Blue Sky Investments: An Analysis of Enterprise Risk Management

This report analyzes the enterprise risk management (ERM) and corporate governance challenges faced by Blue Sky Investments following a media report highlighting issues with the inclusion of undrawn debt facilities in its fee-earning assets under management (FEAUM). The report categorizes the various risks, including financial, strategic, IT, environmental, and reputational risks, using the ERM framework. It assesses the organization's risk culture and risk appetite, highlighting the misalignment between reported financials and actual profitability. The analysis covers the company's handling of financial risks such as credit, liquidity, and market risks, as well as strategic risks related to compliance and reporting. The report further discusses the potential of IT innovations in mitigating financial risks and addresses environmental risks stemming from competition. Finally, it emphasizes the importance of ERM in safeguarding the company's reputation. This document is available on Desklib, a platform offering a variety of study tools and solved assignments for students.

Running Head: ENTERPRISE RISK
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Enterprise Risk Management and Corporate Governance
Student’s Name
Institutional Affiliation

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Enterprise Risk Management and Corporate Governance
Introduction
Following the recent media report, Blue Sky is battling the challenge of credibility within the
organization’s system of governance. This issue results from undrawn debt facilities inclusion in
its FEAUM (fee-earning assets under management). The information provided in the market
update indicates that this situation caused Blue Sky to withdraw its guidance of profit for the two
subsequent financial years. This crisis became critical after the fund manager disclosed that the
credits, which were not used, were amounted to up to 20 percent of his assets under management
right to redemption that was disputed amounting to $ 4 billion (Shapiro & Poljak, 2018). The aim
of this disclosure was to make things clear concerning the actual nature of FEAUM of Blue Sky,
since the firm has been striving to restore its credibility. The information further reveals
organization has access to undrawn debt facilities amounting to $763.5 million for its investment
in real estate. In spite of this scenario, the undrawn debt is still component of fee-earning assets
of the company (Jacobs, 2018). This paper seeks to categorize the risks using the Enterprise Risk
Management (ERM) framework.
The Risk Culture of the Organization
As noted from the media, it is evident that the activities of the organization can expose it
to a myriad of risks. Such risks are categorized as financial, strategic, IT or information and
technology, environment, and reputation risks. In the context of the firm’s risk culture, its overall
risk management program has placed focus on the financial markets unpredictability. This
program also aims at reducing the potential severe impacts on the firm’s financial performance
(Blue Sky Alternative Investments Limited, 2017. Through the framework of ERM, the company

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has been to offer value for its stakeholders. This is based on the fact that the current situation has
had an impact on the organization and stakeholders based on the FEAUM and underlying
earning portrayed in Figures 1 and 2. According to this framework, the maximization of value is
attained when management comes up with objectives and the strategy to achieve an optimal
balance between the goals of return and growth and the associated risks. This can also be done
by efficient and effective deployment of resources to fulfill the objectives of the firm (Blue Sky
Alternative Investments Limited, 2017).
Figure 1: Free-earning (FEAUM)
Source: (Blue Sky Alternative Thinking, n.d, p. 5)

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Figure 2: Underlying earnings of Blue Sky (Blue Sky Alternative Thinking, n.d, p. 5)
The company is aware of the fact that investments in securities are exposed to market
risks among others and that there is no guarantee or assurance that the expected objectives of
investment will be met as reported in the Morningstar (2018). Additionally, the organization
understands that there may or may not be sustainability of its performance of a security in the
past in the offing and that the future performance cannot be known. It is also evident that the
firm has shown readiness for the fluctuation of a security investment return as well the principal
value of an investor in such a way that when redeemed, shares of an investor may be worth less
or more as compared to their initial cost. It is noteworthy that the current investment
performance of a security may be greater or lower as opposed to the performance of the
investment indicated within the report of the organization (Morningstar, 2018). The report also
provides the informational which the intended financial professionals and/or sophisticated

