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THE SHARPSIDE OF RISKUNDERSTANDING, ANTICIPATING AND
MANAGING BUSINESS RISK
IN ASSOCIATION WITH:
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FOREWORD
Natural, economic, social, nancial and technological.
The risks facing businesses have always been plentiful, but today they are more complex and more interconnected
than ever before. This is fostering rapid and signif icant change across the global marketplacechange that brings new
opportunities for growth and success, as well as unexpected and sometimes unwelcome challenges.
For the past century, Zurich has helped companies across the United States, and around the world, better understand
and manage change and the risk it presents.
Whether its large or small, global or local, we know your business. This is why we take the time to learn what makes
your company unique; what it needs to foster growth, to enter new markets, to explore new processes and technolo-
gies, and to recover from business interruptions.
With our insight, we are able to deliver insurance solutions that help our customers manage risk. By openly sharing
our insights and learnings, we are also able to help the broader business community better understand the risks it faces
in todays complex world.
On this note, I am proud to introduce The Sharp Side of Risk: Understanding, Anticipating and Managing Busi-
ness Risk, a research report focused on how key business sectors are planning to grow in a world of interconnected
risks and economic uncertainty.
This collaboration with Forbes is just one example of how we continually seek to learn from the industries we serve.
We hope you find it both in formative and enjoyable.
E. Randall Clouser
Head of Marketing, Distribution & Regional Management
Zurich in North America
Connect with us on social media. @ZurichNAnews Zurich North America
For more information on our insurance products
and risk management solutions, visit us atzurichna.com.
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CONTENTS
Foreword .....................................................................................................................................1
Executive summary .............................................................................................................. .3
Understanding risk and lessons learned (or not)....................................................... 4
Plans for strategic growth ..................................................................................................11
Where future risks lurkand where the jobs will be ...............................................18
Where the construction jobs will be .............................................................................22
Executives rate their companys risk-management skillsand their own involvement in risk assessment .........................................................24
Methodology and acknowledgments ..........................................................................28
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EXECUTIVE SUMMARY
To be successful, growth strategies need to be aligned with risk management. Such alignment
provides understanding about what might hamper growth, and aims to prevent any impedi-
ments to growth. And yet while many companies have taken financial hits because of unforeseen
events, a significant number of executives dont yet have a total grasp of their companys expo-
sure to risk or of its risk-management strategies, according to a survey conducted by Forbes
Insights and Zurich in North America. The respondents included more than 400 executives who
work in one of four industries: banking and financial services, real estate, healthcare, and con-
struction. (See Methodology, page 28.)
The state of the U.S. economy casts the darkest cloud over future revenues and job growth,
according to the survey, though respondents saw a somewhat brighter future for their own
companies. Executives tend to be concerned about risks that have an immediate impact on
growththe economy and the cost of energy and healthcare among thembut they may
be less knowledgeable about risks looming over the horizon, notably cyber terrorism and
climate change.
The analysis conducted by Forbes Insights reveals a significant contradiction when it comes to
the executives understanding of how well their companies have aligned risk management withgrowth strategies. The number of executives who believe that such alignment exists in their
companies is meaningfully larger than the number of executives who know what the actual risks
may be. To help executives resolve the incongruity, this report focuses on how companies can
approach aligning risk management with growth strategies.
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UNDERSTANDING RISK AND
LESSONS LEARNED (OR NOT)Key findings:Executives dont have a total grasp of their companys exposure to risk or of its
risk-management strategies. Even though many of those surveyed say their companies have
taken financial hits because of unforeseen events, a significant number do not seem to have
learned the importance of managing risk. Those who have recognized this imperative say they
will pay more personal attention to specific risks, different for each industry, and some will bring
in outside advisers.
We stuck to what
we do best, got our
arms tightly around
compliance, and
have tried to do the
right thing.
RICHARD A. GRAFMYRE
President and CEO,
Penns Woods Bancorp
We had a subcontractor who decided he wanted to go out
of business and ended up costing us $70,000, says Thomas
F. Judson Jr., chairman and CEO of The Pike Company, a
general contractor operating out of Rochester, N.Y. The
let-down involved the non-delivery of tiles for a college
science building Pike was buildinga blindsiding that
took the company somewhat by surprise, even though
subcontractor default is a constant
risk, says Judson. It also made a
signicant dent in the already-
narrow margin Pike had built into
its bid for this particu lar project.
Far from being the excep-
tion, stories like this are all too
common, although the underly-
ing reasons vary by industry (see
Figure 1a). Just 24% of respon-
dents claimed unforeseen risks
had not hit their companies nan-
cially at all. Richard A. Grafmyre,
president and CEO of Penns
Woods Bancorp, which runs the
13-branch Jersey Shore State Bank
in rural Pennsylvania, includes
his company among that number.
We stuck to what we do best, got our arms tightly around
compliance, and have tried to do the right thing, he saysby way of explanation. Judson, Grafmyre and other top
executives quoted in this report were interviewed inde-
pendently of the survey.
Figure 1. Has your company ever suffered
financial damages due to unforeseen risks
in any of the following areas?
(Percentage of survey respondents answering yes.)
Operational risk
Regulatory/compliance risk
Financial risk
28%
27%
26%
Figure 1a. Top areas of risk by industry
Banking/Financial Services
Financial risk
Construction
Operational risk
Healthcare
Regulatory/compliance risk
Real Estate
Operational risk
38%
33%
24%
35%
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Figure 2. Top three barriers to effective
risk management, by industry
Banking/Financial Services
Lack of understanding of how to mitigate
Lack of understanding of sources
Insufficient budget
Construction
Lack of understanding of sources
Lack of understanding of how to mitigate
Lack of organization
Healthcare
Insufficient budget
Lack of understanding of how to mitigate
Lack of understanding of sources
Real Estate
Lack of understanding of how to mitigate
Growth strategy not aligned with risk management
Lack of understanding of sources
27%
26%
43%
28%
30%
33%
25%
25%
36%
25%
29%
26%
Asked to identify the barriers to effective risk manage-
ment, the biggest number of executives (more than 30%)
said it was a lack of understanding of how to best miti-
gate risk. Almost as many (just over 29%) blamed a lack
of understanding of the sources of risk. Nearly 25% citedtheir companys insuffi cient risk-management budget.
There was divergence within the four industries on which
barrier s were the worst. In the construction industry, 43%
of the executives pointed to a lack of understanding of the
sources of risk, and 36% in banking/nancial services cited
a lack of understanding in how to mitigate it. In healthcare,
33% of the respondents agged an insuffi cient budget, and
among their real estate counterparts, 26% blamed a failure
to align ri sk management with growth strategy.
Surprisingly, given the swath of nancial damage
caused by unanticipated events, 45% of executives still
said theyd manage risk no differently over the next three
years, about twice the percentage of those who said they
would make changes. Even more startling, 32% didnt
know whether theyd do things differently or not.
These gures varied by industry (see Figure 3). These
percentages suggest executives in the construction indus-
try are the most condent that they have risk management
right. They may be right. But the survey a lso showed their
reluctance to see severe climate change as a risk, which
might prove to be dangerous hubris.
