Shaping Your Culture via Risk Appetite

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Andrew Smart will briefly explain risk appetite and how it can be linked into the overall strategy and risk management process of an organisation. He will then go on to clarify how Risk Appetite statements work alongside Vision statements; creating the right ‘tone from the top’, and how that can be cascaded through the organisation in the form of Risk Tolerances and KRI's. The webinar will conclude with a demonstration of how to enable and embed change, leveraging your SharePoint investment.

Please contact andrew.smart@stratexsystems.com for more details about the presentation or to have a talk about our software solutions.

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Shaping Your Culture via Risk Appetite

  1. 1. ShapingYour Culture via Risk Appetite Embedding the tone from the top Prepared  for:   StratexSystems  Webinar  Series   18  October  2012  
  2. 2. Page  §  2   About StratexSystems “StratexPoint  enabled  us  to  reduce   the  value  of  our  opera6onal  losses   by  94%,  the  volume  by  63%  and  our   economic  capital  provision  by  23%”     -­‐  Head  of  Opera=onal  Risk,  HML  -­‐   Skipton  group   Our  mission   To  provide  an  integrated  strategy  and  risk   management  solu8ons  which  enhances   strategy  execu=on,  enhance  capital   efficiency  by  15%  and  reduce  opera=onal   losses  25%  while  providing  100%   confidence  that  your  business  is  opera=ng   within  appe=te.  
  3. 3. Page  §  3   Agenda §  What is Risk Appetite? §  What do we mean culture & risk culture ? §  Embedding the ‘tone from the top’
  4. 4. Risk  Appe=te  
  5. 5. Page  §  5   The credit crunch and subsequent fall-out is rewriting the rules on strategy execution and risk management
  6. 6. Page  §  6   Corporate governance weaknesses related to Risk Appetite contributed to the credit crunch Supervisors  see  insufficient  evidence  of  board  involvement  in  seOng  and   monitoring  adherence  to  firms’  risk  appe=te.     Risk  appe=te  statements  are  generally  not  sufficiently  robust;  such   statements  rarely  reflect  a  suitably  wide  range  of  measures  and  lack   ac8onable  elements  that  clearly  ar8culate  firms’  intended  responses  to   losses  of  capital  and  breaches  in  limits.   Board-­‐level  engagement  in  risk  oversight  should  be  materially  increased,  with  par8cular  aKen8on   to  the  monitoring  of  risk  and  discussion  leading  to  decisions  on  the  en=ty’s  risk  appe=te  and   tolerance.     Remunera=on  structures  for  all  such  “high  end”  employees  are  appropriately  aligned  with  the   medium  and  longer-­‐term  risk  appe=te  and  strategy  of  the  en8ty.     In  essence,  the  obliga8on  of  the  board  in  respect  of  risk  should  be  to  ensure  that  risks  are  promptly   iden8fied  and  assessed;  that  risks  are  effec8vely  controlled;  that  strategy  is  informed  by  and  aligned   with  the  board’s  risk  appe=te;  and  that  a  suppor8ve  risk  culture  is  appropriately  embedded  so  that   all  employees  are  alert  to  the  wider  impact  on  the  whole  organisa8on  of  their  ac8ons  and  decisions.  
  7. 7. Page  §  7   Organisations are increasingly looking to ‘Risk Management’ as a source of competitive advantage Neither  too  cau=ous  nor  too   reckless,  the  best  companies  use   their  risk  management  capabili=es   to  adjust  either  their  capacity  or   their  appe=te  to  make  more   prudent—  and  ul=mately   successful—  investment  decisions.   Source:  Accenture  2011  Global  Risk  Management  Study   64%   Almost  two-­‐thirds  of  Risk  Masters  64%  indicate  that  their  risk   management  capabili=es  provide  compe==ve  advantage  to  “a  great   extent,”  compared  with  only  42%  of  the  peer  set.      