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investors can use. This should not be only information to be utilized by these Users or their
customers in the decision-making on investment.
Analysis of the Risk Appetite of the Organization
One of the key aspects of ERM framework is that there has to be an alignment of the risk
appetite and strategy. In this case, the management takes into account the risk appetite of the
company in the evaluation of the strategic alternatives, development of the mechanisms for the
management of the related risks, and setting of the associated objectives. Therefore, it is
important to analyze each risk category in the context of the organization’s risk appetite.
Financial Risks
The company seems to be struggling with the financials which comprise credit risk, liquidity
risk, and market risk. The managers have indicated that they are carrying out financial detective
job with the limited public information in pursuit of dealing with the related risks. They
acknowledge that they could not realize that undrawn debt was included in the financial report.
The financial experts revealed that the cash flow statements of Blue Sky had historically
indicated that the firm hard barely made profit on what the disclosure termed as the fees of
management. This situation implies that the company never experienced profitability based on
the cost of running the business subtracted from the annuity management fees (Shapiro & Poljak,
2018). Additionally, the idea of raising the equity resulted in a risk of whether firm would raise
new funds for its operations. Following this situation, Blue Sky has considered cutting down its
cost base to be lower than that of its annual recurring management charges amounting to nearly
$30 million. The CEO also reveals that there was an issue of tax imposition on the project
development costs. At this point, there was a need for one to choose the denominator that he or
she intends to utilize to be measured, equity, debt, and realizable value gross.

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Because of these risks, Blue Sky has also considered performing a vigilant liquidity risk
management to hedge the related risks. This approach has required the company to retain its
sufficient liquid assets, which include cash as well as the cash equivalents and available facilities
of borrowing. This consideration makes the firm to have the ability to pay debts they are due and
payable. The company demonstrates it risk appetite through the management of liquidity risk by
continuous matching of the maturity profiles of financial liabilities and assets together with
monitoring of the actual as well as the forecast cash flows. Therefore, the management of the
firm finds ERM framework helpful in attaining the targets of performance and profitability of the
organization and to prevent loss of the resources.
In terms of the market risks, the time of the release of the media report appears to be the
first time whereby Blue Sky has attempted to explain to the market the manner in which it has
reconciled its assets. The firm had been accused for over-estimation of the metric, where Blue
Sky showed no willingness to break the constituents of its stronghold, thought to have been
bound by commercial trust. The issues surrounding the company compelled the top management
to suggest the need for the market regulator to examine activities of short selling that place the
firm in a risky condition (Shapiro & Poljak, 2018).
Strategic Risks
The determination of the ERM to be effective in each of the organizational objectives of Blue
Sky is necessary when managing the related risks. This approach requires that the board of
directors as well as the management should have a significant assurance that they have an
understanding of how the strategic and operations objectives of the firm are being attained
(Flaherty & Maki, 2004). In a similar vein, the management of this entity has focused on
ensuring that its reporting is not only reliable but also there is compliance with the applicable

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regulations and rules. The four categories of the organizational objectives that ERM can be
directed to achieve within Blue Sky include the operations, strategic, compliance, and reporting
objectives (Flaherty & Maki, 2004). Indeed, the problem surrounding the firm emanates from the
risks associated with the efforts towards achieving these four groups of objectives.
Based on the media report concerning the current situation of Blue Sky, objectives
associated with reliability of compliance and reporting with rules and regulations seem to be
within the control of the organization. In this case, it is expected that the ERM will offer
reasonable assurance of meeting the organizational goals in response to the strategic risks.
However, it should be noted that achieving strategic and operations objectives can be affected by
the external events, which are not always within the control of an organization. One of such
external events, as indicated in the media report, is that the market has made a bad judgment
concerning the health of the company’s business, in relation to the disclosure levels which they
can offer at the moment (Shapiro & Poljak, 2018). It is possible that the ERM can offer a
reasonable assurance or guarantee that management, as well as the board in its role of oversight,
are aware of the extent to which the company is going toward achieving the objectives in a
timely way. Following this account, ERM framework is not confined to being a mere serial
process, where only one element severely impacts the next as noted by AIRMIC, Alarm, and
IRM (2010). It takes the form of a multidirectional and iterative process where nearly any
element does and can affect another component within an organization when seeking to address
the strategic risks.
Information and Technology (IT) Risks
The company can hedge the risks related to its financial and accounting activities by adopting
innovation in its operations in the context of information and technology. With modern