Among those who said they would do things differ-
ently, close to 40% said they would make some or all of the
same four changes, namely:
View risk a s interconnected
Align r isk management more closely
to growth strategy
Cover more risks
Revamp the in-house risk management team
More than 20% of this group said they would consult
with or hire outside advisers, with those in banking/nan-
cial serv ices the most likely to do so and their peers in real
estate and construction the least.
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GETTING PERSONALExecutives also identied specic risks that deserve more of
their personal attention. Again, priorities varied by industry.
More than half of the executives in banking/nancial ser-
vices put regulatory and compliance risk at the top of theirlist, but they also agged technology, operational and nan-
cial risk. Respondents in real estate prioritized nancial risk,
and those in healthcare, operational risk. Constructions
respondents identied strategic and operational risk as the
two priorities deserving more of their personal attention.
THE SINGLE BIGGEST RISK FORCONSTRUCTIONS GENERAL CONTRACTORSAs the survey found, most companies have been hit by unan-
ticipated events, a catchall that covers everything from a
tsunami in Japan that wipes out a production facility to a
collapse in housing prices that undercuts a banks mortgage
business to a vendors bankruptcy that severs a supply chain.
The interviews conducted by Forbes Insights found that
these setbacks can happen despite the most painstaking and
thorough risk management. The Pike Company, the gen-
eral contractor burned by a defaulting tile subcontractor, is a
case in point. We have pretty disciplined risk management
when we look at potential jobs, says Pikes Judson, and that
includes looking at potential suppliers. Every one of them is
part of the r isk equation.
The defaulting tile subcontractor typies how the tight
economytoo little work, too many competitorshas
added a new risk for the construction industry. In our busi-
ness, a lot of people get really good at a certain k ind of work
and then the market shrinks, so then the margins shrink.
They shrink all the way through the supply chain. One of
the things that weve seen is that our subcontractors are much
more fragile nancially than they used to be, says Judson.
Hell get no argument from Michael Kennedy, general coun-
sel of Associated General Contractors of America, a trade
group. I would say that the single biggest risk that general
contractors are facing at the moment is the r isk of a subcon-
tractor default, he says.
Judson is less concerned about the risks imposed by
changing climate or extreme weather. AGCs Kennedy offers
an explanation for such equanimity. Weather is always a
risk in construction, and the risk of a delay resulting frombad weather is something that contractors are used to allo-
cating in their contracts, he says. I dont think weve seen
the weather patterns disrupt construction projects any more
or less than they have historically. The big, what we cal l the
CATS, the catastrophes, can have an impact on the cost of
insurance and in particular, builders risk insurance for proj-
ects being constructed in coastal areas. The rates have risen
Figure 3. How executives would manage risk
over next three years, by industry
Banking/Financial Services
No differently
Dont know if they would do it differently
Construction
No differently
Dont know if they would do it differently
Healthcare
No differently
Dont know if they would do it differently
Real Estate
No differently
Dont know if they would do it differently
42%
37%
41%
32%
50%
29%
47%
31%
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in coastal areas with a higher risk of wind damage and the
like, but Kennedy says the insurance is still available and
reasonably affordable.
Scott Rasor, head of Construction at Zurich in North
America, agrees that a subcontractors failure or defaultsupersedes natural catastrophe as a threat to contractors.
But he notes something else of import. We see poor work-
manship creating construction defects because contractors
in bad nancial shape will often cut corners in order to
meet meager margins, he says. In that sense, shoddy work
can serve as an early warning signal of more serious trou-
ble ahead, so general contractors should be on the lookout
for it. Rasor also points out that the construction industry
is crowded. He expects more contraction through acquisi-
tions, especially among family-owned companies that lack
clear succession plans.
Healthcare
Operational risk
Regulatory/compliance risk
Financial risk
Technology risk
Strategic risk
Real Estate
Financial risk
Technology risk
Strategic risk
Operational risk
Regulatory/compliance risk
Figure 4. Top five risks most deserving of personal attention, by industry
39%
41%
42%
43%
50%
48%
33%
34%
30%
24%
Banking/Financial Services
Regulatory/compliance risk
Strategic risk
Financial risk
Operational risk
Technology risk
Construction
Operational risk
Strategic risk
Financial risk
Regulatory/compliance risk
Technology risk
41%
41%
41%
51%
58%
34%
28%
55%
54%
26%
We see poor workmanship creating
construction defects because
contractors in bad financial shape
will often cut corners in order to
meet meager margins.
SCOTT R ASOR
Head of Construction,
Zurich in North America
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A BANKER EXPECTSA SIDEWAYS RECOVERYOther peoples nancial health isnt a risk limited to the
construction industry. Penns Woods Bancorp CEO
Grafmyre says the nancial well-being of his businesscustomers is an ongoing issue. I think most banks are
through the worst of the economic risk, he says. What
were seeing now is just an elongated, sideways recovery
that continues to put stress on our business customers, as
does additional regulation. Our concern is just that, the
continued stress on our small and medium-sized busi-
ness customers. The economy and regulation are beyond
Grafmyres control, he readily admits, but he can still
attempt to contain some of the
risks they represent for his custom-
ers. We work with our clients and
try to help them with their ba lance
sheet management so they can
withstand these extended periods
of stress, he says. Grafmyre also
ags computer hacking as a threat,
not only to his bank but his indus-
try as a whole.
Chris Taylor, head of Financial
Institutions at Zurich in North
America, says deliberate hackers
are only part of the security prob-
lem. Lending institutions are in
a paradoxical position, he says.
The protection of PII [Personally
Identiable Information] is para-
mount at a time when a majority
of customers access their accounts
using a mobile device. Also of
note, Taylor adds, PII is often stored on a cell phone, phone
thefts are increasing and more than half of their owners
fail to protect their phone with the most basic and com-
mon-sense security method: a password. More than ever,
nancial institutions must use an encompassing Enterprise
Risk Management approach that covers all eventualities.
A REAL ESTATE EXECUTIVE EYESTHE EMPLOYMENT NUMBERSEdward J. Fritsch, president and chief executive of
Highwoods Properties, a real estate investment trust
in Raleigh, N.C., also looks at how others are doing as
a source of potential risk to his business. To be sure, he
points to the U.S. economy as a continuing challenge for
his company, which, among other things, owns nearly 350
offi ce and commercia l propert ies, mainly in the Southeast.
Our forecast is the economy will continue to improve,
but it will be more of a waddle than a fast-paced run, he
predicts. We think it has been slow in evolving, and we
dont think the cadence of that is going to pick up dra-
matically over the next couple of years. There are still
signicant issues that need to be dealt with in Washington
that I think will serve somewhat as the governor over the
speed at which the economy can recover. We seem to
be going from one scal crisis to another. As we start to
recover and nd statistics that are clear tel ltales of encour-
aging economic growth, we run right into another brick
wall of theoretical scal concern. So, certainly the debt
ceiling, the scal cliff, the sequester, you feel like you go
from one crisis to the next.
But more specically, Fritsch looks at job numbers. I
think employment is the biggest risk for us, he says. Ilike to think we run a fairly complex business, but the gist
of it is that if youre a customer of ours and youre not hir-
ing more people, you dont need more of our product. If
you lease 20,000 square feet and youre not hir ing more
people, then its hard for me to convince you that you now
need 30,000 square feet. So the employment picture is
something that were keenly interested in. So is housing.
