Overview of Enterprise Risk Management (ERM)

ENTERPRISE RISK MANAGEMENT (ERM)
© 2012 All rights reserved
INTRODUCTION TO ERM CONCEPTS
1

©2012 Paul Esther Consulting Limited, an accredited Member of the Centre for Management development, Nigeria. All rights reserved.Printed in Nigeria
AGENDA
 ERM Unravelled
 Concepts
 Roles & Responsibilities
 Benefits of ERM
2

ERM Unravelled
3

Enterprise Risk Management Unravelled
Case 1: Nike. Shaming the apparel giant
4
 Nike is a leading marketer of shoes and apparel
clothing in the world
 Nike makes an annual revenue of $10billion and Sell
Products in 140 countries
Nike
Design
Market
Manufactures
•600 Factories
•550,00 employees
In 1996, a 48hrs program (boycott Nike) was aired by
CBS showing pictures of young women at a
Vietnamese subcontractor who worked with toxic
materials every week in poor conditions for 20 cents
an hour.
In November 1997, a confidential report of a Nike
(commissioned audit report) Vietnam factory owned
by a Nike subcontractor by Ernst & Young leaked. The
factory has 9,200 workers and made 400,000 shoes a
week. Most workers are women under the age of 25
working in excessive heat , noise, foul air, toxic
chemicals and constantly exposed to carcinogens.
They are a paid a mere $10 a week
In 1998, Nike annual revenue dipped by more than 30%, most of its advert models dropped
their contract, Nike’s ethical rating and brand image fell globally.
Nike was forced to re-examine its subcontracting policies

©2012 Paul Esther Consulting Limited, an accredited Member of the Centre for Management development, Nigeria. All rights reserved.Printed in Nigeria 5
Case 2: American International Group.
 A credit default swap is basically an insurance on bonds. Imagine a large bank buys some
bonds issued by UAC. The bank expects to receive a steady stream of payments from UAC over
the years. But the bank figures there's a chance that UAC might go bankrupt. It's a small
chance, but not zero, and if it happens, the bank doesn't get any more of those payments.
UAC GTB
AIG
Sell Buy
Cash
Bond
CDS; an insurance policy
 Most banks and financial institutions were not all
that bad off, because they were simultaneously on
both sides of the CDS trade. Most banks and hedge
funds would buy CDS protection on one hand and
then sell CDS protection to someone else at the same
time. When a bond defaulted, the banks might have to
pay some money out, but they'd also be getting
money back in. They netted out
 Everyone, that is, except for AIG was on both side of the trade. AIG only sold CDS. They never bought.
Once bonds started defaulting, they had to pay out and nobody was paying them. AIG seems to have
thought CDS were just an extension of the insurance business.
Credit default swaps written by AIG cover more than $440 billion in bonds. In 2009 the
American Government bailed out AIG with $180billion.
The CDS Issue

Case 3: General Motors & Toyota Corporation.
The battle for American Market Share
 General Motors is the world leader in automobile manufacturing while
Toyota Corporation comes next in line. GM manufactures its cars mainly in the
US (its native country) and Toyota does so mainly in Japan.
As at 2002, GM holds 31% market share in the US while Toyota holds 27.5%. An average GM car is sold for $25,000
with a profit margin of 12% while an average Toyota is sold for $24,000 with a profit margin of 11%.
In 2002, the US Dollar strengthened against the Japanese Yen causing the cost of production of Japanese goods
to decline by 10%. This however, increased the profit margin on Japanese cars in the US to 22% and also gave
the Japanese to lower their car prices by up to 10%.
These events caused a dramatic decline in the purchase of GM cars in the US, leaving it with 28% market share
and giving Toyota a 31.5% market share.

