Enterprise risk management ERM l6 v1

Enhancing Capabilities Taking It To The Next LevelWhat steps does management take to enhance risk management capabilities?. apply to those priority risks for which management has decide

Enterprise Risk Management (ERM)

‘Integrated Framework’

IMPLEMENTATION Enhancing Capabilities Taking It To The Next Level

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

Enhancing Capabilities Taking It To The Next Level

What steps does management take to enhance risk

management capabilities?

apply to those priority risks for which management has decided to attain a “managed” or an “optimized”

state of capability - three steps:

quantify risk enterprise wide

improve enterprise performance

establish sustainable competitive advantage

Enhancing Capabilities Taking It To The Next Level

How does management decide on the

appropriate enhancement capabilities?

Market/investment community expectations:

institutional investors

rating agencies

regulatory authorities

industry standards

Enhancing Capabilities Taking It To The Next Level

What is a “portfolio view” of risks and how is it practically applied?

Risks in different units may be within the risk

tolerances of the individual units

taken together, the risks might exceed the

enterprise wide risk appetite

risks may naturally offset across the entity

Enhancing Capabilities Taking It To The Next Level

Portfolio view makes sense for activities directed at

achieving a common enterprise wide purpose

• Risks add up whether evaluated piecemeal or in total

• Increased efficiency and better decisions

• Improved reporting and capital allocation

• Simplicity

Enhancing Capabilities Taking It To The Next Level

How does management quantify risks enterprise wide? At what level are risks aggregated for

quantification purposes?

Centralized vs decentralized

• aligning enterprise wide goals and operating unit incentives

• delineating risk management tasks that must

be executed centrally from tasks that must be executed locally

Enhancing Capabilities Taking It To The Next Level

Ways to aggregate multiple risk measures

Risk-pooling approaches (hedging)

Enterprise wide risk appetite/specific risk tolerances

Hurdle rates (industry risk adjusted)

At risk frameworks (VaR, EaR, GMaR & CFaR)

Risk-adjusted performance measurement

Enhancing Capabilities Taking It To The Next Level

Enhanced capabilities achieve four things

More robust risk reporting – aggregated at multiple

levels by specific investments and projects

Greater investment confidence

Greater integration and alignment of risk responses

Higher valuation - higher price/earnings multiples in

share valuations

Enhancing Capabilities Taking It To The Next Level

How does management use ERM to improve business

performance? helps managers make better choices in

protecting and enhancing enterprise value

Evaluate the key underlying variables in the business plan that are exposed to performance variability and that require specific risk responses

Understand the loss exposures or drivers inherent in the

enterprise’s business model that require specific risk responses Identify incongruities inherent in the business model where

management has, either knowingly or unknowingly, accepted

Enhancing Capabilities Taking It To The Next Level

Critical risk management tasks

• identify events

• assess risk

• formulate risk response

• implement control activities

• inform/communicate and monitor

provides a flexible framework for addressing these

three strategically important issues

Enhancing Capabilities Taking It To The Next Level

Identify value drivers

value drivers are linked to the variables that

influence the achievement of the business

plan

they may be defined in terms of the key

underlying variables that cause revenues and expenses to go up and down (increase and

Enhancing Capabilities Taking It To The Next Level

Key performance indicators are developed

metrics by which performance against plan is

evaluated and ultimately rewarded

converted into reports and are used to monitor

performance over time

managing and monitoring the business will surface opportunities to improve processes, products

and services to enhance enterprise value (EVA)

Enhancing Capabilities Taking It To The Next Level

EVA = NOPAT less WACC (NPV>0)

Create new opportunities - new business activities

Improve performance - policies, processes,

competencies, reporting, technology and/or

Enhancing Capabilities Taking It To The Next Level

EVA

Create new opportunities – change core business risk? Improve performance – insights into soft spots in the

enterprise’s or unit’s business strategy as well as

opportunities to improve performance

Harvest existing value - understand “relative riskiness”

of different units, geographies, products or markets

Adjust and align cost of capital - specific WACC for

specific core businesses

Enhancing Capabilities Taking It To The Next Level

Linkage of ERM to improved enterprise performance - altering risk by increasing/decreasing:

enterprise’s net exposure (materiality)

variability of the enterprise’s expected returns caused

by specific sources of uncertainty (such as exposure

to fluctuating currency rates)

probability of financial distress in the event of realized changes in key variables (such as changes in interest

Enhancing Capabilities Taking It To The Next Level

How should we integrate our ERM approach with our strategic planning process?

integrate specific ERM capabilities with the various

phases of the strategy-setting process

Strategic assessment  Internal environment, event

identification and risk assessment

Strategy development  Risk response

Formulate plan  Control activities, information/

communication and monitoring

Enhancing Capabilities

Taking It To The Next Level

Enhancing Capabilities Taking It To The Next Level

Determine critical value drivers and define the sources of

uncertainty associated with each of those drivers

Shareholder Value  cash flow  earnings

e.g revenue drivers: predictable volume, price competitiveness,

customer liquidity, customer diversification, entry barriers and

growth industry

predictable volume sub drivers: segmented market, scalable

productive capacity and effectively functioning distribution channel

prioritize value drivers based upon their contribution

select the priority drivers for purposes of event identification and risk assessment

Enhancing Capabilities Taking It To The Next Level

Should we complete our strategic planning process

prior to conducting our first enterprise wide risk

assessment, or vice versa? NO

incorporate risk appetite and risk management into

strategy-setting

Enhancing Capabilities Taking It To The Next Level

Is it possible to successfully merge together the risk assessments that companies perform as a result of ERM, Sarbanes-Oxley compliance, business

continuity planning, internal audit and various

compliance activities related to workplace,

environmental and other regulations? YES

Must develop common language and uniform process

Enhancing Capabilities Taking It To The Next Level

How does management use ERM to establish a sustainable

competitive advantage?

Integrate risk management with business & strategic planning Implement more rigorous risk assessment process

Improve management of common risks across the enterprise

Improve capital deployment and resource allocation

Configure the enterprise’s risk taking with its core competencies Seize opportunities through rational assumption of risk