We use housing as an early telltale indicator, because as
housing goes, employment typically tends to follow.
The protection of
PII [Personally
Identifiable
Information] is
paramount at a time
when a majority of
customers access
their accounts using
a mobile device.
CHRIS TAYLOR
Head of Financial Institutions,Zurich in North America
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Like Judson, Fritsch doesnt think climate change is a
major threat, or that energy prices are a risk. We heat and
cool mil lions of square feet of offi ce space for the comfort
of our customers, he says, but there has been an advance
in technology and construction products that enable us tocontinue to be able to look a customer or prospect in the
eye and give them the assurances that they will be in a
comfortable environment. For example, the glass that
is made for buildings today is exponentially more effec-
tive and better than it was years ago. The microprocessors
that manage the energy control systems and HVAC ther-
mostats and so on are exponentially more complex and
more effi cient than they were year s ago, he says. As for
the fuel needed to heat and cool his offi ce spaces, When
we develop a building, the upfront need is to be cognizant
of what utility rates could do to the bottom line. That,
he says, drives his company to buy the right glass, buy
the right roof, buy the right centrifugal chiller, buy the
right microprocessor. I like to think that we would buy
highly effi cient mater ials because its the wise investment
to make, whether the EPA mandates it or not.
As at other companies, Highwoods Properties has
employees who are charged with managing these risks,
says Fritsch, professionals who focus solely on how
energy is consumed and deployed
and paid for. Its a real science. Aslong as youre not foolish about
the way that you buy it, consume
it and deploy it, it can be effec-
tively done. So we recognize that
the risk is out there, but I think the
aptitude, the technology and the
materials are there to adequately
address it. As I say, employment is
what we really look at.
Dan Kleiman, head of Real
Estate at Zurich in North America,
notes how risk management
among real estate investors has
evolved over 15 years. They now
routinely look at such issues as the
usage of space and its relationship
to utility costs, design and construction, and constantly
changing codes and ordinances imposed at the federal and
local level. But while all thi s has produced a more detailed
appreciation of risk, he says, it has to be juxtaposed
against a new reality of severe weather patterns.
Kleiman cites Californias recent hail and thunder-
storms as examples, so aberrant that the damage they
caused fell outside any predictable or measurable patterns.
From the insurers standpoint, says Kleiman, our pro-
cesses have become much more sophisticated, and we are
capable of predictive modeling and very sound underwrit-
ing processes, which help to anticipate such events. Even
so, unpredictable weather continues to affect the accuracy
of actuarial models, he says, as does the unpredictabil-
ity of where storms are hitting. The encouraging news,
in Kleimans view: Companies do seem to be getting
smarter about creating response plans for various catastro-
phes, including weather. Theyre building better buildings
and integrating risk management practices to protect them-
selves. But again, he cautions, these efforts wi ll not always
carry the day. Companies can prepare for severe weather,
but the degree of severity can still surprise us.
Companies do seem
to be getting smarter
about creating
response plans for
various catastrophes,
including weather.
DAN KLEIMAN
Head of Real Estate,
Zurich in North America
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HEALTHCARES QUAKE-IN-PROGRESSTechnology was cited by Pam Davis, CEO of Edward
Hospital and Health Services in suburban Chicago, as an
important component of risk management. Its critical to
have a robust IT infrastructure in place to drive operationaleffi ciencies in workow, effectively monitor and measure
quality, and engage patients in their healthcare and disease
management through an effective patient portal, she says.
The need for computer systems that can talk to each
other is critical for companies in the healthcare indus-
try, which is deep into merger s, business-mix reshuffl ing,
entry into new businesses and cost-cutting. No wonder so
many executives in the survey identied technology as the
best way to make their company an industry leader. (For
more, see How to Be Best in Breed, page 17.) Davis also
notes that risk management is a key part of the equation
each time we make important business deci sions and, she
adds, to help manage risk, we have built a strong interna l
team, supported by excellent vendors.
Stoking the risk for every company in healthcare,
including Edward, is a series of epochal reforms, notably
the tightening tourniquet of Medicare reimbursements
and the Affordable Care Act (Obamacare), a quake-in-
progress, many of whose aftershocks havent yet started.
An industry-wide realignment of business mixes has
enmeshed just about every sector of healthcare, including
hospitals, extended care facilities such as nursing homes,
and a grab bag of medical facilities like dialysis centers
and physicians group practices. A major risk facing most
healthcare companies is clearly regulation. But theres also
a risk of being squeezed into an unwelcome mergeror
out of business, evenby newcomers to a particular sec-
tor, such as hospitals snatching up not only other hospitals
but nursing homes and doctors. For more on how various
healthcare players plan to grow amid such upheaval, see
the next section.
Risk management is a key part
of the equation each time we make
important business decisions.
PAM DAVIS
CEO,
Edward Hospital and Health Services
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PLANS FOR STRATEGIC GROWTH
Key findings:The three-year outlook for economic growth is weak, but executives feel betterabout the prospects for their own industryand even better about their own companys future.
That may mean good news about jobs, too. None of the companies surveyed are putting all
their eggs into a single growth strategy, but overall, domestic expansion is the most popular.
This includes acquisition, particularly in healthcare, as hospitals, medical facilities, nursing homes
and various other components of the industry fight ever-narrowing margins. Different industries
are eyeing different parts of the U.S. for expansion, but most companies plan to stick fairly close
to home. Meanwhile, some of those that already have international sales or operations plan to
expand there, too, and a few are planning to make their first-ever foreign forays.
for Europe
46% Decline or significant decline
43% No change
11% Increase or significant increase
globally
27% Decline or significant decline
53% No change
20% Increase or significant increase
Figure 5. Growth predictions for the U.S.
economy three years from now
20% Decline or significant decline
50% No change
30% Increase or significant increase
MOST OPTIMISTIC FOR THE U.S.Half of the executives in all four industries expected no change
in the strength of the U.S. economy over the next three years.
But with 30% anticipating some bounce-back, they clearly
thought the U.S. economy would do better than Europes, for
which most saw continuing declines. The majority predicted
the global economy would remain unchanged.
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12 | THE SHARP SIDE OF RISK
Real estate executives showed the most condence in
global growth, with 26% expecting an increase. Some 21%
of those in banking/nancial services thought that way.
Condence was lower among executives in healthcare (14%)
and construction (15%).Respondents condence about global growth varied by the
size of their company and showed that the biggest and smallest
companies had the most and least condence, respectively.
Among the 118 companies already doing business in
a foreign country, executives from 24% of them expected
an increase in economic growth, versus 18% that didnt.
Respondents at the 80 companies planning their rst-ever
foreign expansion were almost evenly split over where they
thought the global economy was headed21% expected
growth and 24% looked for a decrease.
FEELING GOOD ABOUT THEIROWN INDUSTRIESAbout 45% of the surveyed executives predicted growth
in each of their own industries over the next three years,
despite the fact that only 30% looked for economic growthin the U.S. as a whole.
