Study Unit 5.2: Strategy, business objectives and performance

Question 1

What are the two things that ERM affect in an entity?

Answer 1

Strategy
Relevance

Question 2

Define: Strategy

Answer 2

refers to an organization’s plan to achieve its mission and vision, and to apply its core values

Question 3

How does having a well-defined strategy help an organization?

Answer 3

A well-defined strategy drives the efficient allocation of resources and effective decision-making

Question 4

How does “Relevance” help an organization?

Answer 4

It also provides a road map for establishing business objectives.

ERM does not create the entity’s strategy, but it influences its development

Question 5

Explain how ERM helps an organization better understand

Answer 5

The possibility that strategy and business objectives may not align with the mission, vision, and core value

The implication from the strategy chosen

Risk to executing the strategy

Question 6

Definition: Mission

Answer 6

The entity’s main purpose, which establishes why it exists

Question 7

Definition: Vision

Answer 7

What the entity aims to achieve over time

Question 8

Definition: Core Values

Answer 8

The entity’s belief of what is acceptable or unacceptable, which influence the behavior of the organization

Question 9

In depth explanation: The possibility that strategy and business objectives may not align with the mission, vision, and core value

Answer 9

A chosen strategy must support the entity’s mission and vision. If not, it will cause value destruction

Mission and vision help the organization to establish boundaries and focus on how decisions may affect strategy.

Once an organization understands its mission and vision it can formalize strategies that will yield the desired risk profile

Question 10

In depth explanation: The implication from the strategy chosen

Answer 10

Strategy selection is about making choices and accepting trade-off.

Each strategy has its own risk profile – implication arising from the strategy

Board and management must determine if the strategy works together with the risk appetite

Question 11

In depth example: Evaluating the chosen strategy

Answer 11

ERM does not create the entity’s strategy.

It informs the organization on risks associated with alternative strategies considered and, ultimately, with the adopted strategy

The entity must evaluate how the chosen strategy with potential risks that may arise from the strategy could affect the entity’s risk profile

The company must choose a strategy with the lowest risk profile yielding the best results/reward

Question 12

What risks may result from the strategy chosen?

Answer 12

The entity must decide if it will achieve its mission and vision with the strategy, or there is a high risk achieving the chosen strategy.

Question 13

Define: Risk Profile

Answer 13

A composite view of the risk assumed at a particular level of the entity, that positions management to consider the types, severity, and inter-dependencies of risks, and how
they may affect performance relative to the strategy and business objectives

Question 14

How does risk profile relate to performance?

Answer 14

Risk profile allows management to consider the type, severity, and inter-dependencies of risks, and how they may affect performance

Question 15

What is the relationship between risk and performance?

Answer 15

The relationship between risk and performance is rarely linear

An increase in changes in performance targets do not always result in corresponding changes in risk

Question 16

What is the importance of Integration?

Answer 16

ERM It is not a function or department within an entity

Instead, culture, practices, and capabilities are, together, integrated and applied throughout the entity

Question 17

What are the benefits of integrating ERM with business activities?

Answer 17

Anticipate risks earlier

Identify and pursue existing and new opportunities

Respond to deviations in performance quickly and consistently

Develop and report a more comprehensive and consistent portfolio view of risk

Improve collaboration, trust, and information sharing across the organization

Question 18

Three ways organizations can encourage full integration

Answer 18

Culture
Capabilities
Practices

Question 19

How can entities encourage transparency and risk awareness into culture?

Answer 19

Implementing forums for sharing information (e.g. risks, opportunities) without fear.

Aligning core values and behaviors with incentives and remuneration models

Sharing a strong understanding of the drivers of value creation

Question 20

In depth explanation: Capabilities

Answer 20

Management is able to make decisions given its risk appetite and risk profile that can change over time.

The organization routinely hires and has access to capable individuals with relevant experience or other relevant resources to support decision-making.

Vendors, contractors, and other third parties are considered in discussions of risk and performance

Question 21

In depth explanation: Practices

Answer 21

Setting strategy clearly considers risk when evaluating options.

Management actively addresses risk in pursuit of its performance targets.

Regular and consistent monitoring performance results and changes in the risk profile