Next month I am writing an article on Stress Testing in the corporate sector. In my banking career I was always amazing at how little attention was paid to downside, multiple case financial scenarios analysis. I see more Corporates spending time on detailed downside scenario analysis now however – particularly when considering major strategic initiatives or investments.
I would be interested in hearing member experiences in how much (or how little) Stress Testing they have seen in the non Banking sector.
- Is Stress Testing more common in 2011 ?
- Do Boards and Executive teams really want to see the results of a harsh downside (ie are they just crossing their fingers and hoping for the best) ?
- Do Boards & Executive teams set aside time to formally think of ‘what can go wrong’ ?
I would be interesting in hearing members' thoughts on the above.
Replies
Hi Steven.
I think that the M&A space - particularly bigger ticket / 'top end of town' transactions generally undertake the mulitple downsides work. Do they all get it right ? Hard to say. In my experience it is invariably the bankers that force the harsher downsides and often the actual financial performance / outcomes are closer to the bankers' cases rather than the clients' case. I think a bias towards optimism tends to kick in on the client side when deciding what downsides to model - particulalry when bidding for an asset, doing an M&A transaction or approving a new project / investment.
Thanks for your comment. Probably lucky and sheltered !
It may be "popular" to sugggest boards and exectuives are just overpaid blundering buffoons - that is simply not true in my experience. My experiences have required pressure testing and presentation of those results to get to a decision. "Harsh" downside, if within reasoanble probablity of occuring, is certainly of interest - just as upside is. I dont think I have ever seen a situation where decision makers "ignore" downside - that is just crazy. I have never seen a M&A deal get done without consideratiopn of multiple outcomes, good and bad, or without careful consideration by executives/boards. Maybe I have been lucky, sheltered or both.