AND THEIR OWN COMPANIESSimilarly, executives expected to see their own com-
pany outperform its industry in revenues. But here their
predictions varied dramatically by industry. The most opti-
mistic: banking/nancial services executives, 64% of whom
expected their company revenues to increase by more than
3% and 14% predicting a rise of more than 15% (Figure 8).
Figure 6. Confidence in a global recovery,
by company size (revenues)
$25 million to $99 million
$100 million to $249 million
$250 million to $499 million
$500 million to $749 million
16%
20%
19%
22%
Figure 8. Expectations for growth
in your company
Banking/Financial Services
Revenue growth more than 3%
Revenue growth more than 15%
Construction
Revenue growth more than 3%
Revenue growth more than 15%
Healthcare
Revenue growth more than 3%
Revenue growth more than 15%
Real Estate
Revenue growth more than 3%
Revenue growth more than 15%
14%
35%
13%
46%
14%
59%
14%
64%
Figure 7. Expectations for growth
in your industry
17% Decline or significant decline
39% No change
45% Increase or significant increase
Note: Does not add to 100% due to rounding
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COPYRIGHT 2013 FORBES INSIGHTS | 1
A MIXED BAG OF GROWTH STRATEGIESNone of the companies in the survey have bet their revenue
growth on a single st rategy, according to their executives.
Overall, domestic expansion was the most popular (41%
of respondents said their company would take that route)and nancing options, such as going public, the least (11%).
Growth through talent/recruitment scored in the mid
20%s, signa ling hopeful news for job creation.
Particular growth strategies varied by industry (Figure 9).
TOP EXECUTIVES DESCRIBE THEIRPLANS FOR STRATEGIC GROWTHFor many companies, growth strategy includes team-
ing with others. Pike, for example, recently merged with
LeCesse Construction Services, another Rochester com-pany and one with strengths in senior housing and the like.
This wi ll ease Pikes strategic move into healthcare, which
Judson thinks offers growth opportunity for hi s company.
Healthcare institutions are looking at new ways to deliver
what they provide for their customers, he says. In our
business, the changes we see are related to the changes our
customers see.
Figure 10. Top three strategies by company size (revenues)
$25 million to $99 million
Domestic expansion (47%) New marketing (38%) New products (31%)
$100 million to $249 million
Domestic expansion (40%) Organic growth(35%) New products (33%)
$250 million to $499 million
Domestic expansion(37%) Organic growth (35%) New products (35%)
$500 million to $749 million
Organic growth (43%) Mergers and acquisitions (39%) Domestic expansion(37%)
Figure 9. Top three strategies, by industry
Banking/Financial Services | Organic growth (51%) New marketing (38%) New products (35%)
Construction | Domestic expansion (52%) New marketing (27%) Talent/recruitment (27%)
Healthcare | New products (49%) Domestic expansion (43%) New marketing (38%)
Real Estate | Domestic expansion (40%) New marketing (32%) Organic growth (29%)
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14 | THE SHARP SIDE OF RISK
Acquisitions also play a role in the growth plan of banker
Richard Grafmyre. His Penns Woods Bancorp is in the pro-
cess of buying Luzerne Bank, another rural Pennsylvania
institution. Luzerne will keep its name, but the acquisition
will add eight branches to PennsWoods portfolio. Our small-
business commercial group was
our agship product until a few
years ago, and now all residen-
tial products are on the table, says
Grafmyre, who describes his strat-
egy as cautious. Were continuing
to balance our asset base.
Community banks like
Grafmyres, meanwhile, along with
big players like TD Bank and
KeyBank, are in the strategic sights
of David Desjardins, president and
CEO of Acadia Federal Credit
Union, of Fort Kent, Maine, which
looks across the St. John River to
Canada. Desjardins plans to turn
bank customers into his members
by offering no-fee services and
pushing commercial business on
top of what has traditionally been
personal banking. Rather than open a fourth branch, he
hopes to use technology to attract newcomers. One way
hell do this is to set up video service via a form of ATMs
that business and private customers can use to talk to bank-
ers and make transactions. He aims to increase membership
from 11,000 to 11,300 by the end of 2013, and for a 3%
annual growth after that.
Hospitals have been prescribing acquisitions and part-
nerships for some years now as an Rx for their growth, and
they have become widespread among both non-prots and
for-prots. The trend continues. Edward Hospital CEO
Davis says the hospital has aggressively pursued acquisition
of primary care physician practices as well as targeted spe-
cialists. The institution has also set up partnerships with
the largest independent multi-specialty physician group in
the region, DuPage Medical Group, to coordinate care for
more than 100,000 HMO patients, and with NorthwesternMedical Faculty Foundation to provide neuro-inter-
ventional and neurological services. Next up: a
merger with another independent hospital,
Elmhurst Memorial.
These deals dont represent growth for
growths sake for Edward. Healthcare
reform demands that hospitals take a much
more active role in managing the overall
health of patients, even as our payment for
services goes down, says Davis. That means we
have to be more creative. We need to grow our service
area to have more potential patients to care for, because it
is more effect ive and cost-effi cient to manage the health of
a population with a more diverse group of patients.
Dan Nash, head of Healthcare for Zurich in NorthAmerica, calls mergers and acquisitions the name of the
game for the industry. But he warns of inherent risks,
including those facing hospitals that buy doctors prac-
tices. For one thing, the hospital is also acquiring any
outstanding liabil ities that physicians, working outside the
hospital and operating like satellites, might have accrued,
he says. Another risk that weve already discovered is that
their premises may not be covered by hospital insurance.
Yet another risk that comes with acquiring a doctor prac-
tice: If it used to have fewer than 50 employees, it wasnt
required to provide them with health insurance. But as part
of a larger company, the hospital, it is now required to do
so. Nash urges hospitals also to be cautious in the acquisi-
tion of enterprises like assisted living facilities, ambulatory
care facilities and the like, because of the many unknowns
that still pervade the new rules of the Affordable Care Act.
WHAT A DOCTORPRESCRIBED FOR HIMSELFSo how do individual doctors, for example, feel about their
place in this roiling, cost-cutting, regulation-beset industry?
Trapped, recalls Bruce Hyman, a general practice physi-
cian in Lake County, north of
Chicago, describing how he felt
the world closing in on him in
2010. For one thing, running
a business seemed to be taking
more of his time than practic-
ing medicine, something hed
done for almost 20 years. He
was spending up to $15,000 a
quarter on technology, which
he needed to process claims and
stay current with various reg-
ulatory agencies. Malpractice
insurance was high, particularly
in Il linois. Offi ce overhead kept
climbing. Reimbursements,meanwhile, from private insur-
ers and Medicare, took ever
longer, sometimes 90 days. By
the end of every month, says
Hyman, youre getting closer and closer to asking yourself,
Oh boy, am I going to meet my payrol l, am I going to meet
my other requirements?
Healthcare reform
demands that
hospitals take a
much more active
role in managing
the overall health of
patients, even as
our payment for
services goes down.
PAM DAVIS
CEO,
Edward Hospital and
Health Services
[A hospital that buys
doctors practices] is
also acquiring any
outstanding liabilities
that physicians, working
outside the hospital and
operating like satellites,
might have accrued.
