risk reimagined! series- the relationship between strategy, governance and risk; risk appetite and...
TRANSCRIPT
Risk Reimagined!
The relationship between Strategy, Governance, and Risk; Risk Appetite and Tolerance
Risk Reimagined!
Risk Management author and evangelist
Former Chairman of the Institute of Risk Management and risk manager
Webinar #1: December 1st, 2015
Webinar #2: December 8th, 2015 (People and Culture)
www.riskreimagined.com
Richard AndersonNorman Marks
Risk Reimagined!
About this webinar:
• CPE: 1 Credit • Program Level: Intermediate
to Advanced • Prerequisites and
Advance Preparation: N/A • Delivery Method: Group
Internet Based• Category: Specialized
Knowledge and Applications
To receive CPE credit:
• Remain joined to webinar for entire duration of programming (full hour)
• Answer all 3 polling questions• Answer all evaluation questions
Join the conversation on Twitter with #RiskReimagined
Risk Reimagined!
Polling question 1
Do you believe that risk management at your organization is fully supported by the board and top management?
- Without question, yes- With exceptions, mostly yes- Only to a degree- Not really- Unsure
Risk Reimagined!How does a senior executive or board member gauge the effect of risk on corporate objectives?
Risk Reimagined!
Is it enough to review a list of top risks at every board meeting?
Risk Reimagined!
Polling question 2
Does your board receive sufficient information to assess whether risk management is effective?
- Without question, yes- With exceptions, mostly yes- Only to a degree- Not really- Unsure
Risk Reimagined!
How does the board know whether risk management is adding value?
Risk Reimagined!
How do you measure success?
Risk Reimagined!
Where do reward and opportunity factor in?
Risk Reimagined!
Polling question 3
Does your management team provide sufficient guidance so that decision-makers at all levels can take the right amount of the right risk?
- Without question, yes- With exceptions, mostly yes- Only to a degree- Not really- Unsure
Risk Reimagined!
Risk appetite: the amount and type of risk that an organization is willing to take in order to meet their strategic objectives.
Risk tolerance: the acceptable variation in outcomes related to specific performance measures linked to objectives the entity seeks to achieve.
What is risk appetite? What is risk tolerance?
Risk Reimagined!
How can you help the board and top management set desired levels of risk and also help decision-makers take the right level of the right risks?
Risk Reimagined!
Does it make sense to be “risk averse”?
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Is risk appetite a useful concept or an overly complicated piece of mumbo jumbo?
Risk Reimagined!
Lightening doesn’t strike twiceBut sometimes it makes multiple hits in the same strike:
Risk Reimagined!
Lightening doesn’t strike twiceBut sometimes it makes multiple hits in the same strike:
Risk Reimagined!
The board should maintain sound risk management and internal control systems.Source: UK Corporate Governance Code, 2010.
The board should, at least annually, conduct a review of the effectiveness of the company’s risk management and internal control systems…Source: UK Corporate Governance Code, 2010.The board is responsible for determining
the nature and extent of the significant risks it is willing to take in achieving its strategic objectives.Source: UK Corporate Governance Code, 2010.
Behavioural change
Risk Reimagined!
http://tinyurl.com/ztwrm9s
Risk Reimagined!The word “appetite” brings connotations of food, hunger and satisfying one’s needs. We think that this metaphor is not helpful in understanding the phrase “risk appetite”. When those two words appear together we think it is more appropriate to think in terms of “fight or flight” responses to perceived risks. Source: Risk Appetite & Tolerance, IRM, 2011
The word “appetite” brings connotations of food, hunger and satisfying one’s needs. We think that this metaphor is not helpful in understanding the phrase “risk appetite”. When those two words appear together we think it is more appropriate to think in terms of “fight or flight” responses to perceived risks. Source: Risk Appetite & Tolerance, IRM, 2011
Our interpretation of risk appetite is that it represents a corporate version of exactly the same instincts and cognitive processes. Except of course, as a legal fiction (as opposed to a biological reality) organisations do not have their own brains, nervous systems, sensory organs and instincts. Source: Risk Appetite & Tolerance, IRM, 2011
Risk Reimagined!
Risk Appetite
Level Propensity to take risk
Propensity to exercise control
Strategic
Tactical
Project/ Operational
Measurement
Stakeholder Value
Risk Metrics
Control Metrics
Risk Taking
Exercising Control
Dele
gatio
nEscalation
Risk Reimagined!