  8. 8. Page  §  8   Evidence suggests many corporate governance weaknesses and Board level challenges still exist “the Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic goals.” UK Corporate Governance Code, 2010 21%     “only  21%  align  their  risks  with  their   business  strategy”    –    Grant  Thornton  Corporate  Governance  Review  2011   Where  the  Board  need  to  spend   more  =me…   70%     Strategy   42%     Execu=on   47%     Performance   Management   67%     Risk  Management   21%     “Only  21%  of  directors  surveyed   claim  a  complete  understanding  of   their  companies’  current  strategy”    –    Mckinsey  Global  Survey  –  Corporate  Governance,   2011   “results  indicate  a  need  to  be0er  educate   Boards  on  industry  dynamics  and  how   their  companies  create  value...”   Approx.  1500  par=cipants  
  9. 9. Page  §  9   What is Risk Appetite? §  The COSO definition provides ‘What,Who,When and Why’ of risk appetite §  What: the amount and type of risk §  Who: an organisational entity  §  When: over a defined time horizon   §  Why: to achieve the objectives of the entity Risk  appe8te  is  the  amount  and  type  of   risk  that  is  acceptable  to  be  taken  by  an   organisa8onal  en8ty  over  a  defined  8me   period,  to  achieve  the  objec8ves  of  that   en8ty  –  COSO  Enterprise  Risk  Management   Risk  appe<te  sets  the  boundaries   within  which  strategy  is  executed     –  StratexSystems  
  10. 10. Page  §  10   Risk Appetite should be integrated into your organisational strategic framework Business  Goals   Business  Model     Business  Drivers   Internal  Analysis   External  Analysis   Business  Objec=ves   Strategy   Appe=te   Appe=te  Alignment   Risk  Management   Performance   Management   Appe=te   Iden8fy  strengths   &  weaknesses   Iden8fy  threats  &   opportuni8es   Is  our  business   model  fit  for   purpose?   Is  our  business   model  fit  for   purpose?   Are  we  opera8ng   within  appe8te?   Manage  threats  &   opportuni8es   Are  we  on-­‐track   to  deliver?   Manage  strengths   &  weaknesses   Appe=te   SeYng  Execu8on  Formula8on   SeOng   § From  high-­‐level  strategies  to  specific  business  objec8ves   § Define  specific  business  objec8ves  and  appe8te  for  specific  en8ty’s   § Alloca8on  of  scarce  resources  by  en8ty,  risk  category,  product  lines   Execu=on   § Are  we  on-­‐track  to  achieve  our  business  objec8ves     § Are  we  opera8ng  within  appe8te  (are  we  taking  too  much,  or  not  enough   risk?)   § Do  we  have  the  right  level  of  controls  in  place  to  meet  internal  and  external   compliance  drivers?   § Are  we  aligning  our  change  agenda  to  our  strategic  agenda?   Formula=on     § Development  of  high-­‐level  strategies  and  alloca8on  of  scarce  resources,   including  capital   § Given  our  business  context,  what  is  our  appe8te  for  risk?     § Given  our  appe8te,  have  we  got  the  right  business  model?   § Are  we  comfortable  with  the  assump8ons  we  have  made?  
  11. 11. Page  §  11   Risk Appetite is the ‘glue’ that brings together Strategy & Risk Management Performance   Management     Risk   Management     Strategy   Management       Appe=te         What  are  we  trying  to   achieve?     Are  we  on  track?   What  is  our  Risk  Appe=te?   Are  we  opera=ng   within  appe=te?   Governance  &  Communica=ons   Culture  
  12. 12. Risk  Culture  
  13. 13. Page  §  13   What is Culture? The thing I have learned at IBM is that culture is everything – LouisV. Gerstner, Jr. former CEO IBM Culture Eats Strategy For Breakfast - Peter Drucker Culture  comprises  an  organisa<on’s  widely  shared  values,  symbols,   behaviours  and  assump<ons  –  Rob  Goffee  &  Gareth  Jones     The  way  we  get  things  done  around  here  
  14. 14. Page  §  14   What is Risk Culture? Risk  culture  can  be  defined  as  the  norms  and   tradi8ons  of  behaviour  of  individuals  and  of  groups   within  an  organiza8on  that  determine  the  way  in   which  they  iden8fy,  understand,  discuss,  and  act  on   the  risks  the  organiza8on  confronts  and  the  risks  it   takes.   A  robust  risk  culture  is  a  substan8al  determinant  of   whether  a  firm  is  able  successfully  to  execute  its   chosen  strategy  within  its  defined  risk  appe8te.  