Case 4: Heathrow Terminal 5: What Went
Wrong?
Almost 300 flights in and out of Heathrow Airport were cancelled during the first five days after opening
of the Terminal 5.
1.0400 - Both passengers and staff have trouble locating car parks
2. 0400 - Delayed opening of check-in resulted in long queues
3. 0442- First passengers arrive early but wait an hour for luggage
4. All morning - Clogged conveyor leads to long wait for luggage
5. 1630 - Baggage system failure; all check-in at T5 suspended
6. 1700 - After long queues form at "fast bag drop" desk, BA suspends check-in of all luggage into hold

Case 5:NNPC Insolvency Issue
The Federation Account Allocation Committee (FAAC), which manages the distribution
of Nigeria's oil revenues to the three tiers of government, says however that NNPC
owes it a shortfall of 450 billion naira in unremitted crude oil receipts.
"NNPC is insolvent as current liabilities exceed current assets," Minister of State for
Finance Remi Babalola told a FAAC meeting in the capital Abuja.
"NNPC is incapable of repaying the 450 billion naira owed to the Federation Account
unless it is reimbursed the 1.156 trillion naira (in subsidies) it has requested from the
federal ministry of finance," he said.

Case 6: PSIN/ASCON
Commissioned in February 2009 to provide human capital
development services to the public service
Established in 1979 to provide human capital development
services to the public service

Case 7:National Assembly Website Hacking?
The National Assembly
website was hacked on
October 1st , 2010 during
the celebration of its 50th
year anniversary.

Case 8: Nigerian Re/NICOM/NICON
Decentralization of the placement of Government Assets in the Insurance industry
NICON once controlled over a 54% market share of the insurance industry and can only
boast of a little over 5% now
Removal of the compulsory Legal cession
An Act that required all insurance companies to cede 25% of their business with Nigerian-
Re was revised to enable insurance companies to do so with any reinsurance firm.
Nigerian-Re lost the captive business
Impact of regulation on the insurance industry
Reduction of the Insurance firms from 103 to 48

What is Risk ?
Risks" are simply future issues that can be avoided or mitigated, it is assessed as a function of three
variables:
1. the probability that there is a threat
2. the probability that there are any vulnerabilities
3. the potential impact to the business or organization.
What is Risk Management ?
Risk management involves assessing and quantifying various risks inherent with an organization, a
business or a process, and then taking measures to control or reduce them

ERM Evolutions
 Organizations have long practiced various parts of what is called enterprise risk management.
 Identifying and prioritizing risks, either with foresight or following a disaster has been a standard
management activity.
 While so much attention has been placed only on financial risk; treating risks by transfer, through
financial/insurance products, has also been common practice.
 What has changed recently is approaching management of variety of risks in an holistic manner.
 Seemly insignificant risks on their own have the potential, to become big risks because they interact with
each other events and conditions to cause great damage.

ERM Evolutions
 Several factors has contributed to the need to approach risk management in a more strategic and effective
manner. Those factors include:
1. More complicated risks are emerging. (Foreign exchange risk, operational risk, strategic risk, advancement
in technology, globalization, increase in terrorism, increasing financial sophistication, e.t.c)
2. External pressures from regulators, rating agencies, stock exchanges and the public,
3. Institutional investors and corporate governance oversight bodies have come to insist that organization’s
top management should take responsibility for managing risks on an enterprise-wide scale
4. Need to analytically foresee and manage crises effectively so as not to jeopardise organization reputation or
brand.

ERM Evolutions
5. The need to start quantifying risk that are once though to be unquantifiable. Think global warming, advance
in technology, meteorology, terrorist attacks. E.t.c
What about risks that cannot be quantifiable irrespective of technological tools present.
Strategic risk (ASCON & PSIN) or risks influenced by human, for example operational risks.
6. Change in organization attitude toward risk. In the past, organization tends to take a defensive posture
toward risk (viewing it as a situation that should be minimized or avoided) but now, organizations are
beginning to recognize the need to take an opportunistic side to risk management
7. While ERM was developed in the commercial sector, it has direct relevance for government - for a number
of reasons. Government should manage risk holistically, probably more than commercial businesses do.

