Commentary on Emerging Risks Survey: Part 1

This post is the first installment of several commentaries on the recently-released 2010 Global Emerging Risks Survey ("Steering the Course, Seizing the Opportunity"), undertaken by Oliver Wyman and the Financial Times. Although the GERS focuses on large corporations, much of what is discussed has some degree of application to independent schools. Over the course of my next few posts, I will highlight and comment on those areas that, I believe, do apply to schools in some way.

Part 1 - Perceived Global Emerging Risks

Looking at the next 18 to 36 months, survey respondents (650 of them!) cited the following five areas as posing the greatest risk (in order):

1. global recession
2. regulation policy risk
3. liquidity/credit crunch
4. financial market volatility
5. commodity price volatility

There is variation within each category, as each industry responded somewhat differently to each perceived risk. For example, manufacturing and transportation consider global recession to be their greatest risk, whereas life sciences consider regulatory risks to be more important.

Non-profits make up 1% or less of the executives surveyed. "Executives," by the way, is a broad term that encompasses such diverse roles as CEO, CFO, COO, CIO, heads of business units, chief risk officers, supply chain logistics managers, and more.

Given the low percentage of non-profit executives, I'm going to tease out some perspectives on the aforementioned perceived emerging risks, as independent schools might see them. My proposed order is as follows:

1. global recession - there is little doubt that independent schools, as a group, fear another global recession. We're still dealing with the aftermath of the 2008-09 recession, which, for many schools, seems to be continuing, as evidenced by enrollment challenges, personnel reductions, benefit "holding patterns," and the like.
2. liquidity/credit crunch + financial market volatility - I don't think that schools can separate these two categories; they truly go hand-in-hand for us. There is the issue of our own liquidity (cash flow from day to day, payroll periods, etc.), but there is the added twist of liquidity for our tuition-paying families, especially those who are involved with small businesses, many of which are experiencing significant liquidity issues. Relatedly, when financial markets are volatile, they affect family liquidity, especially when investments are used to help pay tuition. As a third layer, how our school finances are managed can be affected by the interplay of these two areas: consider endowment draw, for example, or managed cash flow by a full-service institutional manager.
3. educational policy risk/regulation policy risk - although we do not rely (traditionally) on state or federal government assistance, meaning that it is unlikely that we, as entities, will be regulated, we should take seriously any educational policy initiatives promoted by our state governments or federal governments, insofar as they benefit (in some sense) our public/charter school competition. Additionally, have we been enjoying--either directly or indirectly--some subsidy over the course of many years, one which may now be taken away as state governments in particular look to trim state budgets?
4. commodity price volatility - this category may seem an unlikely risk indicator for independent schools, but consider the prices that families pay for energy, in its various forms. If families are going to pay higher prices for energy, that may impact the amount they're willing to pay for tuition. From an endowment standpoint, schools might wish to take advantage of some of this volatility by means of allocating a fixed percentage of the endowment portfolio to commodities. If we end up in a highly inflationary environment, some degree of exposure to commodities will stand to benefit the endowment.