Enterprise risk management tools create shareholder value
May 2013 | SPECIAL REPORT: OPERATING AN EFFECTIVE BOARD
Financier Worldwide Magazine
Enterprise Risk Management (ERM) has received increased attention over the last decade from corporate directors and officers, perhaps due to the challenging and often inconsistent execution of business strategy at many organisations. These business leaders are looking at ERM as a way to link their strategic planning and capital allocation process with the risks that could impede the successful execution of the organisation’s goals. ERM is an integrated framework for holistically managing risks to the company’s strategic goals while minimising its unexpected earnings volatility. It also challenges organisations to view risk as an opportunity for creating new value.
Taking the right risks is a necessary part of growing and protecting shareholder value. Companies can’t operate too cautiously and miss market opportunities that could attract the best talent and investor capital, but must also balance the growth opportunities with the reality that it is operating in a complex world economy.
To consistently achieve the right balance between risk and reward, many corporate leaders adopt ERM within their organisations.
ERM tools deliver shareholder value
Global businesses are increasingly focused on the challenge of mapping and managing their risk profiles, looking beyond a single dimension to understand the complex interactions between many different types of risks. In defining its risk profile, a company must determine its risk to optimise its returns. Its ERM mission is to promptly identify, measure, manage, report and monitor risks that affect the achievement of goals of the organisation.
By aligning ERM with business strategy, certain tools can be used to create new value for the organisation in a variety of areas.
While Key Performance Indicators (KPIs) help an organisation understand how well it is performing in relation to its strategic objectives, Key Risk Indicators (KRIs) are leading indicators of risk to business performance. ERM can add value by embedding KRIs within a company’s operations to provide an early warning that potential risks are on the rise. Some examples of using KRIs to monitor risks are in the areas of natural catastrophe risks (percentage of group shareholder equity), asset-liability matching (duration mismatch), strategic asset allocation (mix of investments across categories) and credit risk (weighted average credit rating).
Companies may also create value through business resiliency , which addresses disruption to business operations using a combination of modelling software, supply chain risk assessment software and gap analysis techniques to evaluate exposure. Larger companies may, for example, appoint a supply chain risk officer who reports to the Group CRO, and is tasked with finding the appropriate balance between cost and risk reliability. Some companies are establishing a Business Continuity Planning team throughout their operating regions, and maintaining a robust network of champions within the business, trained to return the business to operation quickly and efficiently after a disruption. While anything can happen, the Business Continuity Team regularly exercises a variety of plans to ensure the company is ready for anything. Stress-testing activities take place in parallel to ensure the network is prepared to shift workload, deploy contingencies, and remain operational when customers may have suffered the same event.
With new projects or product development, a company may also use a Strategic Risk Assessment tool to evaluate risk scenarios that may prevent it from delivering on time, on budget and with the expected results. Actions are assigned to risk owners during Strategic Risk Assessment workshop sessions, and monitored regularly to ensure risk reduction. This type of tool also helps with quantifying the potential exposure and risk tolerance level. For example, a strategic risk assessment may be conducted before considering outsourcing IT services, helping to vet the solution as a viable alternative. The results should be updated regularly throughout the course of a project as risks change and new ones surface.
Finally, ERM may contribute to a company’s core business through processes and procedures that review customer risks. For example, credit checks can monitor the collateral and financial viability of customers and their suppliers. In addition, a team may be tasked with scanning the horizon for new exposures that may impact customers as well as monitor customers’ loss control techniques. ERM may also be used to examine a company’s risk portfolio to identify areas of disproportionate exposure to a single company, industry, supplier, or geographic location.
ERM produces value over time
Every organisation’s directors and officers will approach ERM differently in order to achieve their unique objectives. Once a company has embedded a robust program into the fabric of its business, it should not rest on its laurels. The program should be constantly scrutinised in search of better ways to identify, assess, manage and monitor key risks. The organisation’s management should continuously look for opportunities to create a closer partnership between ERM and the core businesses, so that a team of consultants is ready to assist the business in understanding risk in pursuit of profit. ERM is certainly a long journey defined by many paths, but one that can yield tremendous benefits for the organisation.
Linda Conrad is Director of Strategic Business Risk and David Shluger is a Strategic Risk Consultant at Zurich, and Kristina Narvaez is president of ERM Strategies, LLC. Ms Conrad can be contacted on +1 (410) 664 5207 or by email: email@example.com. Mr Shluger can be contacted on +1 (212) 871 1547 or by email: firstname.lastname@example.org. Ms Narvaez can be contacted on +1 (801) 492 3933 or by email: email@example.com.
© Financier Worldwide
Linda Conrad and David Shluger
ERM Strategies, LLC