UK: Risky business? Managing risk and creating value in a volatile world

The past decade was characterised by dramatic change and widespread uncertainty; rapid technological advances; fluctuating consumer confidence; and intense global competition, notably from China and India. The result has been a more complex and demanding operating environment for executive teams.

All of these factors are profoundly destabilising – add in the effects on capital markets of one-off events such as the Asian financial crisis, the bursting of the dot-com bubble, September 11th, SARS and the Iraq conflict and it’s easy to understand why volatility has become a constant.

The key questions are – how do market volatility and external factors affect companies in the UK? Are UK-listed businesses more exposed than their counterparts around the world? And if so, what can they do to prosper in this environment?

This report is a starting point to answering these questions. We looked at how companies recovered their value after extreme events. We found that firms in the UK are indeed at greater risk from stock volatility. We also found that risk management, although imperative, is only part of the answer. The other part is value creation – creating a ‘value cushion’ that protects companies from external volatility.

To prosper in uncertain times, a company must identify where all its value lies and how that value can be protected, then consistently communicate its strategy to all stakeholders, not just investors. We do not purport to have a silver bullet to create value, but we do explore how companies that have focused on such strategies have protected their value during inevitable shocks to the market.

This report is part of Deloitte’s ongoing commitment to foster and enhance the UK business environment. We hope you find it useful in provoking boardroom debate.

1. Foundations for success based on relentless value creation aspirations. The last ten years have proved extremely turbulent for UK listed corporates. The lesson for their managers is that value is and will always be at risk from unexpected, unavoidable (internal and external) events. Our study shows, however, that value can still be created in this volatile environment and it is critical to access a value creating, rather than value destroying spiral. We found from our analysis of UK listed companies compared with a global basket of listed stocks between 1995 and 2005, that the most value creating, resilient UK companies focus on long-term risk management strategies which build material value for their stakeholders, e.g. brand, reputation, unique organisational practices and strategies. These value creating corporates go on not only to recover any value lost, but also to add further value. By contrast, value destroyers, the least resilient UK companies, focus on short-term tactics that may shield themselves from outside risks, but do not build long term value for their stakeholders. They lack the capability to build and manage the resilience-creating intangible assets, such as unique business practices, strong brand and robust information flows. In fact 80 percent of value destroyers have never fully recovered their lost value. Our research shows a contrast between value creators and value destroyers that could not be starker. Future success of UK corporates rests on careful integration and equal treatment of tangible and intangible assets within a value orientated strategy.
2. UK markets have been more volatile than global markets over the last ten years. UK-listed businesses in the FTSE 100 and FTSE 250 experienced more volatility than their counterparts in the MSCI World Index¹. However, there is an intrinsic volatility for the FTSE 250 which could raise governance issues. This makes long-term communication strategies with stakeholders particularly important.
3. It takes a long time for firms to recover, if they ever do. The value losses for UK companies were generally greater than their international counterparts. British equities were also less likely to recover their value within a year. Even more important, our research found that one quarter of UK firms that suffered a one-off shock have yet to recover their lost value – which helps explain why life at the top has become increasingly perilous for Britain’s executives.
4. Companies in the FTSE 250 index are most vulnerable. Our research shows that smaller listed UK corporates have experienced the greatest volatility. Over the past ten years, nearly half of FTSE 250 companies experienced one or more events where they lost at least a third of their value – compared to roughly a quarter of the FTSE 100 companies. As a consequence, some FTSE 250 corporates may find themselves sucked into the vicious spiral of dependency on short-term share price movements – a dependency that makes them overly risk averse, and ultimately perpetuates their volatility.
5. A call to action – attack is the best form of defence. Our call to action is on two fronts. First, in boardrooms of UK companies the executive team needs to find the right balance between tangible and intangible assets within their business. And crucially, they must communicate this value creating message to stakeholders – we identify three groups in this report: participating, assessing and influencing – on a continuous basis. Equally, it must be recognised that a strategy of risk avoidance does not protect a company from external shocks. Instead, it leaves the company weak and vulnerable. In our view, the best way to overcome market shocks is through value creation – making business less risky and more value enhancing. Second, at a national level, now is the time for a serious debate around the issue of why value is more at risk for UK corporates. Why is it that UK corporates are more prone to value loss due to market volatility and how do we compare with other major economies? It is imperative to understand in more detail what best practices can be deployed by UK corporates to ensure that the value creation process becomes less risky.