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innovations, financial reporting and disclosure can be made easier and there can be a high level
of accuracy in such aspects. The firm has shown its ability to invest in IT systems as alternative
to hedging the related risks. In this case, there has been a need for data aggregation or integration
to ensure automation as well as the flexibility of the process like reporting, and particularly
where the options have had distinct and separate set of the forums of technology (Drisko &
Truong, 2015). Nonetheless, there are risks associated with the implementation of IT systems. It
expected that this strategy may result in additional operational costs of the business since the IT
equipment and personnel are expensive. Conducting training to the employees concerning the
new technological advances may also add to such costs. Notwithstanding these risks,
implementation of IT systems in the organizations financial reporting has long-lasting benefits
(Drisko & Truong, 2015).
Environment Risk
Blue Sky also seems to be operating in a highly competitive business environment.
Consequently, it faces an ever increasing competition from its rivals in the marketplace. There is
remarkable evidence that the competitors of the companies in Australia and overseas are many,
large multinational organizations among others. It cannot be assured that the rivals of Blue Sky
will not do well in the development of more effective products and take market share from those
that have been, or are under development, by the firm. The competitors of the organization at all
times make some decisions on pricing, marketing, or service or acquisitions which could
severely influence the business of the firm, financial conditions, and results of operations. All
these efforts constitute their strategic response to the changes in the competitive business
environment in which they have to survive. Therefore, the firm has become aware of the risks
associated with such competition and shifted focus on making strategies that would make the

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company have more competitive advantage in the market. For instance, it has started
concentrating on the long-term investments in the private market to increase its profitability and
performance.
Reputation Risk
ERM has been useful ensuring that there is effective compliance and reporting with rules and
regulations which, in turn assist in avoiding damage to the reputation of the company and the
related consequences. Thus, this framework is important to an organization since it helps it get to
a place where it wishes to and shun scandals and surprises in the course of its business. Because
of this condition, the firm intends to ensure a strong track record in the delivery of improved
services and goods and compliance with the rule and regulations under which the firms should
operate (Blue Sky Alternative Investments Limited, 2018).
Recommendations
As noted from the analysis of the risks of the company, there are is a need for changes to
be made internally by the Blue Sky to avoid or deal with such a risk event in the offing in
relation to corporate governance. The company has to disclose whether it possesses any material
exposure to environmental, social, and economic sustainability risks, and, in case it does, the
manner in which it manages or plans to address such risks is important (ASX Corporate
Governance Council, 2014, p. 30). The recommended changes are as highlighted below:
 The firm should consider focusing on protecting its integrity in corporate to avoid the
reputation risks in the offing. It is required that the company needs to have a rigorous and
formal process which can facilitate independent verification and as well protect its
corporate reporting integrity (ASX Corporate Governance Council, 2014, p. 4).

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 The company also needs to have an understanding that increasing the global concerns for
the community of business to handle the issues of social, economic, and environmental
sustainability, as well as raising the need from investors, and particularly institutional
investors. This approach can be considered for achieving greater transparency on such
matters for company to properly assess investment risks (ASX Corporate Governance
Council, 2014, p. 4).
 Laying a solid foundation for oversight and management will be important and will the
firm to establish and well disclose the respective responsibilities and roles of its board
and management. This should also be demonstrated in the manner in which their
performance is evaluated and monitored.
 Recognition and management risk also needs to form part of the firm’s ERM framework.
In this case, the company has to establish a risk management framework that is sound and
as well review the effectiveness of such framework periodically.

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References
AIRMIC, Alarm, & IRM, (2010). A structure approach enterprise risk management (ERM) and
the requirements of ISO 31000 [Online]. Available at
https://www.theirm.org/media/886062/ISO3100_doc.pdf [accessed on 27 May 2018]
ASX Corporate Governance Council, (2014). Corporate governance principles and
recommendations (3rd Edition). [Online]. Available at
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf [accessed on 27 May 27, 2018]
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year ended 31 December 2017 [Online]. Available at
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May 2018]

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management [Online]. Available at https://www.businessinsider.com.au/blue-sky-
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[accessed on 27 May 2018]
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