Enterprise Risk Management

• Or “Enterprise Risk and Assurance

Management”
• What is ERM?
– Concerned with a broad financial and
operating perspective
– Recognizes interdependencies corporate,
financial, and environmental factors
– Strives to determine and implement an
optimal strategy to achieve the primary
objective: maximize the value of the firm
 Goals of ERM

• Ensure business continuity

• Enhance opportunities for the company to
achieve its objectives
• Create and increase company value
• Make risk management more cost-efficient
• Stabilize earnings
 Evolution of ERM
• Historically: “risk silo” mentality
• Mid-1990s:
– First “Chief Risk Officer”
– First use of ERM terminology
• Late-1990s:
– Risk-related regulatory requirements (e.g., Turnbull)
– Earnings protection insurance debuts
• 2001:
– September 11
– Corporate scandals
– Beginning of efforts to improve corporate governance
 Current State
• Findings from various surveys
– An acknowledged need to improve risk
management
– A recognition that a holistic approach is
appropriate and preferable
– ERM can improve overall capital management
and thus enhance corporate value and
competitiveness
– A variety of approaches to improving risk
management
– There are still problems to overcome
 A Paradigm Shift
Traditional
• Risks managed in silos
• Concentrates on
physical hazards and
financial risks
• Insurance orientation
• Ad hoc / one-off projects
Emerging
• Centralized mgt., with exec-
level coordination
• Integrated consideration of
all risks, firm-wide
• Opportunities for hedging,
diversification
Continuous and embedded
•
 Types of Risks
• Operational • Legal
– Hazard – Compliance
– Physical – Regulatory
• Strategic • Financial
– Capital / resource – Capital markets
allocation – Credit risks
– Industry / competitors – Taxes
• Technological • Human capital
– Databases – Retention
– Security – Training
– Confidential information
• Reputational
• Stakeholder
 Issues in ERM Implementation
• Different corporate cultures require different
ERM approaches
• Who is going to be the ERM champion within
the company
– Among senior executives
– Among departments / functions
• How to embed a risk management culture
and responsibilities throughout the firm
Components of the ERM Process
• Determine corporate objectives
• Risk identification

Likelihood
– Goal: comprehensiveness
Impact
– E.g., self-assessment
• Risk measurement
– Volatility measures

Likelihood
– Value at Risk (VaR)
Size of loss
 Components of ERM (cont.)
• Assessing the impact E.g.,
“dynamic
– Stress or scenario testing financial
– Stochastic simulation analysis”

• Examine and select alternative risk

management tools and techniques
– Traditional risk transfer
– Natural hedging / diversification
– Integration of risks
 Keys to Success in ERM
• Senior management commitment and
sponsorship
• Embed a “risk management culture” in the
corporation at the operational level
• Provide for accountability, both specific
and widespread
• Clearly defined responsibilities for
coordination and maintenance
• Adequate communication