View a PDF of an ERM 57 assignment excerpt

Introduction to Enterprise Risk Management 1.15
In the financial risk quadrant, New Company would have exchange rate risk
related to its European sales. It would also have price risk for raw materials
and supplies.
Strategic risks include competition, economic factors that could affect consumer demand, and the political risk arising from countries in which the
company’s component suppliers are located.
ERM Drivers
The introduction of enterprise risk management (ERM) in the mid-1990s
signaled a major expansion of risk management, changing the focus from a
narrow approach to managing undesirable risk exposures to a firm-wide vantage point representing potential opportunity as well as loss.
There are both internal and external drivers that influence an organization’s
decision to establish an ERM program. Internal drivers include the desire for
a comprehensive approach to managing risks that threaten an organization
as well as recognition of ERM’s value in strategic planning. External drivers include legislation, regulatory requirements, risk management standards,
credit rating agencies, investors, social responsibility, and catastrophic events.
ERM programs should address both types of drivers. Some ERM programs
focus on compliance with external requirements, but these programs are not
as successful as ones that also consider internal drivers.
Internal Drivers
After some highly publicized corporate accounting scandals and the global
financial crisis of 2008, many organizations realized that risk management failures could threaten their ability to survive at worst and present reputational
risk exposures at best. For example, an AIG unit’s derivatives risk resulted in
the organization’s dependency on the United States government for survival and a large loss in value for shareholders. Further, fraudulent trading at
Societé Generale resulted in a large financial loss and reputational damage.
These types of risk management failures at established firms increased many
senior executives’ awareness of the importance of ERM.
As ERM began to capture the interest of top management, some of these
leaders started to understand that it was not limited to downside risk, as in
traditional risk management. Rather, it could also be used to exploit risks for
the opportunities they provide. That said, ERM implementation requires a
major change in corporate culture supported by an organization’s senior management and board.
Copyright 2013 American Institute For Chartered Property Casualty Underwriters
1.16 Enterprise Risk Management
ERM’s greatest value is its use in decision making with a dual purpose:
• Protecting an organization’s assets
• Promoting future growth3 When global trade, financial markets, and supply chains are inextricably
linked in a landscape of complexity and uncertainty, risks can come swiftly
and unexpectedly—with significant potential effects on companies’ operations, reputations, and even survival.
In response to greater complexity, interconnection, and uncertainty in global
markets and operations, forward-looking companies are increasingly integrating risk management across business functions, according to a PwC survey of
more than 1,000 executives from various organizations. The perspective of
risk leaders is changing from operational to strategic.4
ERM in Practice
DENTSPLY International Links ERM With Strategic Plan
DENTSPLY International is a global provider of dental products. The organization’s strategic plan focuses on four key areas: financial, innovation,
customer satisfaction, and internal talent. In 2005, the organization began
its ERM program. DENTSPLY integrated risk management into all of its
decisions and activities. For example, the organization implemented a global
performance system to highlight and manage risks associated with innovation
and product development.5
Many organizations have begun to include risk evaluation as an essential
part of strategic planning and to realize the advantages of the broader view
of risk management that ERM provides. For example, organizations that use
ERM produce better-than-average financial results. Ernst & Young recently
evaluated risk management practices through a survey. It found that risk management was consistent in top performers with mature ERM programs and
that consistency was not evident in the bottom 20 percent of performers.6
ERM in Practice
Panasonic Implements ERM to Achieve Profit Goals
Panasonic began its ERM initiative to achieve challenging global business
goals of 10 percent profit and 10 billion yen in sales turnover. The organization focused on implementing ERM into all of its business activities and
operations to achieve these goals. Panasonic uses a combination top-down,
bottom-up approach in its ERM program. The mission and objectives are
established and communicated from the top, but risk assessment is performed
in all areas of operations and reported up to each business unit head. The
Copyright 2013 American Institute For Chartered Property Casualty Underwriters
Introduction to Enterprise Risk Management 1.17
business unit heads then report them to senior management, who can evaluate the effects of risks on achieving strategic goals.7
By using ERM, an organization enhances its ability to select the most appropriate methods of deploying capital. Further, effective ERM can reduce the
overall cost of capital and optimize capital allocation by evaluating the positive and negative aspects of risk in all major decisions.
For example, Allstate began to consider ERM in 2002 for optimal allocation of capital based on risk and expected return. In 2004, the organization
implemented ERM across all of its businesses and functions. Its program uses
an interactive risk and capital visualization tool as part of its ERM program to
explore various risk opportunities and guide strategic decisions.8
Another internal driver is the desire of organizations to manage volatility in
their financial results. ERM enables an organization to analyze the effect of its
risks on financial results and to select a level of risk based on its risk appetite
and risk tolerance. External Drivers
Initially, the increased focus on ERM at many organizations resulted largely
from external forces and events. Although external factors should not be the
sole, or necessarily even major, drivers for any one organization’s ERM program, they are inevitably significant.
These are the major external drivers for ERM:
•
•
•
•
•
•
•
Legislation
Regulatory requirements
Risk management standards
Credit rating agencies
Investors
Social responsibility
Catastrophic events
Risk appetite
The total exposed amount
that an organization wishes
to undertake on the basis
of risk-return trade-offs for
one or more desired and
expected outcomes. (Used
with permission of RIMS.)
Risk tolerance
The amount of uncertainty
an organization is prepared
to accept in total or more
narrowly within a certain
business unit, a particular
risk category or for a
specific initiative. (Used with
permission of RIMS.)
In 2002, after the failure of Enron, the U.S. Congress passed the SarbanesOxley Act (SOX), which imposes numerous requirements on U.S.
corporations. SOX requires both the chief financial officer (CFO) and chief
executive officer (CEO) of a company to personally attest to their company’s
results in financial statements. While the majority of the SOX regulations are
concerned with accounting issues, there are several important aspects related
to risk management. Section 404 requires organizations to provide an assessment of the company’s internal risk control measures. Additionally, SOX
requires corporations to review their risk profiles using an enterprise-wide
approach, rather than the traditional silo approach.
Copyright 2013 American Institute For Chartered Property Casualty Underwriters

Download Report