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KPC ERM conference Kuwait 2014 - Integrating ERM and Strategic Planning - Marc Ronez presentation

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The business case for risk management to contribute to the Strategic Planning process. How ERM can strengthen Strategic decision-making to support effective performance

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KPC ERM conference Kuwait 2014 - Integrating ERM and Strategic Planning - Marc Ronez presentation

  1. 1. ARiMI – Asia Risk Management Institute By MARC RONEZ Chief Risk Strategist & Knowledge Leader ARIMI-Asia Risk Management Institute NOTES 2nd KPC-ERM Conference 2014 Kuwait, 7 January 2014 Integrating Risk Management into Strategic Decision-Making
  2. 2. Agenda for this Session þ Understand the essential connection between ERM and Strategic Planning þ Major Obstacles to Effective Strategic Decision-Making þ How to overcome the Obstacles with ERM Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 2
  3. 3. 1 - Understanding the link between ERM and Strategic Planning Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 3
  4. 4. ERM & Strategic Decision-Making INTEGRATING risk management into the strategic planning & decision-making process of an organization should be considered to be a very essential component of any ERM implementation/improvement projects. The RATIONALE is… simply that since Taking Risk is in the nature of Business… …. Hence Understanding & Managing Risks is therefore INHERENT to the Strategic Planning process Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 4
  5. 5. Indeed TAKING RISKS without managing them properly should be called… GAMBLING! Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 5
  6. 6. 66 Financial & Hazard Need to Expand the Scope of ERM Finance Losses Operational Strategic Protect & Sustain Operations Create Value with effective Risk-taking & Management VALUE increase ➜  From Value PROTECTION to Value CREATION expanding to all risk domains Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  7. 7. Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 7 Strategic Planning is based on the understanding that… You CANNOT keep doing the SAME THING when everything is changing around you!
  8. 8. Strategic Planning starts by analyzing the CURRENT REALITY & Projecting Forward to Identify the Possible FUTURE(S) TODAY CURRENT POSITION Where are you Now? Time Range of Possible FUTURE(S) Threats Performance Opportunities Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 8
  9. 9. Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 9 Strategic Planning is therefore.. an Opportunity & Risk Management Process.. aimed at adjusting or changing an organization’s Business Model
  10. 10. Risk – Threats & Opportunities Management 10 - + Target Performance Expected Potential Losses Expected Potential Opportunities Unexpected Catastrophic Losses Transformational Blue swans Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 Catastrophic Losses Black swans Unexpected Opportunities LOSS GAIN Risk will Lead You & your Organization to either Negative or Positive impacts depending on the environment and how it is managed..
  11. 11. 11 Cost Overruns Accounting irregularities Manage- ment ineffective- ness Supply Chain Issues Competitive Pressure M&A Integration Problems Mis- aligned Products Customer Pricing Pressure Loss of Key Customer Supplier Problems R&D Delays Customer Demand Shortfall % of top 100 Regulatory Problems Strategic Operational Financial Hazard Foreign Macro- Economic Issues Interest Rate Fluct- uation High Input Comm- odity Price Law- suits Natural Disasters Fortune 1000 - Primary Cause of Stock Drop (# of Companies) Source: Compustat, Mercer Management Consulting analysis – May 1999 Which Risks are responsible for most Value Loss in organizations? Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  12. 12. 12 A STRATEGY is a „Road Map“ that provides a Pathway from CURRENT REALITY to VISION Time Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 VISION Where you want to Be? (Possible Future) INGREDIENTS Resources, Capital, People, Culture, SystemsSTRATEGY How to get There? RISKS RECIPE Processes, Structure, Marketing, Products, Pricing, Distribution. TODAY CURRENT POSITION Where are you Now? “Strategy is how to get from where you are now to where you want to be!” A Strategy defines and articulates the value proposition that an organization brings to its market – a description of its business model.