DAN NASH
Head of Healthcare,Zurich in North America
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COPYRIGHT 2013 FORBES INSIGHTS | 15
Lake County had become a highly competitive mar-
ketplace for healthcare, especially for hospitals, Hyman
says. Advocate Medical Group, the largest in the state,
was there. So was Northwestern, which had just acquired
the local Lake Forest hospital. We had the North Shoresystem and a couple of smaller ones, too: Vista, which is
part of a Tennessee for-prot, and the Aurora Group. All
of them were trying to buy primary-care physician prac-
tices like his own, he says. I started to think that maybe
the model of the old traditional practice or small group
practice was going to be extinct.
Was extinction the name of the risk Hyman was actu-
ally facing? Would he have to sell his practice to one of the
hospitals and go on salary? He remembers thinking, Im
not really suited to work on an assembly line. But when
Advocate bought the hospital he was associated with, the
one he sent his patients to, Hyman told himself, Im going
to explore this. He got in touch with James R. Dan,
Advocates CEO and, it turned out, also a physiciana big
plus for Hyman. The outcome: he agreed to sell his practice;
Advocate computerized everything, trained, retained (and
upped the benets of) his staff, brought three additional
doctors into the practice, and, all along, kept his patients
informed on everything that was happening. Hyman, who
says he got an excellent price for his business and now makes
more than he did before as a principal, has one remaining
question. Why didnt I do it sooner?
To John Murphy, president and CEO of the Western
Connecticut Health Network (comprising hospitals, clin-
ics, emergency systems, physician practices, home care
agencies and the like), Hyman is obviously one of those
doctors who, as Wayne Gretzky has said, can see where
the puck is headed. Murphy thinks joining hospital sys-
tems will be the career path for an increasing number of
new M.D.s. Admittedly, some docs may say, Wait a sec-
ond. I want to be Marcus Welby, M.D. I respect that,
says Murphy, referring to the h it 1970s TV ser ies (Robert
Young played the doctor). But the real ity is that physi-
cians who really just want to take good care of patients
need to have a technology person in the offi ce who can
help manage the electronic medical records and digitize
the practice, and somebody with a nancial background
to manage complex contractual relationships with payers.Youre also up against a ll kinds of compliance is sues. The
payers and the government are going to be rewarding pro-
viders who can deliver coordinated care.
ITS ALL ABOUT MANAGING THE PENNIESNot everyone eyes acquisitive hospitals as fondly. One
such individual is Michael J. Pescatello, executive direc-
tor of Radius HealthCare Center at Danvers, a 159-bed
skilled nursing facility in Massachusetts. Like many in
this sector, Radius is involved in
many facets of post-acute care, but
a string of healthcare reforms and
diminishing reimbursements has
made it a struggle to meet todays
spiraling costs of labor, food, elec-
tricity, heat, and other expenses,
Pescatello says. When I rst
entered the business of long-term
care [at another facility], I was told
that operationally it was all about
managing the pennies. Margin
spreads between revenue and
expenses were very thin. Today,
theyre even thinner.
One reason for this is that hos-
pitals and outts like Pescatellos
are now going after the same
patients, those who need skilled
care after being discharged from a
hospital. Previously they worked in
partnership: a hospital would sendsuch folks to an independent post-
acute setting like Radius. But now hospitals are hanging on
to these folks (and their Medicare disbursements) by moving
them into closed-paneled ACOs, or accountable care orga-
nizations, which are skilled nursing facilities they own or
operate themselves. In other words, a hospital would rather
buy or run an outt like Radius and keep the insurance
money for itself.
We are now
expanding our
marketing efforts
beyondhospital
discharge planners.Were marketing
directly to senior
groups, senior
centers, and assisted
living facilities.
MICHAEL J. PE SCATELLO
Executive Director,
Radius HealthCare Center
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COPYRIGHT 2013 FORBES INSIGHTS | 1
FOREIGN EXPANSIONOnly 19% of the executives said their companies had for-
eign growth plans, versus the 40% who said theyd be
staying within the U.S. But companies already doing busi-
ness abroad are planning to grow there, either by steppingup sales or by increasing their international operations.
As the chart s show (Figure 12), executives expect more
companies to increase their foreign sales efforts than to
establish additional foreign operations. But theres a dif-
ference in the growth strategies of the biggest companies
covered by the survey, those with annual revenues of $500
million to $749 million, and the smaller ones. Only a few
of the big outts expect to sell their way into more foreign
markets while many more of them will establish additional
foreign operations.
Executives whose companies are eyeing foreign
expansion favored two main parts of the world, Europe
and Asia Pacic.
HOW TO BE BEST IN BREEDExecutives picked a number of different strategies that
would help to position their company as an industry
leader, in the U.S. and elsewhere. The most-often cited:
business processes and work arrangementsin other
words, technology. Among the respondents in banking/
nancial serv ices, 68% identied this as the best way to the
top, as did 56% of those in construction. Among respon-
dents in real estate, 47% chose community investment/
partnerships as their rst choice, making it the top strategy
for this group. Technology still came a close second, with
44%. Technology was also the top choice among health-
care executives, though for just 49% of them. Perhaps thi s
relatively low percentage signals that theyre all doing it
anywayand have to, if only to survive.
Figure 12. Percentage of companies
(by revenues) that will sell into more
international markets
$25 million to $99 million
$100 million to $249 million
$250 million to $499 million
$500 million to $749 million
and that will set up additional
foreign operations
$25 million to $99 million
$100 million to $249 million
$250 million to $499 million
$500 million to $749 million
13%
19%
19%
6%
3%
7%
8%
14%
Figure 13. Foreign favorites
Real Estate Europe
Construction Europe
Healthcare Asia Pacific
Banking/Financial Services Asia Pacific
48%
56%
63%
82%
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18 | THE SHARP SIDE OF RISK
WHERE FUTURE RISKS
LURKAND WHERE THEJOBS WILL BE
Key findings:The state of the U.S. economy casts the darkest cloud over future revenues and
job growth, though respondents see a somewhat brighter future for their own companies.
Executives tend to be concerned about risks that have an immediate impact on growth, such
as energy and healthcare costs. They display fewer worries about more nebulous risks, like
cyber terrorism and climate change, perhaps because these exposures may seem more remote
and beyond any form of risk management that they can recognize. Most executives expect anupturn in hiring.
Executives in banking/nancial services, real estate and
healthcare gave more or less equal rank ing to what threat-
ens their companys revenues. The U.S. economy came
rst; community investment/relationsa rms relation-
ship with the community it operates in and is supplied by,
including investments, loans and donations to that com-
munityand healthcare costs jockeyed for the next two
places. Construction respondents, though agreeing that
the national economy is the No. 1 potential threat, nomi-
nated oil and energy prices and sustainability initiatives as
Nos. 2 and 3. Some 39% of this group also identied nat-
ural disastersand 34%, changing weather patternsas
growing threats to their industry. These last two ndings
showed a higher degree of concern over Mother Nature as
a harbinger of nancial damage than evidenced in other
parts of the survey.