The greatest challenge for any Board of Directors is sustaining long-term competitiveness, performance and growth while at the same time guarding against a sudden and dramatic reduction in share price. Over the last ten years this challenge has become increasingly difficult – even over-bearing – for UK corporates owing to widespread risk and high volatility in our equity markets. A string of major one-off events, from corporate governance failures to geo-political catastrophes, has created an environment where consistent performance and market value are extremely difficult to sustain.

This report tackles the problem by posing – and answering – four key questions:

1. How have UK companies responded to one of the most turbulent decades in recent memory?
2. How does market volatility in the UK compare to the MSCI World Index?
3. Why are some companies more resilient in the face of market volatility and extreme events?
4. What creates the ‘bounce back capability‘ that allows some firms to resist these shocks and prosper in periods of instability?

To understand the relationship between risk management and value, we must first consider how a company’s diverse stakeholders perceive value.

These stakeholders include (see Exhibit 1):

• Participating stakeholders – management, employees, customers and suppliers. This group assesses value in terms such as financial remuneration, working environment, company reputation, governance and brand.

• Assessing stakeholders – typically investors, regulators, governments and banks. This group quantifies value in the firm’s asset base and market valuation.

• Influencing stakeholders – analysts, credit agencies, industry bodies and the media. This group looks at market valuation and any influences on value.

Each of these stakeholder groups view the firm’s value in a different way – and each faces a different kind of risk.

Against this backdrop of stakeholder value, there have been a number of external events that have shaped value creation and increased volatility in the UK.

• One-off shocks. A series of external, uncontrollable shocks that indiscriminately destroyed value across all financial markets. There have been four main types of shock: (1) financial market shock – e.g., the Asian financial market crash – triggered by dramatic shifts in confidence, often related to currency; (2) business malpractice events, which have been serious enough to drive some major corporates into bankruptcy; (3) terrorism shocks, such as September 11th; and (4) environmental and health disasters, such as Asian Bird Flu.

• Global integration of markets. Technology, regulation, globalisation (specifically mergers and acquisitions), and the growing number of shocks have increased the interdependency between global and national markets.The close alignment between the FTSE 100 and MSCI World Index since 1998 suggests that the business factors driving global markets may be converging for larger companies. These include technological and regulatory changes, longterm changes in relationships with analysts and investors (including quarterly reporting), and the ability for larger businesses to take a longer term perspective than smaller firms, such as those in the FTSE 250.

• Government policy. Policy makers in the UK have made moves to strengthen corporate governance and protect against business and market failures. Their main thrust has been providing guidelines, including: the Myners Report (2001), which addressed the shortcomings of the investment management industry; the Higgs Report (2002), aimed at increasing boardroom transparency; and the Operating and Financial Review (effective from 2005), which recommended that the UK corporate sector provide accounting reports on intangibles.

• Market liquidity. While the liquidity of UK stock markets has increased over the last ten years, this has not contributed to greater volatility (see Exhibit 2).

One-off events are, by definition, difficult to predict or protect against. Yet their occurrence is inevitable – and their potential for value destruction immense.

In this section, we examine how UK corporates have performed relative to major corporations around the world, given the volatile environment. We look first at the comparative global position, then specifically at the performance of the FTSE 100 and FTSE 250 indices between 1995 and 2005.

According to our analysis of firms in the MSCI World Index:

• Nearly half of the 1,000 largest global companies suffered value losses of more than 20 percent in any one month during the decade analysed by the study.

• By the end of 2003, roughly one fifth had not recovered their original value. Another quarter took more than a year to recover their lost value.

• Value loss was the result of operational, strategic, financial and market environment risks that were often interdependent. Of these risks, the most common were strategic and market environment risks. Financial risk was the least likely to drive value loss.

Our global analysis showed that companies suffering the greatest losses in value were often exposed to multiple risks, did not understand the interdependency of risks, and did not plan for one-off damaging events².

Exhibit 3 shows the biggest one-day losses in value for the FTSE 100 and 250. As with the global analysis, the greatest value losses were clustered around major external events such as the Asian financial crisis in 1998, the bursting of the dot-com bubble in 2000, September 11th, and the corporate malpractice of 2002.