  13. 13. Strategic Planning Process & Tools available CURRENT POSITION Fishbone Analysis Porter Five Forces Vision & Objectives Force Fields Analysis FUTURE OPTIONS SWOT, PEST STRATEGIC POSITIONING IMPLEMENTATION MONITORING & LEARNING þ  Strategic planning will identify future opportunities/Threats as well as the critical strengths and weaknesses of the organization. þ  It will identify the structures, systems and processes that will help the organization achieve its intended outcomes both in the short and long term while mitigating the risks identified. Strategic Options Grid Business Model Analysis Gap Analysis Scenario Analysis Stakeholder Analysis Gap Analysis KPIs Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 13
  14. 14. Decision-makers can optimize the tradeoffs… between Risk and Return. By Making INFORMED Decisions! HOW? … by identifying, measuring and managing risks consistently and systematically, and ensuring the timely communication of risk related information to the decision-makers in a transparent manner. Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 14
  15. 15. The Limitation of the Role of Risk Management ¤ IMPORTANT: The final decision to TAKE RISKS rests NOT with the risk manager, but with top management and BOD. þ This decision depends on the risk appetite or tolerance of an organization, þ Hence defining that APPETITE is one of the most important responsibilities of management and the board. þ It is at the heart of the firm’s strategy and how it creates value for its shareholders 15Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  16. 16. 2 – Major Obstacles to Effective Strategic Decision-Making Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 16
  17. 17. A FLAWED Strategy is a Key Strategic Risk A flawed strategy may result from essentially 2 groups of causes: ­ First a flawed process, including an incomplete or inaccurate assessment of strategic risks. ­ Second a flawed people who develop an inappropriate strategy even though the "input" to the process is complete & accurate. It translates into 4 major obstacles to Strategic Decision- Making Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 17
  18. 18. 4 major Obstacles to Effective Strategic Decision- Making 1.  the Complexity Fog: Growing business environment and organizational complexity makes it difficult to comprehend 2.  The Biases Short-Cut: Human cognitive limitations leads to improper decision-making 3.  the Alignment Gap: Perceived self-interested drives people’s behavior even when it contradict the group interests 4.  The Ethical Gap: Relativism in application of moral values and principles open the door to moral flexibility 18Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  19. 19. 19 1 – The Complexity Fog Increasing size, complexity & dependencies Increased Pressures on Resources & Environment Globalization & Increasing Competition Rising value of Intangible Assets Increased Stakeholder Expectations Increasing Regulatory Requirements Continuous Technological Change Need for BETTER Risk Management Growing Gap With Capabilities Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 “Business as usual” presents organisations with a new level of Risks Challenges.
  20. 20. KEY Drivers/factors: Organizations face a COMPLEX, UNCERTAIN always CHANGING environment Human & Social Factors Political & Regulatory Climate Resources & environmental Factors Economic Environment & market Forces Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 20 Technological innovations Source of both Risks & Opportunities Global Domestic
  21. 21. EMERGING RISKS on a 1 to 15 years + Horizon (ARiMI perspective) Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 21 Cyber attack, IT failure Disruptive Technological & Business Innovations Terrorism Regulatory changes Human Capital Challenge Political /Social upheaval, war Business Ethics, Fraud Customer changing expectations Credit Availability Infectious Diseases
  22. 22. 2 - The Biases Short-Cut - Flaws in Decision-making processes When confronted with uncertainty, decision makers are often unaware that.. Pressures from psychological bias are underestimated, and will compromise their professional judgment. Self-interest, Moral Hazard, Greed, Illusion of Control (Overconfidence), Collective Blindness to risk… We are often not very ‘OBJECTIVE’ when making decisions… In fact, people typically RELY on Psychological Programming SHORT CUTS to make split second decisions… that they will rationalize later. 22Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  23. 23. Individual vs Group Cognitive Biases 23 Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 VS Group Biases Individual Biases Human Behaviors ?
