Enterprise risk management ERM l3a v1

RM Vision and ObjectivesHow does management develop a shared vision for the role of risk management in the organization?. senior management working group “risk management vision” develo

Enterprise Risk Management (ERM)

‘Integrated Framework’

IMPLEMENTATION Risk Management Vision and Objectives

FUNDAMENTALS & ROLES

• The Fundamentals

• COSO Enterprise Risk Management

• Role of Executive Management

• Role of the Director

• Role of the Chief Risk Officer

• Risk Management Oversight Structure

• Role of Internal Audit

• Risk Management Vision and Objectives

• Conducting Risk Assessments

• Getting Started – Set the Foundation

• Building & Enhancing Capabilities

• Building a Compelling Business Case

• Making it Happen

• Relevance to Sarbanes-Oxley Compliance

• Other Questions

RM Vision and Objectives

How does management develop a shared vision for the role of risk management in the

organization? What is the practical use of a

shared vision?

senior management working group

“risk management vision” develops a shared view

of the role of risk management in the

organization and the capabilities desired to

manage its key risks (“big picture view”)

RM Vision and Objectives

Risk management vision

“call for action” to drive the organization to

identify, design and build the risk

management capabilities needed to close

significant gaps and make management’s

selected risk responses happen

RM Vision and Objectives

Specific capabilities managing priority risks

selecting the priority risks and determining the current state of risk management capability

desired future state is assessed with the

objective of advancing the maturity of the

capabilities around managing those risks

close significant gaps and deliver management’s desired outcomes

RM Vision and Objectives

ERM infrastructure

overall risk management policy

enterprise wide risk assessment process

integration of risk responses with business plans

presence on the board and CEO agenda

chartered risk committee

clarity of risk management roles and responsibilities

dashboard and other

risk reporting

proprietary tools to portray a portfolio view of risk

RM Vision and Objectives

How does management define the entity’s risk management

goals and objectives?

Develop a common understanding of risk across multiple

functions and business units to manage risk cost-effectively

Achieve a better understanding of risk for competitive advantageBuild safeguards against earnings-related surprises

Build and improve capabilities to respond effectively to low

probability, critical, catastrophic risks

Achieve cost savings through better management of internal

resources

Allocate capital more efficiently

RM Vision and Objectives

RM Goals and Objectives should be consistent /supportive of the

enterprise’s business objectives and strategies

targets the markets and geographies in which the firm does

business

specifies the products and services it provides to those markets,

the channels it uses to access those markets and the

characteristics by which it differentiates its products and services

in the eyes of the customer

built on the processes through which the entity converts materials and labor into products and services; employees,

training/retention; suppliers/customers; shareholders and

lenders

RM Vision and Objectives

“Tough questions”

What are our business objectives and strategies?

What are our financial targets, e.g., profitability, size

and revenue growth?

What values do we want to build and reinforce?

What markets do we choose?

What relative market position do we seek?

What is our business model for winning in our chosen markets?

RM Vision and Objectives

RM Vision and Objectives

“Tough questions”

Which specific future events could, if they occurred,

affect our organization’s ability to achieve its:

objectives relating to quality, innovation, timeliness, safety, compliance, etc.

to execute its strategies successfully?

Which events would affect our market share?

RM Vision and Objectives

unit? By major product? By geography?

If accept the exposures inherent in our business model that give rise to our existing risks, do we have

sufficient capital to absorb significant unforeseen

losses should they occur?

RM Vision and Objectives

ERM Vision Statement:

Contribute to the creation, optimization and

protection of enterprise value by managing

our business risks as we create value in the

marketplace.

RM Vision and Objectives

ERM Mission Statement:

Create a comprehensive approach to anticipate, identify, prioritize, manage and monitor the

portfolio of business risks impacting our

organization Put in place the policies, common processes, competencies, accountabilities,

reporting and enabling technology to execute that approach successfully.

RM Vision and Objectives

ERM Goals and Objectives:

Design and execute a global business risk management process integrated with our strategic management process:

• Integrate business risk management with our strategy formulation and business planning processes

• Articulate our strategies so that they are understood throughout our organization

• Establish KPIs designed to drive behaviors consistent with our strategy

• Reward effective articulation and management of key risks

Ensure that process ownership questions are addressed with

clarity so that roles, responsibilities and authorities are

properly understood

RM Vision and Objectives

ERM Goals and Objectives:

Design and execute a global process to monitor and reassess the top quartile risk profile and identify gaps in the management

of those risks, based upon changes in business objectives and

in the external and internal operating environment

Define risk management strategies and clear accountabilities and action steps for building and executing risk management

capabilities and improving them continuously

Continuously monitor the information provided to

decision-makers in order to assist them as they manage key risks and protect the interests of shareholders

RM Vision and Objectives

What is “risk appetite”?

amount of risk, on a broad level, an entity is willing to accept in pursuit of value

reflects management philosophy, and in turn influences the

entity’s culture and operating style

qualitative risk appetite: high, medium or low

quantitative approach: balancing goals for growth, return and

risk

higher risk appetite may be willing to allocate a large portion of its capital to such high risk areas as newly emerging marketslow risk appetite only in mature, stable markets

RM Vision and Objectives

What is “risk thresholds” = “tolerances” =

“limits”?

acceptable level of variation relative to

achievement of a specific objective

best measured in the same units as those used

to measure the related objective

RM Vision and Objectives

Observations:

Risk appetite is strategic - relates primarily to the business modelRisk tolerance is tactical - relates primarily to objectives

Every organization has a risk appetite

Risk tolerance reflected differently for different objectives:

• relating to earnings variability

• interest rate exposure

• compliance with laws and regulations

• acquisition, development and retention of people

RM Vision and Objectives

Is there a defined methodology for calibrating performance

with risk tolerances? (“the acceptable variation relative to the

achievement of an objective.”)

three types of risk tolerance:

• Variability in achieving expected returns (materiality)

• Susceptibility to extreme events = loss exposure or loss

driver  exposure to catastrophic loss (probability)

• Inconsistency with the desired risk appetite

RM Vision and Objectives

How are the risk management vision and objectives translated into the appropriate ERM infrastructure?

Develop “Capabilities”  policies, processes,

competencies, reports, methodologies and

technologies

• phase 1 sets the foundation

• phase 2 builds capabilities for critical risks

• phase 3 enhances existing risk management

capabilities

RM Vision and Objectives