Understanding power

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(No Transcript)
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Developing and implementing an effective
enterprise risk management strategy

• Presented by
• Glenn Labhart - Chief Risk Officer
• Dynegy Inc.

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The Success of Business Risk Management

• Investment and Return
• Opportunity and Return
• Capital allocation and management
• Competitive Advantage and Growth

Without risk, we are out of business.
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Why focus on Enterprise Wide Risk Management?

• Business at warp-speed
• Obsolete business models.
• Converging financial services providers
• Increasing demanding investors and regulators.
• Increasingly accountable - and demanding -
  directors.

Source AA and Financial Times
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Enterprise-Wide Risk Management
A comprehensive process to manage the impact on
the total return of an enterprise, allowing it to
achieve the stated business goals and objectives.
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Enterprise Risk

• Address all risks in all parts of the
  organization.
• Measure and aggregate risk on a consistent basis.
• Report on business exposure to all risks in real
  time.
• Standardize risk management processes, methods,
  and systems.
• Develop common computing platform to evaluate
  risk.
• Centralize risk.

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Risk Management Evolution
Accounting
Economics
Risk Control
Positioning
Balance SheetEntries
EconomicValues
Valueat Risk
OptimalPosition
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Address All Risks
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Centralized Risk



Managed Unacceptable Risk
Complete Risk Reduction
Ineffective Risk Mgmt.
Open Operational Control


Flexible Operational Control
Stifled Operational Control
The benefit is reduced risk at lower cost.
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Enterprise Risk Framework
RISK IDENTIFICATION
Risk Inventory
Strategic
Operational
Financial
Operating Activities
Financial Services
Distribution
Generation
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Enterprise Risk Framework
RISK MANAGEMENT
Risk Measurement
VAR
Optionality
Modeling
Strategy

Processes
Execution
Planning
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Enterprise Risk Framework
BUSINESS OUTCOMES
Results
EPS
RAROC
Balance Sheet
MA
Applications
Deals
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Enterprise Risk Framework
RISK IDENTIFICATION
RISK MANAGEMENT
BUSINESS OUTCOMES
Risk Inventory

Results
Risk Measurement
Shareholder Value Risk Adjusted Return on
Capital Balance Sheet Assets, Funding,
Capital
Income Statement Earnings (EPS) Cash
Flow Economic Value Measures
Technology Environment Catastrophic
Regulatory Political Economic
Operational Competitive Pricing Legal Financial
Risk Measurement Financial Modeling

Operating Activities
Applications
Strategy
Treasury Risk Product Management Management Devel
opment Purchasing Sales Distribution Manufacturi
ng Marketing Pension Tax Information Actuarial
Systems Insurance Accounting Other
Shareholder Value Risk Adjusted Return on
Capital Balance Sheet Assets, Funding,
Capital
Income Statement Earnings (EPS) Cash
Flow Economic Value Measures
Senior Management Decision Making Strategic
Planning Processes Internal Controls Execution
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Key Elements in Identifying Enterprise Risk

• Financial risks arise from a companys operations
  and strategic plan. Companies will gain value by
  understanding these risks rather that solely
  focusing attention on financial risks.
• Define Operational risks and quantify.
• Differentiate between risk and earnings.
• Develop framework that identifies real option
  valuation.
• Balance Strategic and Tactical focus of
  responsibilities.
• Develop upstream processes.

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Enterprise Risk Methodology
Senior Management
Top Down Corporate Risk Strategic Assessment
Strategic and Tactical Risks Managerial
Priorities Solutions
Bottom-up risk inventory
Business Management
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Enterprise Risk Management Process
Phase I
Discovery/Risk Assessment
Phase II
Quantification/Risk Identification
Think, Focus, Plan, Execute, Follow-up
Tolerance Setting
Phase III
Policy Development
Phase IV
Hedging/Trading Strategy
Phase V
Education and Monitoring
Phase VI
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PHASE I Discovery
Perform Gap Analysis

• Develop knowledge of business units.
• Review strategic plan and internal documentation.
  