  24. 24. Blindness to Risk – Herding As long as the music is playing, we have to keep on dancing! Statement by Chuck Prince in 2007, former CEO of Citibank Group Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 24
  25. 25. 25 Illusion of Control Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 "It's only when the tide goes out that … you learn who's been swimming naked." Warren Buffett, Berkshire Hathaway
  26. 26. 3 – The Alignment Gap – An Agency Problem Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 26 Agency relationships occur when … þ … one partner in a transaction (the principal) þ … delegates authority to another (the agent) to do something on the principal’s behalf. As a result the principal is effectively putting his/her welfare under the CARE of the agent (Example Employment). What is the Problem?
  27. 27. What is the Agency Problem? Can you TRUST your Agent? 1.  Conflict of Interest: The interests of principal (shareholders) and agent (Management) will DIVERGE 2.  Lack of Control: With its delegation of authority, the agent can make the decisions he wants and it is difficult for the Principal to interfere and organize effective control. 3.  Lack of Transparency & Information asymmetry: The agent’s actions are HIDDEN from the principal or are costly to observe. The agent possesses information that is, for the principal unobservable or costly to obtain 27Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  28. 28. Essential Consequences of Agency Problem Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 Return $ Risk High Zone 1 Insufficient Risk Taking Low High Zone 2 Optimal Risk Taking Zone 3 Excessive Risk Taking Gambler Effective Risk Taker With ERM Risk adverse “Sweet Spot” ­  Financial & other Asset Loss of the principal due to excessive risk- taking, incompetence or fraud of agents ­  Opportunity costs due to missed opportunities because of risk averse agents 28
  29. 29. 4 – The Ethical Gap One of the reasons why ERM is difficult to implement is because it is based on and promotes a Value System that many people find hard to accept in today’s organizations… : þ Think in terms of Shared Value and Sustainability þ Act with Integrity and Discipline þ Be Responsible & Accountable for what they do þ Be Open & Transparent about how they do things þ Share information and knowledge proactively Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 The Wrong Value Systems can prevent the Effective Management of Risk 29
  30. 30. Can you trust a corporate leader when he says.. “Risk Management is part of our Corporate DNA” Statement by Dick Fuld, CEO of Lehman in 2006 Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 30
  31. 31. WHY too often Unethical Gamblers are the ones Hired & Promoted? Ken Lay, Enron Chuck Prince, Citi Group TT Durai, NKF Bernie Ebbers WorldCom Dick Fuld, Lehman Bros Alan Greenspan, Chairman FED Bernard Madoff, BM Investment Ramalinga Raju, Satyam Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 31
  32. 32. Root causes for many Organization's Problems The examinations that followed many corporate collapses revealed a common theme behind the institutions‘ troubles i.e. The People’s Factor!: ­ high-profile scandals involving unethical abuse of corporate power due to greed and conflict of Interests, ­ In a number of cases, fraudulent/criminal activities by corporate officers. ­ A lack of responsibility, accountability and oversight of corporate operations at every level of management; ­ An inherent Blindness and human Complacency to Risk; ­ A people issue circumventing control systems in place 32Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  33. 33. “To educate a man in knowledge but NOT in morals is to create a menace to society. “ Theodore Roosevelt, USA president Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 33
  34. 34. 3 - How to overcome the Obstacles with ERM Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 34
  35. 35. In short, How to overcome the obstacles? 1.  UNDERSTAND the “BUSINESS MODEL”: þ  By Identifying & Analyzing the REAL Value Drivers and Key Vulnerability Points of an organization to clear the fog of complexity and guide decisions 2.  BE AWARE of BIASES: þ  By taking into account and compensating for the Subjective and Irrational dimensions of Decision-Making 3.  CREATE REAL ALIGNMENT: þ  By tying value drivers to performance drivers and REWARDS 4.  MAKE RATIONALIZATION DIFFICULT: þ  By creating the appropriate risk-aware cultural environment with zero tolerance for unethical behaviors 35Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  36. 36. The Objective of Risk Management is that … .. an organisation takes risk and manage risk exposure INTELLIGENTLY .. in a controlled (or balanced) manner so that the business is viable for a longer term (SUSTAINABILITY) while meeting the expectation of all the relevant stakeholders by CREATING SHARED VALUE (i.e., shareholders, customers/policyholders, employees, regulators, rating agencies, suppliers, etc). Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 36