Anxiety about regulation may be waning. Although
close to a third of all respondents said the threat has increased
somewhat or signicantly, 44% said it had decreased by
the same extent56% in the case of executives in bank-
ing/nancial services, despite the fact that these particular
respondents still list it as a prime source of risk.Does this mean Washington reformers have wrought
their worst? Possibly so. But that doesnt mean the threat
is over. As noted earlier, banker Richard Grafmyre, for
one, is waiting for the end of the Dodd-Frank shake-
out. Until that happens, he says, he isnt about to leave
Pennsylvania and take on what he calls the burden of
multi-state banking regu lations and the different compli-
cations that come with them.
The 33% in the construction industry who expected
regulation to decrease somewhat or signicantly as a threat
may be deluding themselves, thinks Michael E. Kennedy,
general counsel of the Associated General Contractors of
America. We dont see any fading of regulatory activ-
ity at the federal level, he says. There are quite a few
initiatives that are still pending from the rst term of the
current administration. The evidence we have is anec-
dotal, but it does suggest that the U.S. Department of
Labor, the Equal Employment Opportunity Commission
and the Environmental Protection Agency continue to be
quite aggres sive in their enforcement activities.
HOW THE FACE OF RISK MAY CHANGEOVER THE NEXT THREE YEARSExecutives expected their company to be looking at the
same sources of risk and degrees of risk three years from
now as they do today. In other words, they said the U.S.
economy and healthcare costs would continue to have a
somewhat or signicant effect on their companies, with
regulation still a threat, too. Construction respondents
again agged energy costs as a high-risk factor three yearshence. The majority of respondents tended to dismiss
future threats of cyber terrori sm or terrorist attacks on the
U.S. as insignicant, just as they do now.
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COPYRIGHT 2013 FORBES INSIGHTS | 19
THE EFFECTS ON HEADCOUNTFeeling good about their companys growth prospects
suggests good news for future employment, too, albeit
with different expectations among executives of the four
industries surveyed. Among construction executives, 50%expected a somewhat higher job increase of between 3%
and 15%, while 8% looked for a signicantly higher rise of
more than 15% (Figure 15).
Clearly, construction looks to be the biggest creator of
new jobs over the next three years (Where the construc-
tion jobs will be, page 22).
Figure 15. Expectations for job growth
in your company
Banking/Financial ServicesHeadcount growth more than 3%
Headcount growth more than 15%
Construction
Headcount growth more than 3%
Headcount growth more than 15%
Healthcare
Headcount growth more than 3%
Headcount growth more than 15%
Real Estate
Headcount growth more than 3%
Headcount growth more than 15%
42%
7%
50%
8%
42%
8%
31%
9%
Figure 14. Which risks are growing
somewhat or significantly, by industry
Banking/Financial Services
U.S. economy
Community investment/relations
Healthcare costs
Construction
U.S. economy
Oil/energy prices
Sustainability initiatives
Healthcare
Community investment/relations
Healthcare costs
U.S. economy
Real Estate
U.S. economy
Community investment/relations
Global economy
60%
48%
37%
51%
42%
39%
42%
46%
46%
55%
49%
45%
EXECUTIVES EXPECT TO INCREASE HIRING, BUTTHE U.S. ECONOMY AND HEALTHCARE COSTSREMAIN RISKS
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20 | THE SHARP SIDE OF RISK
THE NEGATIVE IMPACT OF HEALTHCARECOSTS ON HEADCOUNTExecutives in the survey were asked to identify which
events were likely to either decrease or increase their com-
panys headcount over the next three years.They chose a number of potential events that could
create a decrease in jobs, but an overwhelming number
picked healthcare costs in their various forms. Offered a
choice between total healthcare costs, provider health-
care costs or employer healthcare costs, banking/nancial
services and construction executives pointed to all three
as potentially harmful to any prospects of an increase in
headcount. Healthcare executives, excluded by the survey
from provider or employer options, split their vote for the
most likely threat to job growth for their industry, with
31% picking healthcare costs and 31% naming the U.S.
economy. The regulatory environment, with 25%, was
their third pick.
Respondents identied a very different set of events
when asked to say what would somewhat or signicantly do
the opposite and increase the headcount at their company
(Figure 17). The U.S. economy came in rst for executives
in real estate (44%) and in construction (49%). Executives
in banking/nancial services cited the regulatory environ-
ment (39%) with the U.S. economy a close second (38%).
Healthcare executives put healthcare costs rst, with 36%,
though they too rated the U.S. economy a close second,
with 35%. Among other potential boosts to job growth,
respondents in real estate identied the global and European
economies, with 37% and 31%, respectively, making them
perhaps unexpected Nos. 2 and 3 for that industry.
Figure 16. Events that could somewhat or
significantly decrease headcount
Banking/Financial ServicesTotal healthcare costs
Provider healthcare costs
Employer healthcare costs
Construction
Total healthcare costs
Provider healthcare costs
Employer healthcare costs
Healthcare
Total healthcare costs
U.S. economy
Regulatory environment
Real Estate
Total healthcare costs
Employer healthcare costs
U.S. economy
33%
31%
31%
28%
25%
25%
31%
31%
25%
26%
26%
23%
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COPYRIGHT 2013 FORBES INSIGHTS | 2
Saint Augustine prayed to be granted chastity, but
not yet. Executives interv iewed for this report echoed the
sentiment when asked about their hiring projections, say-
ing, yes, theyll be taking on more people, but not yet.
Edward Fritsch of Highwoods Properties says the down-turn enabled hi s real estate company and others to do the
paring of mediocre and underperformers that maybe we
should have done earlier. Our v iew now is that productiv-
ity is at an all-time high. Companies are properly staffed
with the right people that they need to deliver on their
mission and vision statements. The next step is that as busi-
ness gets better, theyre going to have to add people.
Fritsch has put his nger on a Catch-22 of how the
recovery might affect jobs, at least as it affects Highwoods
Properties. Hes looking for employment to pick up among
his customers to help his company grow, but he cant start
hiring until his customers do. Many of them are wait-
ing for consumers to start spending, but they wont spend
unless theyre working and feel secure about their jobs.
New hiring in all aspects of healthcare may also be
stalled, at least for the present, because of the enormous
contraction going on. So says James Dan, president of
Advocate Health Care, the non-prot hospital giant in
Chicago that acquired Bruce Hyman and many other
physicians along with various nursing facilities and the like
in recent years. Dan believes that healthcares evolution
necessarily will get rid of what he calls unnecessary care
but that new jobs will be there if employees are willing
to adapt and train. This applies to nurses, and it applies to
doctors, too. Hyman says hes had growth opportunities
himself, having been involved in strategic planning and
primary care development. Hes even mulling going after
an MBA. Dan cites the aging baby boomers as one sure but
changing market, and one that will produce employment.
I dont care how much exercise you do, the boomers are
going to need care, he says. And if that care includes
the need for a stent, well, he believes that before long the
patient will be going to an outpatient clinic for the proce-
dure rather than a hospital.
Figure 17. Events that could somewhat
or significantly increase headcount
Banking/Financial ServicesRegulatory environment
U.S. economy
Community investment/relations
Construction
U.S. economy
Sustainability initiatives
Community investment/relations
Healthcare
Total healthcare costs
U.S. economy
Regulatory environment
Real Estate
U.S. economy
Global economy
European economy
39%
38%
23%
49%
30%
29%
36%
35%
33%
44%
37%
31%
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22 | THE SHARP SIDE OF RISK
WHERE THE CONSTRUCTION JOBS WILL BE
Forbes Insights interviewed Kenneth D. Simonson, chief economist at the Associated General
Contractors of America, for his take on the construction industrys coming increase in
employment.
