Class #5 Flashcards
Five (Broad) Categories of Assets Representing Value to the Organization
♠ Physical ♠ Customer ♠ Financial ♠ Employee ♠ Organizational
Physical assets (Assets Representing Value to the Organization)
Land
Buildings
Equipment
Inventory
Customer assets (Assets Representing Value to the Organization)
Customers
Channels
Affiliates
Financial assets (Assets Representing Value to the Organization)
Cash
Receivables
Investments
Equity
Employee assets (Assets Representing Value to the Organization)
Employees
Suppliers
Partners
Organizational assets (Assets Representing Value to the Organization)
Leadership Strategy Knowledge Values Reputation Innovation Systems Process
Physical assets risks
Unauthorized Use
Inefficient Use
Catastrophic Risk
Unacceptable Costs
Customer assets risks
Pervasive Quality Failures
Significant Loss of Key Customers
Loss of Markets
Financial assets risks
Poor Economic Performance Unacceptable Losses Unexpected Losses Insufficient Liquidity Inefficient Use
Organizational assets risks
Lack of Leadership Unclear Strategies Inefficient Processes Irresponsible Behavior Illegal Acts Inadequate Information for Decision Business Interruption Brand Erosion Reputation Losses Security Breach
Implementing ERM requires management to: (7 steps)
- Identify and understand organization’s priority risks
- Define current state of organization’s risk management capabilities
- Define desired future state of RM capabilities
- Determine how to reach point #3
- Develop an “argument” for addressing the gap between #2 and #3 does it make economic sense
- Organize plan of action that moves towards desired ERM capabilities.
- Provide oversight and facilitation necessary to ensure effective integration and coordination of overall effort.
Estimated that most comprehensive ERM plans will take approximately between…
3-5 years
With ERM we must also look at…
Risk appetite
Risk appetite definition
The amount of risk an organization is willing to undertake in pursuit of value i.e. the amount of Active Retention and amount of Residual Risk.
Risk appetite reflects the organization’s (3)
- Risk management philosophy;
- Organizational culture; and
- Organization’s operating style.
Observations about risk appetite and risk tolerance (3)
- Risk appetite is strategic (offensive) whereas risk tolerance is tactical.
- Risk appetite relates primarily to organization’s business model whereas risk tolerance relates primarily to an organization’s objectives.
- Every organization has a risk appetite -
although some organizations do not explicitly acknowledge such hunger.
Some important considerations when evaluating alternative risk responses (8)
- Management’s Objectives and Strategies
- Risk Reward Trade-offs
- Risk Management Capabilities
- Time Horizon
- Potential Means of Financing
- Residual Risk
- Inadvertent Risk Taking (i.e. Passive Retention); and
- Risk Manageability
ERM plan stages
- Initial Stage
- Repeatable Stage
- Defined Stage
- Managed Stage
- Optimizing Stage
Initial Stage (ERM plan stages)
ad hoc (no formal plan) purchases - not leveraged / few partnerships
Repeatable Stage (ERM plan stages)
occasional supply leveraging
Defined Stage (ERM plan stages)
defined process / put strategic partnerships in place
Managed Stage (ERM plan stages)
effective use of formal risk management techniques
Optimizing Stage (ERM plan stages)
integrated and effective procurement process and continual benchmarking (i.e. monitoring)
Some common pitfalls that should be avoided in implementing an effective ERM plan:
- Lack of support from the top
- Lack of stakeholder ownership and buy-in
- Failure to integrate ERM with what matters (i.e. of value) to the organization
- Getting immersed in details
- Failure to define roles and responsibilities
- Failure to consider cultural issues
- Failure to balance market making activities with market control activities
- Failure to manage conflicts of interest
- Failure to apply Management’s ERM plan across entire organization
- Getting ahead of organization’s capabilities