  37. 37. Risk DIAGNOSTIC Risk SOLUTION/TREATMENT MIX Business Model & Strategy Organizational: People/Culture, Processes & Systems Understanding Business Model as Risk-Taking & Management Positioning Risk –Taking & Management Decisions 37 Risk Universe + Financial: Insurance, ART, Capital Market KEY OBJECTIVES KEY OBJECTIVES Source: Marc Ronez – Asia Risk Management Institute Risk Appetite Risk Tolerance Key Value Drivers Key Processes & Resources Risk Exposure Profile Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014
  38. 38. Clarifying your Organization Context (External & Internal) Key Partners: (Supply Chain) Raw Materials, Goods & Services Competitors & New Entrants YOUR ORGANIZATION Key Partners: (Routes to Markets, Channels) Distributors, Complementors, Vendors, etc. Customers (Segments & Profiles) Prospectivecustomers External Macro Forces: Global, national, natural, economic, Technoligy and political influences… Substitutes Source: Marc Ronez – Asia Risk Management Institute Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 38
  39. 39. Strategic Planning & Performance Management Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 39 Organization Mission, Vision & Shared Values Determine Business Model (CCS - Value Creation, Value Capture, Value Sustainability) Drives Business & Operational OBJECTIVES Map associated Key Resources, Activities & Processes Financial Customer Internal processes Employee / HR Community and Environment Key Performance Indicators & Standards Identify CSFs (Critical Success Factors) Drives Long-term STRATEGY &l GOALS
  40. 40. Strategic Planning & Risk Management Key Risk Indicators What FACTORS influence our objectives and ability to succeed by disrupting key resources & processes Key Control Indicators What CONTROLS we need to put in place to mitigate our risks Critical Success & Failure Factors Root Causes & Events Scenario Analysis Financial Customer Internal processes Employee / HR Community and Environment Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 40
  41. 41. Performance Management Organization Mission, Vision & Shared Values Determine Business Model (Value Creation, Value Capture, Value Sustenance) Drives Strategy & Objectives Map Key Resources & Processes to Identify Critical Success Factors Financial Customer Internal processes Employee / HR Community and Environment Key Performance Indicators Risk Management Critical Success vs Failure Causes / Factors Financial Customer Internal processes Employee / HR Community and Environment What FACTORS influence our objectives and ability to succeed by disrupting key resources & processes What CONTROLS we need to put in place to mitigate our risks Knowledge & Information Management Enterprise Risk Management (ARiMI Model) Drives Key Business Objectives Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 41 Key Risk Indicators Key Control Indicators
  42. 42. In summary, Enterprise Risk Management (ERM) is… A TOOL BOX that includes a formalized framework that organize the Principles, Methodologies, Processes, Infrastructure and culture used by organizations to DEAL with RISK issues effectively in order to: þ Maximize upside opportunities þ minimize negative surprises and In relation to the achievement of their OBJECTIVES But like any tool, its effectiveness depends on what the User do with it! Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 42
  43. 43. Dealing with the Human side: Human Capital Risk Management Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 43 Attracting the Right Human Capital Developing Human Capital Protecting & Retaining Human Capital Three Interdependent Activities
  44. 44. A framework for Building a Risk Culture supporting effective Decision-Making Code Conduct & Ethics Management Leadership FOUNDATIONS OF ETHICAL RISK MANAGEMENT Communication & Training Set clearly the principles & values to guide behaviors Top Management must lead by example Provide information, induction, training & mentorship EMBED in PROCESSES, SYSTEMS & CULTURE Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 44 STEPS TO MANAGE ETHICAL RISK Human Capital Cycle Management Hire, Reward & Promote the right employees HEALTHY SUSTAINABLE ORGANIZATION
  45. 45. For Organization to manage Strategic Risk Effectively, they need to.. Stop THINKING like Mechanics… 45Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 Start ACTING like Gardeners.
