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Week 1 SMA3033 Enterprise Risk Management Students

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15 views

Week 1 SMA3033 Enterprise Risk Management Students

Uploaded by

Ridhwan Afiff
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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SMA3033:

Enterprise Risk Management


Topic 1:
ERM Concept & Framework
Introduction to the Course
Lecturer: Sharifah Fairuz Syed Mohamad
Room: FEM Level 3, Room 44

Overview of SMA3033:
Course Teaching Plan
Introduction to the Course
Attendance

• ALL attendance will be recorded from GOALS (Both physical and online
class) – there will be attendance section for lecture and tutorial
accordingly.
• Absence from class (please let me know latest by the day you are going to
be absent / provide MC / letter / valid reasons).
1.1 Introduction – Principal Terms
Principle Terms in enterprise risk management (there are
practi cally more than 20 to list)

So here are some of them…we will be learning more terms


along with the course 

1. The diff erent types of risks (market, credit, operati onal,


liquidity, insurance, interest rate, foreign exchange,
environmental)
2. Severity vs Frequency of risks
3. ISO 31000
1.1.1 Definitions and Concept of Risk
Defi niti ons and Concept of Risk
1. Uncertainty over range of possible outcomes (Important to
disti nguish between upside and downside risks).
2. Quanti fi able probability associated with parti cular outcome /
range of outcomes.
3. Likely severity of a loss; given that a loss occurs
4. Exposure to loss (maximum loss that could be suffered)
5. Problems and opportuniti es that arise as a result of an outcome
not being as expected
6. Can be divided into whether or not they depend on future
uncertain events, on past events that have yet to be assessed or
on past events that have already been assessed.
1.2 The Concept of ERM
Defi niti on:

Enterprise Risk Management (ERM) is a holisti c risk


management process which considers the risks of an enterprise
/ organizati on as a whole; rather than considering individual
risks and business units in isolati on.

This should also consider both easily quanti fi able risks such as
those relati ng to investments and those which are more
diffi cult to assess such as risk of loss due to reputati onal
damage.
1.2 The Concept of ERM
The Concept of ERM

The term ‘enterprise risk management’ also implies some sort


of process – not just the management of risk itself, but the
broader approach of:
• Recognizing the context;
• Identi fying the risks;
• Assessing and comparing the risks with the risk appeti te;
• Deciding on the extent to which risks are managed;
• Taking the appropriate acti on; and
• Reporti ng on and reviewing the acti on taken.

• *When formalized into a process, with detail added on how


to accomplish each stage, the result is what we call an ERM
framework.
1.2.2 Traditional RM
Risk management is the process of:
• IDENTIFYING the risks faced by an organizati on.
• ASSESSING how likely these risks are to materialize and what
their impact could be.
• DECIDING how to deal with each risk (keep / remove /
reduce / transfer).

*The key problem with a silo approach:


• It misses the interacti ons and interdependencies between
risks faced by diff erent business units.
• These interrelati onships between risks may serve to reduce
their impact (diversifi cati on), or may work to increase their
eff ect (concentrati on).
1.2.2 ERM vs Traditional RM
HOLISTIC APPROACH
• Applying risk management techniques
consistently across the whole business /
enterprise
• Led by the Board, co-coordinated through a
Risk Management Functi on, led by a Chief VALUE CREATION
Risk Offi cer, and incorporated into the day- • Integrati ng risk management and
to-day operati ons of all personnel. measurement into business processes and
• Recogniti on that risks interact strategic decision making
(concentrati on of risk and diversifi cati on / • Considering not only downside risks but also
portf olio eff ects) and that risks are dynamic upside risks.
(ongoing approach needed)
1.2.3 Objective of Risk Management

To optimize risk-adjusted returns; i.e. to maximize


returns for a given level of risk
1.2.4 Role of Important Concepts in ERM

The Holistic Approach Downside and Upside


• As discussed Risks
• Upside - risks that appear as
unexpected but positive
• Downside - risks that appear as
unexpected and negative

Risk Measurement
• quantifiable
• non-quantifiable
1.2.4 Responses to Risk & Risk Management

(1) RETAIN (2) REMOVE (3) REDUCE


• The risk is small • Cease production of a risky • Take action to reduce
• A type of risk that the product line
its potential impact /
company is well-placed frequency
• Other options to deal
with this risk is unfeasible

(4) TRANSFER
• By insuring the risk /
outsourcing operation
1.2.5 Reasons Why We Manage Risk

benefits society as a whole (reducing contagion risk)

it’s management’s job to make optimal risk-return decisions on behalf of the


shareholders

to reduce earnings volatility

to maximise shareholder value

to enhance job and financial security, especially for senior executives.