However, when we conduct a closer comparison of the different UK indices and examine their underlying volatility, we find some interesting differences. For example, over the entire ten year period, the UK indices have had a greater volatility than the MSCI World Index (5.3 percent for the FTSE 100 and 6.9 percent for the FTSE 250, versus 2.1 percent for the MSCI World Index). After 1998, the MSCI World Index and FTSE 100 tracked each other very closely; however, the FTSE 250 remained significantly more volatile throughout.

There are three likely reasons for the FTSE 250’s greater volatility, all of them related. First, the companies themselves are smaller, meaning they are inherently riskier investments (higher concentration long risk). Second, that inherent risk and volatility tends to elicit a hair-trigger response from investors in response to market fluctuations, perpetuating a vicious cycle of short-term thinking. Third, fund managers – which tend to follow more stable investment patterns – are increasingly favouring investments in larger, less risky, corporates.

Both executive compensation and performance measurement can also contribute to short-term thinking and hence volatility. The standard practice of linking compensation and incentives to share price tends to make executives risk-averse. That, in turn, undermines company performance – thereby creating a vicious circle of rising volatility and lost value. Further, in a survey carried out in 2004 for the Institute of Chartered Accountants in England and Wales (ICAEW), fund managers conveyed that a mix of tangible and intangible assets is how they assess investment opportunities.

Overall, our study suggests that UK corporates are significantly more vulnerable to value loss than their global counterparts:

• The FTSE 100 and FTSE 250 indices, on average, lost 15 percent more value than the MSCI World Index in response to extreme events³.

• 30 percent more of the FTSE 250’s total value was affected by extreme events, compared to the total impact on the MSCI World Index.

• UK firms were also far more likely to suffer a large single day loss (25 percent or more) in response to an extreme event. In the MSCI World Index, only a quarter of the companies experienced a one-day loss of that magnitude. In the UK, nearly 40 percent of the firms experienced such a loss. Looking at the odds for individual firms, relative to their global counterparts, FTSE 100 firms were 21 percent more likely to suffer a large one-day loss; FTSE 250 firms were 35 percent more likely.

Most importantly, UK firms generally took longer to recover than their MSCI World Index counterparts. Only 41 percent of UK firms that experienced a major value loss recovered their value within a year, compared to 50 percent for companies in the MSCI World Index. Moreover, 25 percent of UK companies never recovered their value during the decade from 1995 to 2005, compared to 22 percent in the MSCI World Index.

1. Over the past decade, UK stock markets have been more volatile than the MSCI World Index.
2. One-off events have a greater impact. Overall, a higher percentage of the UK’s total market value is at risk.
3. Similarly, the impact of one-off, exogenous, events at the company level is also higher in the UK. If the company’s internal risks (strategy, operations, external relations and finance) are not minimised, the impact of these events will also be correspondingly greater.

This section examines how individual companies responded to the tumultuous decade, and provides useful lessons from the companies that prospered – insights that others can use to smooth out their own ride on the volatility roller-coaster.

Our findings have derived from two distinct analyses. The first analysis is based on public domain press and broker commentary for the FTSE 100 and FTSE 250 companies that experienced the largest single day increases/decreases in value from 1995 to 2005. The second analysis is based on case studies of a group of UK companies that went from zero to hero (or hero to super-hero) – transforming themselves into global titans over the course of the decade.

This analysis examines press and analyst commentary for the 20 most and least resilient companies in the FTSE 100 and FTSE 250. We monitored commentary for the month before and month after each of these companies’ lowest valuation during the period. Valuations were based on total shareholder return, market capitalisation and share price.

The last ten years has proven extremely turbulent for UK listed corporates. The lesson for their managers is that value is and will always be at risk from unexpected, unavoidable (internal and external) events. Our study shows, however, that value can still be created in this volatile environment and it is critical to access the value creating, rather than value destroying spiral.

We found that the most value creating, resilient companies blend together tangible and intangible assets to provide a ‘value cushion’ against major shocks. These value creating corporates go on not only to recover any value lost, but to add further value. By contrast, value destroyers tended to focus on tangible assets, such as property or equipment, as a way of protecting themselves against risks. They lacked the capability to build and manage the resilience-creating intangible assets, such as unique business practices, strong brand and robust information flows.

