the importance and mechanics of sound real estate risk management, including the difference between risk aversion and speculation. Participants will be provided with a summary of the transaction, including the risks associated with the purchase of several plots of land, and the consequences of the portfolio manager’s loss. After the summary is provided, participants are asked to discuss what steps the portfolio manager should take to manage the real estate portfolio’s risk in light of the loss. The case leads participants to appreciate the real estate portfolio manager’s role, risks, and rewards. After this discussion, we show participants how the portfolio manager managed the risk and averted serious financial loss. We conclude by summarizing the lessons learned from the portfolio manager’s approach.

4.1 Case study 1: Risk management a) Land acquisition activity in Harvard’s Real Estate Portfolio b) Loss of portfolio manager

Hands-on exposure to case studies on effective risk management in a variety of settings is the best method of risk management education. At Harvard, we have developed several live case studies based upon actual events involving risk management under different business sectors. These true stories of how risk management can save millions of dollars illustrate the relevance of effective risk management to MBA candidates in the Business and Government program, as well as executives attending programs in finance, real estate, and strategic planning. Learn about the importance of sound risk management by examining actual events and deriving lessons learned that promote effective risk management.