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Enterprise Risk Management

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Enterprise Risk Management Dr. Jacques Saint-Pierre, LABVAL From a process of compliance to a strategic tool for value creation – PowerPoint PPT presentation

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Title: Enterprise Risk Management


1
Enterprise Risk Management
  • Dr. Jacques Saint-Pierre, LABVAL
  • From a process of compliance
  • to a strategic tool
  • for value creation

2
Value Creation landscape
  • The new, holistic view of risk realizes the goal
    is value creation.
  • Risk management, capital structure management,
    and capital budgeting, if coordinated
    effectively, provide a framework to decrease
    total risk while increasing future expected cash
    flow.

3
Capital Structure Management (1/2)
  • The highest credit rating is not a sufficient
    condition to maximise value creation.
  • Depending on the portfolio of existing assets and
    liabilities (business mix), the marginal cost of
    maintaining the highest credit rating can be
    greater than the benefits it provides.

4
Capital Structure Management (2/2)
  • Once a bond-rating objective has been determined,
    the question becomes how much debt a company can
    borrow.
  • The optimal capital structure trade-off simply
    cannot be properly evaluated in terms of an
    effect on the interest paid on one of the
    components of capital.

5
Capital Management
  • Firms wishing to obtain sustainable superior
    returns cannot avoid committing to at least some
    firm-specific resources.
  • Commitments to firm-specific resources are no
    panacea because they may imply irreversible
    losses as well as sustainable superior returns.
  • Most of the strategic choices that managers have
    to make in todays highly uncertain and
    competitive markets imply both commitment and
    flexibility.

6
Developing a culture
  • that integrates risk management into the
    decision-making process is often the first step
    in reaping rewards from ERM in terms of value
    creation.

7
Do not let regulators drive
  • tomorrows risk management agenda.
  • Meet regulatory demands but ensure your
    decision-making process is seen both company wide
    and by shareholders as a single entity working
    toward value creation.

8
Remember W. Edwards Deming (1900-1993)
  • What we need to do is learn to work in the
    system, by which I mean that everybody, every
    team, every platform, every division, every
    component is there not for individual competitive
    profit or recognition, but for contribution to
    the system as a whole on a win-win basis.

9
RatingsDirect
  • ERM For Ratings Of Nonfinancial Corporations

10
On May 7, 2008, Standard Poor's Ratings
Services announced that they would expand their
ratings analysis of nonfinancial corporations to
include a review of enterprise risk management
(ERM). They expect this initiative to enhance
their analysis of management generally, identify
differentiated capabilities of companies to
respond to adversity, and help make their ratings
more forward-looking.
11
Which sectors would get an ERM analysis?
  • SPs will introduce ERM discussions into the
    ratings process for all companies in all sectors
    globally. Roll-out will be staggered over several
    months.

12
Exactly when will this happen?
  • ERM will become a part of the standing agenda in
    regular review meetings SPs have with rated
    companies beginning in the third quarter of 2008.
    After three to six months of gathering
    information from these discussions, they expect
    to be able to benchmark ERM performance and
    publish criteria that will eventually lead to
    evaluation and possible scoring of ERM
    capabilities. They would not expect to entertain
    the idea of scoring until at least mid-2009.

13
What if companies want to present their ERM
before their regular review meeting?
  • They are open to discussing ERM with companies at
    any time, but for SPs a more effective
    discussion will result from allowing their
    analysts to take the lead in scheduling.
  • SP does not require elaborate ERM presentations
    because they say their analysts are already
    familiar with companies' key risks, risk
    appetite, and risk-mitigation strategies.
  • According to SPs the ERM discussion fits
    naturally into the existing dialogues they
    routinely conduct. Always according to SPs,
    good risk-management practice suggests that ERM
    be integrated into everyday practice and
    therefore not be something that requires hours of
    explanation.

14
Who will conduct the reviews?
  • The primary ratings analyst for each company has
    responsibility for the review. ERM specialists
    will assist with training and consistency issues.
    In all cases, someone who is knowledgeable about
    the sector will do the review.

15
What effect will ERM have on ratings in the long
run?
  • SPs will use ERM analysis to enhance their
    evaluation of management performance, an existing
    part of their analytical framework. They expect
    that the effect on ratings will be on the
    margins firms with very highly developed ERM
    programs might see a positive impact on the
    ratings and firms with unexpectedly poor ERM
    programs might see a negative impact.

16
Discussion Questions for Management Meetings
SPs ERM review for nonfinancial companies will
be based primarily on information provided by
issuers in public disclosures and through
discussions with SP analysts. The following
slide provides sample discussion topics and
questions about which their analysts will inquire.
17
Sample Discussion Topics and Questions
  1. What are the company's top risks, how big are
    they, and how often are they likely to occur? How
    often is the list of top risks updated?
  2. What is management doing about top risks?
  3. What size quarterly operating or cash loss has
    management and the board agreed is tolerable?
  4. Describe the staff responsible for risk
    management programs and their place in the
    organization chart. How do you measure success of
    risk management activities?
  5. How would a loss from a key risk impact incentive
    compensation of top management and on
    planning/budgeting?
  6. Tell us about discussions about risk management
    that have taken place at the board level or among
    top management when making strategic decisions.
  7. Give an example of how your company responded to
    a recent surprise in your industry and describe
    whether the surprise affected your company and
    others differently.

18
How to prepare your company ?
19
Q How can your company prepare for the ERM
discussion and ratings process with SPs?
  • A The ERM evaluation is an opportunity to
    establish a comfort level with the ratings agency
    as it adds a new dimension to its assessment of
    enterprise stability and the readiness of your
    own risk management capability.
  • Management can prepare by
  • Leveraging work already done on ERM.
  • Performing a robust risk assessment that goes
    beyond business-as- usual and
    includes emerging risks.
  • Evaluating, and being able to articulate, the
    inherent strengths and weaknesses of the current
    ERM capability.
  • Assessing the state of the companys risk
    management culture.
  • Demonstrating that ERM influences strategic
    planning.
  • Preparing an action plan to improve the SP ERM
    rating, secure an upgrade or defend against a
    downgrade.
  • Developing a presentation that demonstrates ERM
    progress to SP.

20
Q What is the boards role?
A Boards must first recognize the SPs
pronouncement is meaningful in that a direct
relationship is being established between ERM
assessments and credit rating decisions. Boards
can begin by seeking assurance from management
that an effective ERM framework is in place and
that management is prepared to champion the
current ERM environment to the rating agency.
21
Q How are the scores defined and when will they
be applied?
A The ERM scores will be presented in four
levels excellent (lowest risk), strong (slight
risk), adequate (moderate risk) and weak (highest
risk). SPs has said that formal scoring of ERM
capabilities will be deferred until the agency
has conducted a sufficient number of reviews
across sectors to permit reliable benchmarking
and publishing of evaluation criteria. This could
be well into 2009.
22
Sources
  • www.algorithmics.com
  • www.standardandpoors.com
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