The contrast between value creators and value destroyers could not be starker – prior to and following its greatest losses, 76.7 percent of all market mentions regarding the value creators emphasised ongoing value creation plans and activities. In contrast, the market commentary regarding the value destroyers shows their value creation plans and activities in only 25.4 percent of market mentions. Future success of UK corporates rests on careful integration and equal treatment of tangible and intangible assets within a value orientated strategy.

Exhibit 5 represents the most resilient companies (value creators). Our analysis shows the management of these companies was clearly focused on value creation, even at low points in their valuation. This was apparent across all categories: strategy, operational, financial and external market.

In general, all of these value creating companies had a well-balanced portfolio of risk and value management strategies. They were not, of course, immune to risk. But by focusing on value creation, they were able to create a ‘value cushion’ that helped protect them from volatility and risk – and even more crucially, allowed them to have a significant bounce back capability, enabling them to quickly recover from one-off shocks.

We found that there is no one-size fits all ‘value cushion’, rather they varied by company. For example:

1. One company de-merged its two distinct businesses (each of which has since rationalised its portfolio); established innovation processes for both products and people management; and implemented controls to ensure the effectiveness of its intangible assets.
2. Another company deployed an ecosystem of strategies focused on: ensuring a strong future product pipeline; researching the environmental impact of its business; and raising the public’s understanding of its work. This multi-faceted approach was largely a response to the intrinsic risks of the business, which included long product lead times and a need for product safety.

However, one common factor that distinguished the value creators was an extraordinary focus on intangible assets such as unique business practices, a strong brand, and organisational knowledge (see sidebar). Although these intangibles were not strictly limited to the resilient performers, they were certainly more prevalent among that elite group. Value orientated companies are constantly looking for ways to improve and differentiate themselves – and these intangibles essentially serve to help the company maximise the value of all its assets – in good times and in bad.

Exhibit 6 represents the least resilient companies (value destroyers). Once again, the analysis is extremely stark. The majority of market coverage, for the month before and after the low-point in value, revolved around the risks each business was facing. Management were evidently fixated on risk, not creating value. This self-inflicted, flawed approach was almost universal.

Other features common to these companies included: badly managed mergers or de-mergers; weak or missed profit forecasts; and overreliance on one product or service. Indeed, one company had simultaneously issued a profit warning, initiated a major restructuring, and started pursuing an aggressive acquisition strategy just when the economy was faltering. Further, it’s worth noting that 80 percent of these least resilient companies never fully recovered from the shocks. They simply had no bounce back capability.

The second analysis looks at five resilient companies selected as outlined in the qualitative methodological appendix. Each of these companies took calculated risks to create value, and focused on unique organisational practices and strategies to achieve differentiation.

The value of a company is generated by the sum of its tangible and intangible assets. The former, typically physical or financial, are easily quantified. The latter are, by definition, not readily measurable – but equally important. Intangibles include:

• Unique organisational practices and strategies⁴. For most companies this is the most important intangible upon which all other intangible assets are built.

• Employees who, through a company’s human capital practices, also have a stake in the business⁵.

• Brand and reputation. The former is the value aspiration; the latter is the value perception. Both have an impact on the attractiveness of the company to its client base and employees.

• Knowledge capital, which is widely regarded as a major driver of economic growth and wealth creation⁶.

• Civil society that provides land and raw materials – thereby taking a social, environmental or ethical ‘risk stake’ in the business.

The value of intangibles is the gap between a company’s total value and the value of its tangible assets.

HSBC made a quick recovery from the Asian financial crisis, and has delivered strong financial results since 1999 – largely driven by an aggressive acquisition strategy overseas, and by continued strength in the UK. Today, the firm is first in its sector for economic value added. It is also recognised as a good corporate citizen, proudly appearing on the FTSE4Good index.

HSBC’s recovery and strength are the direct results of a five year strategy based on "managing for value".

The strategy emphasises growth through strategic acquisition and strong financial management, and through intangibles such as innovation, people, customers and ethics.