  46. 46. Return $ Risk High Zone 1 Insufficient Risk Taking Low Achieving Optimal Risk vs RETURN High Zone 2 Optimal Risk Taking Zone 3 Excessive Risk Taking Gambler Winner Risk adverse Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 46 “Sweet Spot” Risk Aversion & Control: protect their position, build structures to increase their capabilities of control. Excessive Risk Taking: Unaware of ‘real’ level of risk, incentivized to take risks.
  47. 47. The role of ERM in the Strategic Planning process Is to ensure that the strategic planning process has: þ A comprehensive view of the relevant risk issues and a framework for their management including common terminology, common measurement, risk appetite, a target risk profile; a desired risk culture. þ The right processes and tools for the various aspects of risk & performance management (identification, assessment, addressing, measurement and monitoring). þ A system and culture to support full and unbiased discussion and evaluation of opportunities & risks. þ The people with the right values & risk-aware culture involved in the process Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 47
  48. 48. Marc Ronez - Chief Risk Strategist & Knowledge Leader at ARiMI - Asia Risk Management Institute An ERM & Governance expert with over 20 years of experience both as a practitioner & trainer for large MNCs, Governments & Charities. Marc has an MBA from the University of Chicago GSB, an MSc in Insurance & a LLM from the University of La Sorbonne What do I do? Help managers & leaders to use Risk Management to: þ  Resolve difficult operational and business challenges þ  Take & manage risks effectively to build sustainable & profitable growth models Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 Marc’s specific areas of expertise include ERM, risk decision-making processes, data analytics, corporate governance, business ethics, social responsibility, risk- aware culture, risk communication and crisis management, business model/strategy risk management, corporate learning systems development. 48
  49. 49. Risk Management is a continuous journey, not a destination! Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 Marc Ronez is on Linked in & WordPress You can find his profile & read his blogs at: P: www.linkedin.com/in/marc-ronez B: theriskmanagementparadox.com B: riskmanagementdemystified.com 49
  50. 50. ARiMI – Asia Risk Management Institute Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 50
  51. 51. ARiMI is an applied research and business studies institute that was set up in 2003 (in partnership with NUS) and has established itself as the Institute of Reference for Enterprise Risk Management studies in Singapore and in the region. We FOCUS on programs: 1.  For Decision-Makers (Middle to Top Management): Developing PRACTICAL Knowledge & Skills in Risk & Crisis Management 2.  For Organizations: Building CAPABILITIES for Sustainable and Profitable Growth by EMBEDDING Control Systems with a Risk Aware & Crisis Readiness Culture ARiMI, Asia Risk Management Institute Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 51
  52. 52. ARiMI - Focus and Expertise ● Crisis management & Business Continuity ● Leadership risk decision- making and Social Capital ● Reputational Risk & stakeholders management ● Corporate governance & business ethics ● Business Innovation & Corporate Transformation Research ● Professional Designation Programs CERM (Certified Enterprise Risk Manager), CPRM (Certified Professional Risk Manager), ARM (Associate in Risk Management), FSRM (Fellow in Strategic Risk Management) ● Public Seminars and Workshops ● Corporate Training & learning Programs Education Expertise Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 52 ● Risks Analytics & Decision- making ● Crisis & Business Continuity Mgt ● Reputation Risk Mgt & CSR ● Business Ethics, Fraud Risk & Compliance Mgt ● Risk Appetite & Risk Aware Culture Readiness ● Project risk management ● ERM Design & Implementation ● Innovation & Change Mgt ● Information & Cyber Risk Mgt
  53. 53. 53 For more information on ARiMI, check our website at: www.arimi.org Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 Developing Effective Leaders & Decision- makers for complex & volatile times
  54. 54. Important Note: Please note that that this presentation and its contents, is the intellectual property of the Asia Risk Management Institute Pte Ltd. It has been prepared for this KPC ERM Conference 2014 session and it cannot be used for any other purposes without the specific written consent of the Asia Risk Management Institute. 54Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014

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