  15. 15. Page  §  15   Risk Culture Framework Source:  Taking  Control  of  organisa=onal  risk  culture  -­‐  McKinsey  &  Co,  2010  
  16. 16. Page  §  16   Risk Culture failings fall into relatively predictable categories §  Disregard for risk §  Over-confidence §  Business Units evading or distorting risk management efforts §  Risk Management failing emerge, with no apparent consequences §  Sweeping problems under the carpet §  Assumptions are not challenged §  Blind spots as a result of lack of challenge or excessive challenge §  Shoot-the-messenger mentality §  Siloed risk management processes §  Passivity §  Not sharing warning signals §  Indifference §  Denial §  Excessive hierarchical organisations no listening to the front-line §  Tribal culture §  Ignorance §  lack of understanding of risk or risk management issues §  Faulty communication of the firms risk appetite §  Failure to be clear about who is in charge of risk issues §  Ignorance can reflect lack of insight §  Failure to correct bad behaviours §  Frequent breaches of procedure, ignoring of limits, failures to complete reports, or disregard of compliance requirements, can contribute to issues above §  Excusing the behaviour of those who are generating high revenue volumes §  Focusing on ‘hit’ while overlooking ‘Near Misses’ §  Failure to send the correct signals
  17. 17. Page  §  17   Culture was seen as a main contributory factors to the Libor scandal We  place  considerable  emphasis  on  the   CEO  seDng  the  right  culture,  risk   appe6te  and  control  framework….   Hector  Sans,  FSA  
  18. 18. Page  §  18   In the wake of a $3B fine for mis-selling drugs, GSK are transforming their culture A culture of putting patients first is our priority
  19. 19. Page  §  19   Fukushima crisis ‘made in Japan’ - ingrained conventions of Japanese culture.
  20. 20. Page  §  20   The Right Culture should ensure… The  right  people…   Are  doing  the  right  things…   At  the  right  =me…   With  the  right  amount  of  challenge…   To  seize  opportuni=es  and  manage  threats…   While  opera=ng  within  appe=te  
  21. 21. Page  §  21   The seven key characteristics of a Strategy-focused, Risk- aware culture Strategy-­‐focused,  Risk-­‐ aware  culture     1.  Driven  by    a  compelling   vision   2.  Live  by  a  clear  set  of   values   3.  Led  with  integrity   4.  Align  risk-­‐taking  to   strategy   7.  Incen=ves  are  aligned  to   appe=te   6.  Engage  in  high  quality   conversa=ons   5.  Established  clear   accountabili=es  
  22. 22. Embedding  the  Tone  from  the  Top  
  23. 23. Page  §  23   Tone from the top is critical is shaping culture Vision Mission Values Shareholder  value   Risk   Appe=te   Processes   Key   Controls   Tone  from  the  Top   What  we  do  on  a   day-­‐to-­‐day  basis   What  we  think  on  a   day-­‐to-­‐day  basis   Strategy   Controls  Risks   indicators   Shared  values   Behaviours   Incen=ves   Leadership   Symbols  
  24. 24. Page  §  24   Strategy Map helps make ‘tone from the top’, Leadership,Vision ‘tangible
  25. 25. Page  §  25   Using drivers to frame appetite setting enables the Board to set clear a clear ‘tone from the top’ and operating boundaries Business  drivers   Capital   Income   Reputa=on   Shareholder  value   Share  price   Economic  value   add   Profit   Strategy   Align  Risk-­‐taking   to  Strategy   Manage     Risk   Manage     Performance   Appe=te   Governance   Communica=on   Culture   Appe=te  
  26. 26. Page  §  26   Using drivers to frame appetite setting enables the Board to set clear a clear ‘tone from the top’ and operating boundaries Business  Drivers   Low   Moderate   High   Extreme   Capacity   Limit   Income   X%  Capital   @Risk   X%  Capital   @Risk   X%  Capital   @Risk   X%  Capital   @Risk   Capital   Up  to     X  £M   X  £M  to     Y  £M   X  £M  to     Y  £M   X  £M  to     Y  £M    Above     X  £M   Reputa=on   Up  to  X  vol.   Bad   coverage   Up  to  X  vol.   Bad   coverage   Up  to  X  vol.   Bad   coverage   Up  to  X  vol.   Bad   coverage  