Despite the turbulence and risks inherent to the last decade, BP has built its value to become the number two oil company in the world. It has done this through a series of acquisitions and a major joint venture in Russia. Under the mantra "boost scale and reach" it has reaped economies of scale and shed assets to build a robust financial base. As a result, its share price varied by only three percent over the whole of the ten year period, and it is the top performer in terms of economic value added for its sector.

The interdependency of risk and value management has been a key driver of BP’s success. There have been five key drivers to this. First, it has created an outstanding portfolio of material strategic asset and market positions emphasising the need for careful management of diverse assets. Second, it has focused on developing leadership talent all the way through the organisation by encouraging diversity and inclusiveness alongside an entirely merit-based selection procedure. Third, it has focused on its values, reputation and brand throughout the organisation and has linked these to the adoption of a "best in class" business planning and performance management system to ensure that strategies are linked with reward and development systems. Fourth, it has taken a risk-based approach to focus strategic attention on the environmental and geopolitical risks that are a feature of the sector. In particular it has built long term relationships with governments and invested substantial amounts for research into renewable energy sources.

The fifth driver rests in the way BP has managed its unique combination of tangible and intangible assets. Both are seen as equal value drivers and are treated in an identical way when any new venture – such as the merger with Amoco, or the Joint Venture entry into Russia – is undertaken. This simultaneous and complementary management of tangible and intangible asset building is where the real competitive edge of the business is found.

Because the company’s ethical and environmental stance is a key part of success in its sector, it emphasises the importance of a strong stance on CO2 emissions, and links with governments in some of the more volatile global regions. The fact that, despite the obvious challenges posed by its geopolitical locations, it is a FTSE4Good company demonstrates how well it has done this. It has a charismatic and visionary CEO but, critically, its leadership culture is also distributed throughout the firm with all employees given a forum in the workplace to act as leaders and take responsibility for their roles. It commits substantial resources to the search for alternative renewable energy and has managed to invest in these intangible areas as well as aggressive expansion by communicating its strategy clearly to investors and analysts.

As Nick Butler, BP Group Vice President of Strategy says, "BP has learned that to create a successful performance outcome requires the application of a carefully crafted intangibles strategy combined with a portfolio asset strategy. We have invested significant resources in knowledge, talent, diversity and reputation management to achieve this."

Over the last ten years, Royal Bank of Scotland (RBS) has successfully negotiated every major market shock. This resilience resulted from the bank’s broad based market strategy, and its diverse collection of revenue streams – particularly from new products and new geographies.

The bank’s value creation strategy has five major elements:

• Diversifying talent. Making a conscious effort to blend in-house talent with an influx of expertise from other industries.

• Sharing information and clarifying roles. Building the capabilities and agility to anticipate and respond to critical events and market shocks.

• Diversifying investors. Not becoming too dependent on one type of investor.

• Communicating to employees. Aligning behaviour with strategy. (A recent survey by the bank showed that 85 percent of its employees clearly understood the overall business objectives).

• Diversifying deals. Executing deals wherever good opportunities arise.

Through these intangibles – and a diversified growth strategy – RBS has shaped itself into the world’s fifth largest bank.

Like many other financial services companies, Standard Chartered’s flashpoint for value destruction was the Asian financial crisis in 1998. The firm’s challenge was to overcome the obvious external risk caused by global financial instability, while at the same time boldly expanding into the very markets where the crisis had originated. Standard Chartered recovered quickly, and within 12 months had actually exceeded its pre-crisis valuation.

The company succeeded by re-orienting its strategic thinking around the fundamental principles of value creation: value-based business, strong ethical performance and exemplary governance practices. The strategy combined organic growth with selective mergers and acquisitions. It has also focused on innovative products, services, and management systems that helped differentiate the brand and improve productivity.

Above all, Standard Chartered acknowledged that the biggest operating risk was change itself. Accelerated change and intensive competition increase a firm’s risk.

To succeed, a financial services company – or any company, for that matter – must be able to react with agility, essentially creating its own resilience to external shocks. That agility stems from the intangibles: recruiting and developing the right talent. Creating a work environment that helps people perform their best. Encouraging a leadership culture and aligning actions with business strategy. Those intangible assets – and others – have helped Standard Chartered build a strong brand that is synonymous with trust and customer service.

