Class #5

Question 1

Five (Broad) Categories of Assets Representing Value to the Organization

Answer 1

♠ Physical
♠ Customer
♠ Financial
♠ Employee
♠ Organizational

Question 2

Physical assets (Assets Representing Value to the Organization)

Answer 2

 Land
 Buildings
 Equipment
 Inventory

Question 3

Customer assets (Assets Representing Value to the Organization)

Answer 3

 Customers
 Channels
 Affiliates

Question 4

Financial assets (Assets Representing Value to the Organization)

Answer 4

 Cash
 Receivables
 Investments
 Equity

Question 5

Employee assets (Assets Representing Value to the Organization)

Answer 5

 Employees
 Suppliers
 Partners

Question 6

Organizational assets (Assets Representing Value to the Organization)

Answer 6

  Leadership
  Strategy 
  Knowledge 
  Values 
  Reputation 
  Innovation 
  Systems 
  Process

Question 7

Physical assets risks

Answer 7

 Unauthorized Use
 Inefficient Use
 Catastrophic Risk
 Unacceptable Costs

Question 8

Customer assets risks

Answer 8

 Pervasive Quality Failures
 Significant Loss of Key Customers
 Loss of Markets

Question 9

Financial assets risks

Answer 9

  Poor Economic Performance 
  Unacceptable Losses 
  Unexpected Losses 
  Insufficient Liquidity 
  Inefficient Use

Question 10

Organizational assets risks

Answer 10

  Lack of Leadership 
  Unclear Strategies 
  Inefficient Processes 
  Irresponsible Behavior 
  Illegal Acts
  Inadequate  Information for Decision 
  Business Interruption 
  Brand Erosion 
  Reputation Losses 
  Security Breach

Question 11

Implementing ERM requires management to: (7 steps)

Answer 11

1. Identify and understand organization’s priority risks
2. Define current state of organization’s risk management capabilities
3. Define desired future state of RM capabilities
4. Determine how to reach point #3
5. Develop an “argument” for addressing the gap between #2 and #3 does it make economic sense
6. Organize plan of action that moves towards desired ERM capabilities.
7. Provide oversight and facilitation necessary to ensure effective integration and coordination of overall effort.

Question 12

Estimated that most comprehensive ERM plans will take approximately between…

Answer 12

3-5 years

Question 13

With ERM we must also look at…

Answer 13

Risk appetite

Question 14

Risk appetite definition

Answer 14

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.

Question 15

Risk appetite reflects the organization’s (3)

Answer 15

1. Risk management philosophy;
2. Organizational culture; and
3. Organization’s operating style.

Question 16

Observations about risk appetite and risk tolerance (3)

Answer 16

1. Risk appetite is strategic (offensive) whereas risk tolerance is tactical.
2. Risk appetite relates primarily to organization’s business model whereas risk tolerance relates primarily to an organization’s objectives.
3. Every organization has a risk appetite -
   although some organizations do not explicitly acknowledge such hunger.

Question 17

Some important considerations when evaluating alternative risk responses (8)

Answer 17

1. Management’s Objectives and Strategies
2. Risk Reward Trade-offs
3. Risk Management Capabilities
4. Time Horizon
5. Potential Means of Financing
6. Residual Risk
7. Inadvertent Risk Taking (i.e. Passive Retention); and
8. Risk Manageability

Question 18

ERM plan stages

Answer 18

1. Initial Stage
2. Repeatable Stage
3. Defined Stage
4. Managed Stage
5. Optimizing Stage

Question 19

Initial Stage (ERM plan stages)

Answer 19

ad hoc (no formal plan) purchases - not leveraged / few
partnerships

Question 20

Repeatable Stage (ERM plan stages)

Answer 20

occasional supply leveraging

Question 21

Defined Stage (ERM plan stages)

Answer 21

defined process / put strategic partnerships in place

Question 22

Managed Stage (ERM plan stages)

Answer 22

effective use of formal risk management techniques

Question 23

Optimizing Stage (ERM plan stages)

Answer 23

integrated and effective procurement process and continual benchmarking (i.e. monitoring)

Question 24

Some common pitfalls that should be avoided in implementing an effective ERM plan:

Answer 24

1. Lack of support from the top
2. Lack of stakeholder ownership and buy-in
3. Failure to integrate ERM with what matters (i.e. of value) to the organization
4. Getting immersed in details
5. Failure to define roles and responsibilities
6. Failure to consider cultural issues
7. Failure to balance market making activities with market control activities
8. Failure to manage conflicts of interest
9. Failure to apply Management’s ERM plan across entire organization
10. Getting ahead of organization’s capabilities