ERM Definition
Strategic Risk Management
Holistic risk management
Integrated risk management
Enterprise Risk
Management
ERM is the discipline by which an organization in any industry assesses,
controls, exploits, finances, and monitors risks from all sources for the
purpose of increasing the organization’s short- and long-term value to its
stakeholders
CAS committee on Enterprise Risk Management 2003

Types of Risk ? Public Sector Focus.
Reputational Risk
Project Risk
Political/Policy Risk
Operational Risk
Informational Risk
Strategic Risk
Credit RiskLiquidity Risk
Hazard Risk

ERM Concept
Enterprise risk management, as defined by COSO (Committee of Sponsoring Organizations of the
Treadway Commission) is a process designed to:
1. identify potential events
that may affect the
organization
2. manage risk to be within
the organization's risk
appetite
3. provide reasonable
assurance regarding the
achievement of the
organization's objectives

ERM Concept
Holistic approach to Managing all the risk inherent within the enterprise

ERM Concept
Enterprise Level
Divisional LevelDivisional LevelDivisional Level
Business Level Business LevelBusiness Level Business Level Business Level Business Level
Process Level Process Level

For ERM to be effective, an agency's managers and employees must value risk information, which
typically requires a cultural mind-set for change so that a healthy risk communication culture can take
hold. In addition, agency managers should assign responsibility for risks to those managers who can
best oversee them. Risk without responsibility is a recipe for organizational disaster.
In its best form, ERM identifies and manages the individual, collective and cumulative effects of
different types of risk on agency decisions. When done well, ERM helps an agency realize its full
potential.
Realizing that ERM is a dynamic process that affects every aspect of an organization's resources and
operations, it is also important to note that ERM’s approach is as well as taking the approach that
"everyone is a risk manager."
ERM Roles & Responsibilities

Chief Risk Officer
Risk Management
Dept.
Hazard Risk
Research &
Development
Strategic risk
Treasury/Finance
Dept
Financial Risk
Human Resource
Dept
Workers
compensation,
health, employee
risks
Planning &
Documentation
Operational risks
ERM Roles & Responsibility

Role of the Chief Risk Officer in ERM
 The risk officer play an important role in monitoring ERM, and also have primary responsibility
for its implementation or maintenance.
 The personnel should assist management and the board or audit committee in the process by:
Monitoring, Evaluating, Examining, Reporting and Recommending improvements
 The Chief Risk Officer activity’s plan of engagements should be based on a risk assessment,
undertaken at least annually.
 Based on the results of the risk assessment, the Chief Risk Officer should evaluate the
adequacy and effectiveness of controls encompassing the organization’s governance,
operations, and information systems.
 When planning the engagement, the Chief Risk Officer should identify and assess risks relevant
to the activity under review. The engagement objectives should reflect the results of the risk
assessment.

key benefits of ERM
1. It allows the Organization to set a quantitatively based risk/reward threshold across its
businesses so that management can better understand the totality of its risks, their
interrelationships and their financial implications for the company
2. It allows management to evaluate how lines of business compare to each other vis-a-vis
capital consumption and whether the returns are commensurate with the risks inherent in
those businesses.
3. It provides management solid new measurements to inform business decision making
4. It will enable managers make risk and capital related decisions, asset/liability management,
risk limit setting and monitoring, and capital allocation and pricing
5. The long-term benefits of a good risk culture include transparency and a "fix-it" mentality,
thus making risk management behaviours a natural part of the way an organization does
things

Conclusion
Enterprise Risk Management should not be perceived as theoretical but rather as an
implementable strategy. ERM is becoming an inevitable strategy for organization to survive in this
recent economic situations and It is also a strategic step for laying a solid foundation for
sustainable growth and competitiveness in this present day dynamic business environment. ERM is
a discipline which each organization should imbibe and treat as a corporate culture rather than a
mere guiding framework.
For ERM to survive both In the private and Public Sector, efforts has to come from the everyone in
the organization (from top management to mid management to junior staff)

Thank you

Overview of Enterprise Risk Management (ERM)

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