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Business schools are braced for a recessionary downturn, which may leave deep wounds in short-term budgets. The tremors come at a time when many schools are susceptible to economic crises.

In recent years business schools have aggressively taken advantage of international growth opportunities to expand their proprietary revenue streams, and have invested a significant portion of the extra funds in faculty expansion and faculty upgrades. This is troubling from a financial perspective as these business schools have pushed revenue volatility upwards while expanding the fixed cost base.

Although business schools have developed a stronger appetite for risk-taking, they still lack the counterbalance of a risk-management culture. They frequently manage their financial affairs with short-term cash-basis accounting, engage in linear trend forecasting and often lack even basic forms of risk accounting such as scenario analysis.

Risk management may not have been a priority issue in the past but it has become highly relevant as business schools are encouraged to become more entrepreneurial and to act with greater autonomy. And it becomes a necessity if schools face a general economic downturn of historic proportions.

For management education, risk-taking is a key ingredient of operating in the global market and a source of innovation. However, if coupled with risk ignorance, it can trigger a slow and hidden process of institutional decline – a lowering of admission standards and student selectivity, faculty devoting less time to non-income generating activities (such as non-funded research), diversification in search of additional funds, or moving from high-margin to high-volume activities.

Risk management is not about improving operational efficiency, as some deans argue. This should be done irrespective of the risk environment. It is also not about making ends meet when risk exposures become tangible problem areas. It is about implementing checks and balances before the event to prevent a mismatch between risk exposures and risk funding. It is about the ability to cushion the impact of market fluctuations with built-in cost flexibilities.

Deans have a significant role to play in shaping a business school’s destiny, but managing risk effectively places great demands on their managerial expertise. External and internal risk governance must be properly designed with a clear definition of risk ownership, risk reporting and risk controlling.

Increasingly, regulators are discovering the need to monitor risk-taking in higher education. Some are pushing for risk-based governance principles at the university level, which will eventually trickle down to business schools. They have good reasons for doing so.

First, organisations that are characterised by risk ignorance tend to reallocate resources from back-office to front-office activities when hitting hard times. Hence, they are least willing to invest in risk management when it is needed the most. Second, business schools need to focus on how risk exposures may ultimately affect institutional reputation, which is a fairly fuzzy concept. They will display a natural reluctance to invest tangible resources to achieve ambiguous gains. Third, a dean’s performance is typically measured by how much an institution has grown in terms of student body and faculty, by upgrades of facilities, upward moves in the rankings, etc. Experts of such a bull-market game are not necessarily the ones who can successfully guide institutions during bear-market times.

Business schools are in an ideal position to shape the agenda of the regulatory debate and can play an instrumental role in establishing the risk-management function in higher-education institutions. It is an opportunity rather than a threat with immediate benefits for their own development.

Ulrich Hommel is director for research and surveys at the European Foundation for Management Development and professor of finance at EBS Business School, Germany.

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