Since 1984, Vodafone has grown into a global business with revenues of over £34 billion for the year to 31 March 2005 compared with £3 billion in 1998. Its annual report attributes much of this growth to two transformational transactions in 1999 and 2000. The report also notes the importance of understanding performance in terms of the way in which Vodafone has focused on delivering value to all its stakeholders and how it engages with them in the following ways:

• First, it has placed its customers at the centre of its strategy, focusing on providing services to address the diverse communication requirements of its customer base globally through pricing and customer management strategies.

• Second, it has sought to improve delivery to customers through service innovation to take advantage of the Group’s lead in the deployment of new technology, from 2G to 2.5G and most recently 3G.

• Third, it fosters a people-based culture and a reputation for understanding stakeholders beyond the immediate customer and employee base.

• Fourth, it has systems to share best practice globally to provide uniform standards of delivery to customers and stakeholders.

• Lastly, it views intangible aspects of its business as crucial and has been reporting on many of these in the form of its Corporate Responsibility Report since 2000. Effective governance and management are treated as indivisible aspects of value building. Assurance mechanisms are in place to ensure that its targets in relation to safety, people and the environment are continually monitored, in an attempt to ensure that the Group maintains its position in the FTSE4Good and Dow Jones Sustainability indices.

The process of value creation is central to building a dynamic and competitive UK economy. This report highlights three major trends influencing the value creation process. First, volatile market conditions have had a polarising effect on the ability of UK companies to create value. Second, we have illustrated a stark difference between the strategies of value creators and those companies prone to destroying value. Third, there are no limits to growth. The liquidity of UK markets has grown in absolute terms over the last decade. Further, a handful of UK companies have gone literally from zero to hero, from FTSE 250 to the upper echelons of the global 100 – witness the rise of The Royal Bank of Scotland Group and Vodafone.

Going forward the relationship between market volatility and value creation requires a national debate. It will play a key part in determining the future success of UK plc, even the wealth of the man on the street. At a minimum, this report has provided some insights around some of these critical issues to kick start this debate. Our call to action is on two levels – in the boardroom and amongst policy makers.

Running a major business in the UK has never been more challenging. Over the last decade, UK-listed companies endured more volatility than their global counterparts – making it exceedingly difficult to achieve their business goals and deliver sustained performance.

Running a FTSE 250 listed corporate in the UK has been even tougher. Not only has the FTSE 250 experienced more volatility; according to our study, smaller corporates are even less likely to recover their lost value. Overall a quarter of the firms we studied never regained their original value. For most boards, this is an unacceptable result – and is likely to make the position of CEO or CFO tenuous at best. Action is required.

It is imperative that the management team immediately address four key issues:

• Strong and consistent value creation messages around the strategic, operational, financial and market activities need to be developed.

• A robust buffer between the business and the volatility and risks of the market needs to be enhanced through the development of intangible assets. Although intangibles form a sizeable proportion of the shareholder value in a business, they are all too often neglected in favour of shorter-term responses to perceived risk.

• Communication to all stakeholders – assessing, influencing and participating – needs to happen on a systematic and continuous basis.

• The management team must not deviate from this strategy when unavoidable, unpredictable events hit the business. Similarly, there are some actions that need to be eradicated from the business. Value destruction can be self-inflicted. In the face of volatility the business should not turn inwards and focus on risk mitigation, or overly focus on tangible assets alone. Investors are not the only important stakeholders in the business – it is important to also focus on internal communications alongside market messaging. To create a virtuous, value-based risk management circle it is important to incorporate four key components into any strategy:

• Rethink risk management on the basis of a complete picture of a business. Every constituent of value must be identified and its risk assessed.

• Understand the three types of stakeholders, and how each assesses a company’s value. Prioritise accordingly.

• Build value prioritisation into a risk management strategy.

• Monitor continuously.

At a national level, now is the time for a serious debate around the issue of why value is more at risk for UK corporates. Why is it that UK corporates are more prone to value loss? How do we compare with other major economies? What are the implications for UK plc? It is imperative to understand what best practices can be deployed by UK corporates to ensure that the value creation process becomes less risky.