Where do you think growth is going to come from over the next three years?
Im pretty upbeat about the outlook for construction overall. I certainly think that multi-family construction has really strong
prospects. I think that single-family home building is going to keep growing, at least for the next few months, and its not going to
retreat. It may stall at a lower level than we saw last decade, but certainly not going back to where it was in the last five years. Pri-vate, non-residential construction also looks like its well past its low point. Im particularly optimistic about construction related
in any way to oil and gas: drilling, transportationmeaning pipelinesand downstream uses by domestic oil, gas and natural gas.
I think the Panama Canal expansion is also leading to a variety of con-
struction activity and will for several more years, as ports on the East
Coast prepare for much larger ships being able to transit the canal, and
the West Coast ports try to improve their productivity in order to hang
on to that traffi c. And then re-shoring [bringing manufacturing activity
back to the U.S.] is helping to increase investments in factories, ware-
houses and transportation facilities.
Any particular region?
Thats showing up in quite a few different industries in different parts
of the country. Then there are selective other pockets of good news for
non-residential construction. For the moment, private colleges and uni-
versities are back on a spending spree, although I think thats going to be
fairly short-lived. And data centers are another very active niche.
Warehouse construction looks good, too, partly in response to the Panama Canal and the re-shoring, but also, as consumers
move their purchases from retail to online, big merchant retailers are trying to locate distribution facilities much closer to their
customers. In the healthcare sector, I expect modest hospital construction, but there seems to be a lot more activity in stand-
alone, urgent care facilitiesso-called doc-in-a-box facilities, where people just walk in to see a doctor.
Where will job growth be weak?
The one downer on construction now and for the next several years is public construction. Local government school districts that
depend heavily on property tax receipts have been slashing construction spending in half, and I dont expect that to turn around
for a couple of years. State government has seen a downturn in revenues for three straight years, according to the Rockefeller
Institute of Government. They have so many more obligations for Medicaid, public employee retirement plans, retiree healthcare
and other income-secure programs. I havent seen much evidence that states are spending more on construction here.
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COPYRIGHT 2013 FORBES INSIGHTS | 2
What do you think the net difference in jobs is going to be?
Let me benchmark by saying last year, according to the Census Bureau, construc-
tion spending overall was up by 10%. I would say thats pretty close to what well
see this year. Job growth really lagged the growth in spending in 2011 and 2012,
partly because firms were reluctant to hire until they were sure that they would have
follow-on work; they werent going to hire just for one job. And also, because they
had reduced the hours of some of the people they had kept on.
At first they were able to fulfill the new work by expanding hours, putting part-
timers on full time or taking people out of the shop and training room and putting
them in the field. Lately, theyve probably been paying more overtime. But I think in
2013, theyre going to have to go out and do some significant hiring.
What does that means in number of jobs?
Last year construction employment rose by about 100,000, to about 5.6 million in December 2012. In 2013, I think firms are going
to be hiring 250,000 to 350,000 additional people. In other words, about a 5% increase in hiring.
Do you see any regional patterns? Is one part of the country better off than the other?
Well, certainly the areas that have a lot of oil and gas drilling are also getting a lot of construction activity. Every well requires an
access road, a runway perhaps, a pad for the well itself and a storage podand then housing for the pumping and processing
machinery, and either a pipeline for getting the product offsite or storage tanks. The nearby communities are benefiting from
spending by the drilling companies, by their workers, by the landowners who become royalty holders. Well definitely see con-
struction in areas like the Marcellus and Utica shales in Pennsylvania, the Bakken formation in North Dakota, the Eagle Ford in
South Texas and probably the Niobrara in Colorado this year, the Parmian Basin in West Texas and Mexico. Oil and gas activity is
also stimulating construction around Houston and in Louisiana with interstate pipelines, petrochemical plants, huge liquefaction
trains [plants that liquefy natural gas that arrives by pipeline] and export terminals.
As construction companies get ready for all this hiring, where is the risk? Where are the unpleasant surprises?
There are multiple types of risk. The feds may try to step in and regulate [hydraulic] fracturing [aka fracking], although up until now
thats been left to the states, and so far I dont see strong evidence that the feds would do so. Theres also the risk that the U.S.
economy will slump and that will cause cancellation of a lot of projects. But I think that for the moment, those risks are fairly low.
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24 | THE SHARP SIDE OF RISK
EXECUTIVES RATE THEIR
COMPANYS RISK-MANAGEMENTSKILLSAND THEIR OWNINVOLVEMENT IN RISKASSESSMENTKey findings: Executives give high marks to their companies for how they manage various
risksbut with one critical proviso: Even though most say their company has a commitment to
align risk management with growth strategy, fewer think every company is doing so. Executives
give themselves low marks on their own expertise on some threats to their company.
While executives faulted their companys risk management
on a number of points, as described in the rst section of
this report, at least half of them actually rated their com-
panys overall risk-management skills as very good or
outstanding in a number of areas. Among them were its
managing of nancial risk, corporate responsibility/sus-
tainability risk, strategic risk, operational risk, regulatory/
compliance risk and reputational risk. Companies got their
lowest ratings for their management of political/geopo-
litical risk, but even there, 31% of respondents said their
company was doing a very good or outstanding job.
OUCH!But just how much do executives real ly know about the risks
their company faces? To be sure, the majority (76%) said
they rate the need to align risk management with growth
strategy as very or extremely important,
while almost as many (68%) said that they
believe their company was walking that
talk and, indeed, aligning the two. But
startlingly, only 54% said they were con-
dent or very condent of how aware they
actually were of the risks associated with
their companys growth strategies.
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COPYRIGHT 2013 FORBES INSIGHTS | 25
Figure 18. The extent to which companies
align growth strategy and risk
varied by industry
Banking/Financial Services
Company rates the alignment as very
or extremely important
Company actually aligns the two
Construction
Company rates the alignment as very
or extremely important
Company actually aligns the two
Healthcare
Company rates the alignment as very
or extremely important
Company actually aligns the two
Real EstateCompany rates the alignment as very
or extremely important
Company actually aligns the two
86%
79%
77%
68%
54%
72%
66%
71%
Figure 19. as did the percentages of
executives who were aware of the risks in
their companys growth strategy
Banking/Financial Services
Construction
Healthcare
Real Estate
59%
57%
42%
60%
Conclusion: The low overall awareness scores
reected in Figure 19 cast serious doubt on the respon-
dents assessment of how well their company aligns risk
and growth strategies.
RATING PREPAREDNESS FOR CHANGEAbout 33% of executives gave their company average
scores when asked how well they were prepared to lever-
age a variety of scenarios, ranging from changes in weather
patterns to changes in oil prices. Still, there were some
industry-specic standouts reecting the industrys expo-
sure to particular risks and its ability to handle them. For
example, 59% of executives in construction said their com-
pany was very or extremely well prepared to leverage
lower energy prices, 56% of those in healthcare said their
company was similarly prepared to leverage healthcare
legislation, and 57% of respondents in banking/nancial
services thought their institution was prepared to leverage
continuing or worsening problems in the U.S. economy.