  27. 27. Page  §  27   Using drivers to frame appetite setting enables the Board to set clear a clear ‘tone from the top’ and operating boundaries Business  Drivers   Low   Moderate   High   Extreme   Capacity   Limit   Income   X%  Capital   @Risk   X%  Capital   @Risk   X%  Capital   @Risk   X%  Capital   @Risk   Capital   Up  to     X  £M   X  £M  to     Y  £M   X  £M  to     Y  £M   X  £M  to     Y  £M    Above     X  £M   Reputa=on   Up  to  X  vol.   Bad   coverage   Up  to  X  vol.   Bad   coverage   Up  to  X  vol.   Bad   coverage   Up  to  X  vol.   Bad   coverage  
  28. 28. Page  §  28   Those same drivers are used in the risk assessment process Capital     @Risk   Reputa=on   @Risk   Impact  x  Likelihood     (over  a  =me  horizon)  
  29. 29. Page  §  29   Appetite Alignment Matrix is a key tool for monitoring the alignment of Risk-taking to Strategy §  Enabling  monitoring  of   risks  which  are  outside   of  Appe8te   §  Shows  where  we  are   taking  to  much  and   not  enough  risk   §  Changes  the  risk   conversa8on   §  Answers  the  ques8on:   Are  we  opera=ng  with  in   Appe=te?  
  30. 30. Page  §  30   Risk Maps is powerful tools for creating transparency around risk
  31. 31. Page  §  31   Effective Controls has an important role in reinforcing the tone from the top
  32. 32. Page  §  32   An accountabilities model is ‘baked’ into our solutions “The  buck  stops  here”   Those  with  Yes/No  authority   related  to  the  objec8ve,  risk  or   control.   “Keep  in  the  loop”   Those  involved  prior  to   decisions  or  ac8on  related  to   the  objec8ve,  risk  or  control.   “The  doers”   Those  people  working  on   delivering  the  objec8ve,  managing   the  risk  or  applying  the  control.   “Keep  in  the  picture”     Posi8on(s)  that  need  to  know   about  decision  or  ac8on  related  to   the  objec8ve,  risk  or  control.     P  
  33. 33. Page  §  33   An accountabilities model is ‘baked’ into our solutions
  34. 34. Page  §  34   Our solutions provide a number of ‘tools’ to help embedding the tone from the top Strategy Map Risk Map Appetite Alignment Matrix
  35. 35. Page  §  35   About StratexSystems “StratexPoint  enabled  us  to  reduce   the  value  of  our  opera6onal  losses   by  94%,  the  volume  by  63%  and  our   economic  capital  provision  by  23%”     -­‐  Head  of  Opera=onal  Risk,  HML  -­‐   Skipton  group   Our  mission   To  provide  an  integrated  strategy  and  risk   management  solu8ons  which  enhances   strategy  execu=on,  enhance  capital   efficiency  by  15%  and  reduce  opera=onal   losses  25%  while  providing  100%   confidence  that  your  business  is  opera=ng   within  appe=te.  
  36. 36. Page  §  36   Our solution enables our clients to “control their risks while executing strategy”
  37. 37. Page  §  37   Examples of where our solution has added real and tangible business value 60%   23%   182   Op  losses   HML  seen  a  60%  reduc8on  in   opera8onal  losses  within  18   months     Regulatory  capital   HML  also  seen  a  23%  reduc8on   in  regulatory  capital   Ini8a8ves   Consolidated  global  pormolio  of   major  ini8a8ves  to  enable   single  view  of  status  &  risk      
  38. 38. Page  §  38   Free trail of StratexLive Stratex  Bootcamp     §  30  day  free  use  of  StratexLive   §  Regular  ‘coaching’  session  online   §  Load  your  own  data   §  Add  your  own  users   §  START  NOW  

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