HELPING THE BOARD MAKE INVESTMENT DECISIONS
Exhibit 35.17 shows how AOL's ERM Framework ultimately assists its board of directors in making key investment decisions about its portfolio of foreign investee companies.
Horizontal movements in the investment performance dashboard represent a change in the performance score. On that front, an increase in the performance score requires more attention. But a decrease in the performance score (financial or risk scores) may also call for further analysis, because, as we know from the risk/return relationship, a reduction in the risk profile may also mean a corresponding decrease in profitability that, if sustained, would mean a relative stagnation in AOL's investment value in the future. Possible strategic decisions for that axis of the dashboard range from reviewing the business model, the strategies, or the financial processes, the capital required to sustain or grow the business or to simply divest it.
Vertical movements in the investment performance dashboard represent a change in investment value. As explained earlier, a reduction in value indicates a lower risk in the matrix as long as it is a result of selling a portion of the business. Otherwise, a decrease in valuation is obviously a negative sign. The possible actions are similar to those above: review with a view to maintain or to divest.
Exhibit 35.15 Investment Performance Dashboard Comparison
Exhibit 35.16 Investment Performance Dashboard – Quarterly Movements
Exhibit 35.17 Assisting the Board in Making Key Decisions
This case study illustrates how a structured and diligent approach to ERM implementation, monitoring, and reporting can add value not only to the investee company adopting it, but also to the parent company having to make investment decisions for its portfolio of direct foreign investments. For this case study, we showed how the investment performance dashboard could allow a company to compare investment value to total investment risk score and compare profitability to overall risk. Without being fully quantitative, this approach brings the management of a portfolio of direct investments closer to the risk/return management of a portfolio of financial investments.