A new balance
Propensity to take risk Propensity to exercise controlvv
Risk Reimagined!
Throughout the organization
Strategic Tactical Operational
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Risk Capability
A function of1. Capacity (how
much you can carry?); and
2. Maturity (how much can your people cope?)
Risk Reimagined!
Risk Measurement
Shareholder Value
Cashflow from OperationsOper
ational
Issues
1 Sales Growth
2 Operating Margin
3 Cash Tax Rate
Investmen
t Issue
s
4
CAPEX
5
Working Capital
6 Competiti
ve Advantag
e Perio
d
Discount RateDebt
7 Cost of Debt
Shareholder Value
= Cashflow from
Operations, discounted by the
Weighted Average Cost of
Capital -
Debt
Risk Reimagined!
Risk Measurement
Shareholder Value
Cashflow from OperationsOper
ational
Issues
1 Sales Growth
2 Operating Margin
3 Cash Tax Rate
Investmen
t Issue
s
4
CAPEX
5
Working Capital
6 Competiti
ve Advantag
e Perio
d
Discount RateDebt
7 Cost of Debt
RIS
KS
Risk Reimagined!
So what does this mean in practice?
A
B
t0 t1
Perf
orm
ance
Time
Current direction of travel for performance
A
B
t0 t1
Perf
orm
ance
Time
Where you might get to if everything goes right
D
CWhere you might get to if everything goes wrong
A
B
t0 t1
Perf
orm
ance
Time
D
C
Risk U
niverse
t0 t1
Perf
orm
ance
Time
Tolerance
t0 t1
Perf
orm
ance
Time
Appetite
1 2 3
4 5
Risk Reimagined!
Achieving objectives depends on...
Avoiding unnecessary problems
Creating the right performance culture
Setting appropriate corporate “ethics” and behaviours
Taking more managed risk
Risk Reimagined!
Achieving objectives depends on...
– risk of taking on too much risk which becomes unmanageable
Avoiding unnecessary problems
– risk of avoiding everything, resulting in total inaction
– risk of over-stretch resulting in burn-out
Creating the right performance culture
Setting appropriate corporate “ethics” and behaviours
– risk of sclerosis as every stakeholder of every decision is consulted
Taking more managed risk
Risk Reimagined!
Long
Ter
m P
erfo
rman
ce
Low
Hig
h
Low High(i) Managed Risk Taking or (ii) Avoiding
Pitfalls or (iii) Performance Culture or (iv) Corporate Ethics and Behaviours
Attribute:
And doing the right amount of each
Risk Reimagined!
Zone
3D
ead
Zone
Zone
1D
ead
Zone
Zone
2Pe
rfor
man
ceZo
ne
Long
Ter
m P
erfo
rman
ce
Low
Hig
h
Low High(i) Managed Risk Taking or (ii) Avoiding
Pitfalls or (iii) Performance Culture or (iv) Corporate Ethics and Behaviours
Attribute:
And doing the right amount of each
Risk Reimagined!
Balanced Risk
PerformanceCulture
CorporateEthics
AvoidingPitfalls
More ManagedRisk
PerformanceZone
DeadZones
Risk Reimagined!
Enron? Or the Big Banks?
PerformanceCulture
CorporateEthics
AvoidingPitfalls
More ManagedRisk
PerformanceZone
DeadZones
Risk Reimagined!
UK plc?
PerformanceCulture
CorporateEthics
AvoidingPitfalls
More ManagedRisk
PerformanceZone
DeadZones
Risk Reimagined!
The objective
PerformanceCulture
CorporateEthics
AvoidingPitfalls
More ManagedRisk
PerformanceZone
DeadZones
Risk Reimagined!
Relating this back to the balanced risk model
Risk Reimagined!
The bottom line
Risk Management should be the disruptive intelligence that pierces
perfect-place arrogance
Risk Reimagined!Risk Reimagined!Next Events:Webinar 2: Dec 8th, same time,same place
RiskReimagined Events:Tampa, FL March 3rd, 2016London, UK April 7th, 2016Chicago, IL April 22nd, 2016
Details for booking: www.riskreimagined.com
Risk Reimagined!
www.riskreimagined.com
Richard AndersonDirector, [email protected]
Norman MarksRisk Management Author and [email protected]
Contact Us:
Resolver [email protected]
Hussain HasanPrincipal and Regional Leader for Risk Advisory Services, RSM US [email protected]