1.2.5 Benefits of ERM

Improved reporting, transparency and understanding of risk

Improved organizational effectiveness

Resulting in improved business performance

It is flexible; an ERM framework can be designed to suit the


individual circumstances of each particular organisation
1.2.5 ERM programs have typically been
implemented in response to …
Previous risk management failures in a company / organization
itself

Failures in other companies

A regulatory requirement

Pressure coming from other stakeholders


1.2.5 Why might companies that have adopted ERM experienced
improvements in business performance?

This is due partly to senior management being more informed


when taking important decisions. This enables them to:
 Better understand the organization’s risk exposure
 Better comprehend the links between business growth, corporate risk and
return
 Better understand the impact of changing external factors, such as interest
rates
 Assess more accurately the risk / return trade-offs of a particular decision
 Align strategy more closely with risk appetite
1.2.5 How can a centralized ERM function improve an
organizations’ operational effectiveness?
Co-ordinating risk management activities across all parts of the
organization

Encouraging and facilitating the sharing of risk information

Identifying and assessing links between risks managed by various teams

Improving efficiency (e.g. with respect to management time and


business resources)
1.2.5 How may ERM enhance an organization’s business
performance?
Using and allocating capital more efficiently

Minimizing losses and unpleasant surprises

Pricing, managing and / or transferring risks better

Optimizing risk mitigation strategies (e.g. allowing for natural hedges between business units)

Reacting more quickly, e.g. seizing opportunities

Deriving value from the time, effort and money spent on risk management, rather than it being viewed as a box-ticking
exercise.
1.3 Framework for Risk Management & Control
within Company
Corporate Governance: The way the Board CONTROLS the
organization, and the processes it establishes so that it is run by
management and in the best of shareholders. Good corporate
governance is essential to establish effective ERM Framework.
1.3 Framework for Risk Management & Control
within Company
Three Main responsibilities of the Board with regard to risk
management:
• Risk governance
• Setting ERM policies
• Determining risk compensation
1.3.1 Framework for Risk Management & Control
within Company

Board Education &


Board Constitution Board Compensation
Performance
1.3.1 Framework for Risk Management & Control
within Company

Board Constitution:

• Different people should hold the role of chairman (running the board) and chief

executive (running firm)

• Meaning: these roles should be separated in order to avoid conflict of interest

• Good practice for majority of directors to be non-executives, independent and sole

members of committees such as remuneration, audit and appointment


1.3.1 Framework for Risk Management & Control
within Company
Board Education:

• Detailed specialist industry knowledge is needed only by executive members of the board

– for non-executive directors it is more important that they have the generic skills

necessary to hold executives to account. These skills are not innate, and new directors

should receive training to help them perform their roles.


1.3.1 Framework for Risk Management & Control
within Company
Board Compensation:

• Compensation should be linked to the individual performance of a director and to the

performance of the firm as a whole. The latter can be achieved by basing an element of

remuneration on the share price. Averaging this element over several periods can reduce

the risk of short-termism. A similar way of incentivizing directors is to encourage or even

oblige them to buy shares in the firm on whose board they sit
1.3.1 Framework for Risk Management & Control
within Company
Board Transparency:

• Good corporate governance implies transparency in dealings with stakeholders

who include shareholders, regulators, customers and employees to name but

a few. This means sharing information as openly as possible, including the minutes of

board meetings, as far as this can be done without the disclosure of commercially

sensitive information
1.3.1 Framework for Risk Management & Control
within Company – Three Lines of Defence
(1) First tier - Part of the day-to-day management of an organization, for example pricing and

selling investment products

(2) Second tier of risk management carried out by Central Risk Function (CRF)

(3) Third tier (Audit)


1.3.2 Framework for Risk Management & Control
within Company – Best Practices

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