1 / 22

ERM!!!

ERM!!!. Enterprise Risk Management Not just insurance, auditing, risk analysis A philosophy – A way of business. Definition. Systematic, integrated approach Manage all risks facing organization External Economic (market - price, demand change) Financial (insurance, currency exchange)

ancelin
Download Presentation

ERM!!!

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. ERM!!! Enterprise Risk Management Not just insurance, auditing, risk analysis A philosophy – A way of business Olson: ERM1

  2. Definition • Systematic, integrated approach • Manage all risks facing organization • External • Economic (market - price, demand change) • Financial (insurance, currency exchange) • Political/Legal • Technological • Demographic • Internal • Human error • Fraud • Systems failure • Disrupted production • Means to anticipate, measure, control risk Olson: ERM1

  3. DIFFERENCES Olson: ERM1

  4. Risk & Business • Taking risk is fundamental to doing business • Insurance • Lloyd’s of London • Hedging • Risk exchange swaps • Derivatives/options • Catastrophe equity puts (cat-e-puts) • ERM seeks to rationally manage these risks • Be a Risk Shaper Olson: ERM1

  5. Types of RiskStroh [2005] • External environment • Competitors; Legal; Medical; Markets • Business strategies & policies • Capital allocation; Product portfolio; Policies • Business process execution • Planning; Technology; Resources • People • Leadership; Skills; Accountability; Fraud • Analysis & reporting • Performance; Budgeting; Accounting; Disclosure • Technology & data • Architecture; Integrity; Security; Recovery Olson: ERM1

  6. Another viewSlywotzky & Drzik, HBR [2005] • Financial • Currency fluctuation • DEFENSE: Hedging • Hazard • Chemical spill • DEFENSE: Insurance • Operational • Computer system failure • DEFENSE: Backup (dispersion, firewalls) • New technology overtaking your product • ACE inhibitors, calcium channel blockers ate into hypertension drug market of beta-blockers & diuretics • Demand shifts • Gradual – Oldsmobile; Rapid - Station wagons to Minivans Olson: ERM1

  7. Industry Margin Squeeze • Pharmaceutical R&D • Cost escalation • Semiconductor industry • Airline deregulation • Suppliers gain upper hand • Flat panel displays, Intel direct marketing • Cycle volatility • DEFENSE: Shift compete/collaborate ratio • Coproduction; supply chain coordination; joint R&D; collaborative marketing • Airlines, Utilities, Textiles, Steel, Music, Autos Olson: ERM1

  8. Technology Shift • Loss of patent protection • Outdated manufacturing process • DEFENSE: Double bet • Invest in multiple versions of technology • Microsoft: OS/2 & Windows • Intel: RISC & CISC • Motorola didn’t – Nokia, Samsung entered Olson: ERM1

  9. Brand Erosion • Perrier – contamination • Firestone – Ford Explorer • GM Saturn – not enough new models • DEFENSE: Redefine scope • Emphasize service, quality • DEFENSE: Reallocate brand investment • AMEX – responded to VISA campaign, reduced transaction fees, sped up payments, more ads Olson: ERM1

  10. One-of-a-kind Competitor • Competitor redefines market • Wal-Mart • DEFENSE: Create new, non-overlapping business design • Target – unique product selection Olson: ERM1

  11. Customer Priority Shift • DEFENSE: Analyze proprietary information • Identify next customer shift • Coach leather goods – competes with Gucci • Went trendy, aggressive in-market testing • Customer interviews, in-store product tests • DEFENSE: Market experiments • Capital One – 65,000 experiments annually • Identify ever-smaller customer segments for credit cards Olson: ERM1

  12. New Project Failure • Edsel • DEFENSE: Initial analysis • Best defense • DEFENSE: Smart sequencing • Do better-controllable projects first • Applied Materials – chip-making • DEFENSE: Develop excess options • Improve odds of eventual success • Toyota – hybrid: proliferation of Prius options • DEFENSE: Stepping-stone method • Create series of projects • Toyota – rolling out Prius Olson: ERM1

  13. Market Stagnation • DEFENSE: Generate demand innovation • House of Quality? • Air Liquide industrial gas • Developed technology allowing customers to establish small gas production facilities on-site Olson: ERM1

  14. Means to Control Enterprise Risk • Honeywell (1997) • Multi-year contract combining property, liability, option hedging risks against adverse currency exchange rates • Dickinson [2001] • Holistic approach • Extend contingency planning with comprehensive internal risk management systems • CRO / CEA • Chief Risk Officer / Chief Auditing Executive Olson: ERM1

  15. COSOCommittee of Sponsoring OrganizationsTreadway Committee – 1990sSmiechewicz [2001] • Assign responsibility • Board of directors • Establish organization’s risk appetite • establish audit & risk management policies • Executives assume ownership • Policies express position on integrity, ethics • Responsibilities for insurance, auditing, loan review, credit, legal compliance, quality, security • Common language • Risk definitions specific to organization • Value-adding framework Olson: ERM1

  16. COSO Integrated Framework 2004Levinsohn [2004]; Bowling & Rieger [2005] • Internal environment – describe domain • Objective setting – objectives consistent with mission, risk appetite • Event identification – risks/opportunities • Risk assessment - analysis • Risk response – based on risk tolerance & appetite • Control activities • Information & communication – to responsible people • Monitoring Olson: ERM1

  17. Risk Management Tools • Simulation (Beneda [2005]) • Monte Carlo – Crystal Ball • Multiple criteria optimization (Dash & Kajiji [2005]) • Goal programming - tradeoffs • SYSTEMS FAILURE METHOD • Information Systems Project Management Olson: ERM1

  18. ERM SoftwareRhoden [2006] Penny [2002] • Algorithmics Incorporated – ERM software, global financial institutions Jane’s Defence Industry [2005] • Strategic Thought – Active Risk Manager – defence industry Rhoden [2006] • Q5AIMS • From Q5 Systems Ltd • Safety audit & corrective action tracking • Mobile devices, Web-link • Preceptor • Learning management system • Regulatory compliance, technical training • PicketdynaQ • Workplace audit & assessment management • Regulatory references built in Olson: ERM1

  19. Experiences with ERM • Walker [2003] • FirstEnergy Corp – auditing, problem-solving • Wal-Mart – best auditing practices, governance • Unoval – auditing to consultation • Canada Post – auditing efficiency • GM – corporate governance • Kleffner et al. [2003] • Canadian risk & insurance • 31% adopted ERM Olson: ERM1

  20. UnitedHealth ManagementStroh [2005] Olson: ERM1

  21. UHM Lessons Learned • ERM value must be apparent to executive sponsors in a timely fashion • Begin the process by focusing on the most important risks, thus avoiding swamping the organization with all possible risks, which would likely discourage participation • Obtain sponsorship, and assign accountability for specific risks to responsible organizational members • Standardize approaches where possible, setting minimum thresholds of execution • Develop a diverse set of ERM team members • Keep ERM implementation simple Olson: ERM1

  22. ERM Research • Mostly descriptive, frameworks • SURVEY • Lynch-Bell [2002] surveyed 52 companies • Examined practices of governance, strategy, processes, technology, functions, culture • Milladge [2005]; Gates [2006] surveyed 271 members of the Conference Board • Skelton & Thamhain [2003]; Thamhain [2004] • 3 year field study R&D product development • Suggest look-ahead simulation, rapid prototyping to anticipate problems • Beasley et al. [2005] • Gathered data on 123 organizations, found ERM implementation positively related to: • Chief risk officer presence • Board independence • Top management support • Big Four auditor presence • Entity size • Banking, Education, Insurance Olson: ERM1

More Related