We analysed share prices, market capitalisation and Total Shareholder Return (TSR) movements over a ten-year period from January 1995, and identified those companies who have experienced extreme losses or extreme value increases over that time. The results are normalised to remove exogenous fluctuations and, hence, to isolate the factors that directly affect firms. We compared the volatility of global and UK markets, and investigated the impact of one-off events using significant value theory approach that allows us to analyse significant deviations from the mean of probability distributions – in other words, events like September 11th or the Asian financial crisis. The general theory sets out to assess the type of probability distributions generated by such processes.

We compared the trends in the UK with the Morgan Stanley Capital International (MSCI) World Index, building on the methodology developed by Deloitte Research8. We took the press and analyst reports for those companies with the biggest one day losses a month before and a month after their lowest valuation. Our focus was to understand how these losses were reported in order to identify some of the risks that they were facing at the time, external, strategic, operational or financial.

1. We used the data available from DataStream of FTSE 250 and 100 and MSCI World Index Month Average Price Indices from Jan 1995 to Feb 2005 in order to assess the probabilities of any rapid realignment in the FTSE and MSCI World Index.
2. We computed returns used in the analysis to remove stationary issues and to provide scale free measures of possible future (percentage) price changes.
3. We explored the distributional properties of these FTSE price returns to see that they deviated substantially from Gaussian distribution.
4. This emphasised that substantial statistical errors could be made if the probability of any tail event were to be calculated assuming a Gaussian distribution.
5. We got the variance of risk factor I in time step by using the Exponentially Weighted Moving Averages (EWMA):
6. 
   
7. The parameters of the exceedances distribution are estimated using the maximum likelihood estimation for the left tail of the marginal distributions:
8. 
9. We calibrate using an historical dataset of n risk factors on-period (daily) log-returns:
   
10. We filtered the data using the variances (6) estimated with EWMA to obtain as historical data as independent determinations sampled from a common c.d.f.
11. We plot the exceedances cumulative probabilities and notice that EVT gives unbiased results and accounts for heavy tails.
12. The VaR estimate is calculated by inverting the tail estimate shown below, so as to get:
    
13. The risk measures reported assuming normality are biased. Using EVT, we get higher and unbiased risk measures.
14. We made a plot of the volatilities of FTSE 100, 250 and MSCI World Index.

1. We gathered the daily average stock price, total shareholder return (TSR) and market capitalisation data for ten years from January 1995-January 2005 of the FTSE 250 companies by Market Value on 31 January 2005 from Thomson Financial – Datastream.
2. Next we calculated a one month stock price moving average for each of the measures for all FTSE 100 and 250 companies to eliminate volatility.
3. We normalised the one month stock price and TSR moving average to reflect the value gain or loss only due to individual company performance (unsystematic risk).
4. We calculated the percentage change in normalised one month period moving average over one month period for each daily record over the ten-year period for MSCI World Index.
5. We selected the highest negative percentage change and corresponding data for each company over the ten-year period for all FTSE 100 and FTSE 250.
6. We conducted a resiliency test by calculating the number of days for which the normalised one month stock price moving average was below the value that was attained on the date at which it hit the highest negative percentage change.
7. We conducted a recovery test by calculating the number of days for which the normalised one month stock price moving average was below the value that was attained one month before the date at which it hit the highest negative percentage change.
8. We conducted the same test on the FTSE4Good index to understand the role of corporate responsibility in value creation.

1. On average we reviewed around 100 articles per company from all of the major UK press and business information sources. These include all of the UK business broadsheets and other key business information sources like The Investors Chronicle, Wall Street Journal and The Economist. We looked at around six to eight broker reports per company to get as full a picture on their value/risk proposition as possible.
2. The next phase was identifying the key value and risk factors associated for each particular company from all of the information contained in the press and analyst reports. These risk and value factors were grouped into four categories – Operational, Strategic, Financial and External.
3. The key value and risk drivers identified were then summarised and we recorded the number of risk and value factors across each category. Often companies had both risk and value elements in their strategy and operations. If a company had several risk or value factors in the same category this was also noted.
4. The case studies were determined by their top five ranking based on a basket of three indicators – largest single day share price movement, FTSE4Good index and Economic Value Added (EVA) rankings. The share price movements in our sample are based on largest single day increases in each of the three measures of value (market capitalisation, total shareholder return and share price). The FTSE4Good and the EVA rankings provided proxies for the intangible value within each firm.

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