• Examine core competencies.
• Business/Industry risk profile
• Process and Systems Review
• Accounting Methodology / Regulatory

THINK
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PHASE I Risk Assessment

• Identify and consider internal factors of your
  company
• Nature of activities, quality of personnel,
  organizational changes, employee turnover
• Planning and historical data
• Cross Functional Data Gathering
• Identify external factors
• Fluctuating economic activities, changes in the
  industry, technological advances.
• Develop methodology for risk identification

THINK
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PHASE II Risk Identification
Enterprise Risk
Asset Risk
Commodity Risk
Financial Risk
Fixed Price
Interest Rate
Transmission Capacity
Basis
Foreign Exchange
Operating Costs
Index
Capital at Risk
Transportation
Generation Capacity
FOCUS
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PHASE II Risk Identification
FOCUS
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PHASE II Risk Identification
Accounting Hedging Political Bankruptcy Horizon P
repayment Basis Iceberg Publicity Call Interest
Rate Raw Data Capital Interpolation Regulatory Col
lateral Knowledge Reinvestment Commodity Legal Rol
lover Concentration Limit Suitability Contract Liq
uidity Systemic Credit Market Systems Currency Mod
eling Tax Curve Construction Netting Technology D
aylight Optional Time Lag Equity Personnel Volatil
ity Extrapolation Phantom Yield Curve
FOCUS
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PHASE III Tolerance Setting

• Identify Corporate Risk Tolerance and obtain
  Board of Directors Approval
• Develop executive risk policy statement.
• Create acceptable risk exposure that establishes
  accountability of business unit leaders.
• Design risk measurement that can be understood.
• Define risk tolerance relative to the companys
  growth.

PLAN
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PHASE IV Policy Development

• Chairmans Letter
• Risk Management Policy Statement Executive
  Summary
• Major Policy Guidelines for Business Units
• Trading Limits and Controls
• Foreign Exchange and Interest Rate Risk
• Reporting Requirements / Accounting Policies
• Systems
• New Products
• Code of Conduct / Conflicts
• Internal Controls / Segregation of Duties
• Credit

EXECUTE
Key Elements for Trading Policies
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PHASE V Hedging/Trading Strategy

• Centralize Risk Management
• Decentralize Risk Taking
• Define Book Structures
• Map commodity price risk to separate book to
  segregate financial price risk
• Establish daily procedures which segregate
  financial functions

EXECUTE
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PHASE V Hedging/Trading Strategy
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PHASE V Hedging/Trading Strategy
Key Elements in Risk Measurement

• Include senior management in basic development
  and use as a resource for development of scenario
  planning.
• Define primary risk drivers.
• Separate strategic risk measurement from tactical
  risk measurement.
• Explain risk results in English ( or your native
  language).

EXECUTE
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PHASE V Hedging/Trading Strategy
Develop Aggregate Exposure Limits

• Control Net Exposure Whether From Financial or
  Physical Transaction
• Mark to Market Position and Portfolio Controls
• Progressive Authority Based on Position Within
  Organization
• Maximum Exposure Without Board of Directors
  Authorization
• Monitor cash outlay
• Document acceptable losses to trading portfolios

EXECUTE
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PHASE V Hedging/Trading Strategy
Set up Risk Oversight Function

• Identify and evaluate enterprise risk
• Aggregate risk exposure
• Coordination of all inputs for strategic and
  tactical risk
• Measure corporate exposure quantitatively
• Continually evaluate trading limits
• Forward Commodity Curve Evaluations

EXECUTE
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PHASE VI Education and Monitoring

• Senior Management sponsorship of enterprise
  projects.
• Initiate active communication between financial
  services and commercial divisions.
• Communicate risk exposure in writing.
• Communicate cost benefit of enterprise risk
  efforts.

EXECUTE
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PHASE VI Education and Monitoring
Risk Modification through operating decisions
Risk Control to reduce potential for returns
less than target through risk aggregation.
Risk Transformation (Strategic) through business
expansion to increase upside profit potential.
Follow-Up
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Enterprise Risk ManagementRisk Charges
Risk-free Rate
Dynegy Corporate Premium
Specific Risk Charges
Capital Charge
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Enterprise Risk Management Relative Risk/Returns
Capital at Risk Charge Risk-Free Charge

Capital at Risk Charge Risk-Free Charge

• Low Risk High Risk
• Low Return High Return

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PHASE VI Education and Monitoring
Strategy vs. Control
Control Focus Risk assessment focus on control
aspects of an organizations infrastructure to
measure, manage, and monitor risk. Strategic
Focus Extends to integrate core risk components
in the business process.
Strategy Based
Control Based
Develop a business strategy focusing on risk
measurement and control as a platform for
maximizing growth and return strategies.
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Conclusion