Not surprisingly, the majority of executives in all four
industries said their company was very or extremely well
prepared to leverage an improvement in the U.S. econ-
omy, with 67% of those in banking/nancial services
thinking that way, 60% in real estate, 58% in healthcare,
and 69% in construction.
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26 | THE SHARP SIDE OF RISK
READY FOR CATASTROPHE?Executives werent as condent as they might have been in
their companys preparedness for catastrophic emergencies.
Only 28% thought their company was well or extremely
well prepared for cyber terrorism, for example, 33% forsupply chain disruptions, and 20% for terrorist attacks
within the U.S.
These ndings may well reect the executives admit-
ted general lack of know how in such intangible risks (for
more, see Executives rate their own expertise, page 27).
But they also suggest a possible lack of awareness of how
ubiquitous these risks are, cyber attacks in particular. The
computer systems of American Express, JPMorgan Chase,
Exxon Mobil and many others have been attacked in
recent months. China and Iran are widely believed to be
behind the assaults, variously motivated by industrial
espionage or willful sabotage.
Not all cyber terrorism, or computer hacking, bears
the ngerprints of a foreign power, of course. International
hacking groups target big corporations, often seeming to do
so simply out of malice or conceit. Either way, some estimate
that cyber attacks cost U.S. companies billions of dollars.
Sony alone admitted a $171 million loss after an attack on
its PlayStation network in 2011. Disgruntled customers or
investors can also take to the ether, and if their attacks go
viral, which many do, the cost to a target company can run
high, both nancially and in battered reputation. Big-time
hackers and various social mediaTwitter, Facebook, blogs
and the likepresent a very real risk that respondents to the
survey seemed to underestimate.
Executives were better able to get their arms around
more easily-dened emergencies, like ood damage, and
showed some condence that their company had plans
in place to recover from them. For example, 49% said
they were very or totally satised that their company hadplanned to build or replace damaged infrastructure, and
43% felt the same about their companys plans to build or
replace damaged homes, commercial property or factories.
Some 47% said they were very or totally satised that their
company had planned how to nance any of the above.
Almost as many (46%) thought thered be no or little sig-
nicant delay if an emergency forced their company to
relocate offi ces or manufacturing facilities within the U.S.,
and 38% thought that would be the case abroad.
LIVING DANGEROUSLY?The executives in the survey generally saw their compa-
nys approach to risk as more proactive than cautious.
Among those who called their company cautious, 66%
gave economic uncertainty as the reason (86% in the bank-
ing/nancial services sector), 49% pointed to regulatory
uncertainty, and 40% to healthcare costs. Just over 40%
of real estate executives said their companies were proac-
tive or extremely proactive, making them marginally the
least likely to describe their outts that way. Highwoods
Properties Edward Fritsch gives three reasons for this rela-
tive caution.
Figure 20. How thin is the ice?
17% Were extremely or slightly cautious
39% We take on medium risk
44% Were slightly or extremely proactive
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COPYRIGHT 2013 FORBES INSIGHTS | 2
First, This is such a cyclical economy. If you get too
aggressive in the busines s, its only a matter of time before
youre out of business.
Second, Real estate companies need credibility. Its
really important, and you dont earn it on one project. Tokeep your investors, customers and bankers, you need to
be very calculated.
Third, Imagine sitting down today and trying to pre-
dict the GDP, the Dow, interest rates and housing starts
three years from now. You cant forecast these things. Its
the same with a new building. You dig a hole today for a
development that might be completed two or three years
out, not knowing where theyll be at that time.
Concludes Fritsch, Its always wise to aim carefully
before you shoot.
Among those who described their company as proac-
tive, a huge 71% credited its vision and direction for the
boldness. In (distant) second place, 40% cited the risk of
not being proactive. Executives in banking/nancial ser-
vices and healthcare were particularly sensitive on this
point45% and 46% of them, respectively, cited the need
of not being left at the gate by more risk-ready competi-
tors. The claim that proactivity was part of their corporate
DNA was cited by 37% of respondents. Construction
executives were by far the biggest proponents of such rea-
soning, with 60% of them voting that way.
EXECUTIVES RATE THEIR OWN EXPERTISERespondents had little personal involvement in assessing
more arcane but still potentially catastrophic risks and, in
fact, they dont know much about them. More than 45%
said they had little or no expertise in assessing the risk of
natural catastrophes such as an earthquake, for example,
compared with the 24% who said they had some or con-
siderable experti se and who therefore were more involved
in assessing the risk. Similar disparities showed up when
executives were asked to rate their expertise and involve-
ment in assessing the risk of changing weather patterns or
terrorist attacks within the U.S. Long shots though these
threats may be, all of them are stil l the stuff of current news
events and the executives lack of expertise is worrying.
They were more on top of how economic turmoil and
supply chain disruption might affect their company, but
not dramatically so. Some 35% still claimed little or no
expertise, versus 28% who said they had some or consider-
able expertise. More executives said they knew only a little
about how economic turmoil would affect their company
than those who said they knew a lot, with responses of
34% and 28%, respectively. This pattern was common in
all four industr ies, suggesting a broad need for help.
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28 | THE SHARP SIDE OF RISK
METHODOLOGY
The insights and commentary found in this report are derived from both a survey and personalinterviews.
In collaboration with Zurich in North America, Forbes Insights conducted a survey in February/
March 2013 that was completed by 414 U.S. executives, evenly spread among four industries: bank-
ing and financial services, construction, healthcare and real estate.
KEY DEMOGRAPHICS INCLUDE:
Executive title: SVP/VP/Director (45%), CEO/President/Owner (18%), CFO/COO (12%), Other
C-level executive (9%)
Company size:$25 million revenue to $99 million (38%), $100 million to $249 million (27%), $250
million to $499 million (23%), $500 million to $749 million (12%)
Survey results are believed to be reliable for informational and educational purposes only. Zurich
does not guarantee the accuracy of this information or any results and further assumes no liability
in connection with this survey. Zurich undertakes no obligation to publicly update or revise any of
this information, whether to reflect new information, future developments, events or circumstances
or otherwise. Nor does Zurich endorse or reject the information presented on this survey. Zurichs
name and logos are trademarks owned by Zurich Insurance Company Ltd.
ACKNOWLEDGMENTS
Forbes Insights and Zurich in North America extend their gratitude to these executives.
James R. Dan,CEO, Advocate Medical Group
Pam Davis, CEO, Edward Hospital and Health Services
David Desjardins,President and CEO, Acadia Federal Credit Union
Edward J. Fritsch,President and CEO, Highwoods Properties
Richard A. Grafmyre,President and CEO, Penns Woods Bancorp
Bruce Hyman, M.D.,Advocate Medical Group
Thomas F. Judson Jr.,Chairman and CEO, The Pike Company
Michael Kennedy,General Counsel, Associated General Contractors of America
John Murphy,President and CEO, Western Connecticut Health Network
Michael J. Pescatello,Executive Director, Radius HealthCare Center
Kenneth D. Simonson,Chief Economist, Associated General Contractors of America
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