Description
The PPT about corporate finance report discusses Defining Risk, COSO Framework, Enterprise Risk Management, Financial Risk Management Systems, Un-hedged Risk
Risk Management
Agenda
? ? ? ? ?
The Impetus Defining Risk
COSO Framework
Enterprise Risk Management Financial Risk Management Systems
2
Impetus for Enterprise Risk Management
Three drivers:
1.
Total Shareholder Returns and Capital market focus
Hyper-growth rates of Technology companies
2. 3.
9/11: Physical Security threat and Business Continuity
Highlighted in a Need for a Common terminology and Framework Resulting in COSO Enterprise Risk Management Framework
Why do Businesses Take Risk?
3
Why do Businesses Take Risk?
? ?
Competition for resource
- Financial, human and vendors priority
Competition for markets
Creating new markets Higher promise to customers Introduction of new technology Investment in R&D
?
Gunning for higher growth / profitability
- Acquisitions - Diversifications
Risk, The Source of All Profits
4
But, What is risk?
Loss or damage Cause for loss or damage Past Past
History- You cannot do anything Logically not feasible
Present
Accountingrecognize & provide
Future
Contingent liability –track & contain
Present
Operations: Policies & training Logically not feasible
Risk management: Identify areas where mitigation needed Strategic management: Initiating action in anticipation
Future
Logically not feasible
Risk Management Follows Strategy Selection 5
When Do Risks Arise?
EXTERNAL FACTORS
?
?
Event based - what happens around us
Competitive action based –what other do to
you
INTERNAL FACTORS
?
At every opportunity for a decision –credit
approval
?
Irrespective of whether decision is taken or
6
Deciding on Risks to Take
Risk = Ambition Environment
? ? ?
X
Competence
X
Higher Ambition increases risk Higher Competence decreases risk Turbulent Environment increases risk
7
Risk, source Italian word ‘risicare’ which means ‘to dare’
Risk assessment & Response: First Filter -Ambition
Low Impact High Impact
Action: - Accept if competent - Share if unclear - Reduce or avoid if unknown
Action: - Transfer, if price acceptable
High likely hood
Action: - Refine Controls - Training to enhance competence
Action: Accept and Monitor to quantify the impact and watch trends
Low likely hood
• High likely hood low impact - Machine break downs, goods damaged in transit • Low likely hood high impact - Fire, cyclone, earthquakes • Low likely hood low impact - Bundh, employees absence • High likely hood high impact – Product failure, acquisition failure
8 Perception of Risk a Function of Competence
Risk assessment and Response: Second Filter -Competence
Competence
Low Good Track record Poor
Low competence - good track record: Reduce risk, wait and reassess
High
High competence – good track record: Accept /Increase risk
Low competence –poor track record: Avoid / transfer risk
High competence – poor track record: share risk
• Track record is a fact
• Competence is a judgment • Sustained track record is Competence
9
When do Entities think of Risk Management
After being confronted by a big loss 2. After they see their “peer” confronted by a big loss 3. Enlightened management start with a well designed risk management system
1.
Even for enlightened managements Risk management systems evolve to considering new risk factors based on the first two situations
Experience is an effective teacher
10
What is Hedge-able Risk
?
A risk that can be hedged is a risk that can be transferred Features of a hedge-able risk
- Risk identified to an event
- Impact quantifiable before the event - Need felt to hedge - Market exist to hedge risk –can be either OTC / Exchange - Reasonable Price
11
?
Isolating Un-hedged Risk
?
Total Risk less hedged risk = unhedged risk
?
Un-hedged risk is the potential for
value creation
?
For maximizing value creation Un-
12
Quantifying Risk
Based on Likely hood of the event and impact of its occurrence ? Likely hood can be assessed through
?
- Probabilistic models - Judgment calls or non probabilistic models - Benchmarking –across industry
?
Impact assessed through quantification
- Direct impact
13
Classification of risk
?
?
Market risk ? Credit risk, Interest rate risk, Foreign exchange risk. Equity risk, Commodity risk Operational risk ? Failure of internal process, people or systems or external events,
? Contractual risk or legal exposures ? Catastrophic risk
?
?
Trading book ? Assets held with trading intent Two major global initiatives on risk management ? Basel Accord for Banks ? Committee of Sponsoring Organizations (COSO) ERM Framework for Other entities
14
Enterprise Risk Management COSO ERM
?
? ?
?
Developed by a committee consisting of American Institute of Public Accountants, Institute of Internal Auditors, Financial Executive International, Institute of Management Accountants & American Accounting Associations The report in summary: Environment uncertainty arises from Globalization, technology, regulation, restructuring, changing markets and competition No management operates in risk free environment. ERM will
1. 2. 3. 4. 5. 6. 7. 8.
Align risk appetite and strategy Link growth, risk and returns Enhance risk response decisions Minimize operational surprises and loss Identify and manage cross enterprise risk Provide integrated response to multiple risk Seize opportunity Rationalize capital
15
COSO Enterprise Risk Management
?
Components of risk management: ? Internal environment: Risk philosophy, risk appetite, risk culture ? Objective setting –Strategic, Operational, Reporting & Compliance ? Event identification ? Risk Assessment
? Risk Response
? Control activities ? Information and Communication
? Monitoring
Primary role of management
16
Risk Management Today
When are Risks Identified
?
When Raising Funds – Reported in
the Prospectus
?
Annually - Risk Management Report in Annual Reports
17
doc_280922588.ppt
The PPT about corporate finance report discusses Defining Risk, COSO Framework, Enterprise Risk Management, Financial Risk Management Systems, Un-hedged Risk
Risk Management
Agenda
? ? ? ? ?
The Impetus Defining Risk
COSO Framework
Enterprise Risk Management Financial Risk Management Systems
2
Impetus for Enterprise Risk Management
Three drivers:
1.
Total Shareholder Returns and Capital market focus
Hyper-growth rates of Technology companies
2. 3.
9/11: Physical Security threat and Business Continuity
Highlighted in a Need for a Common terminology and Framework Resulting in COSO Enterprise Risk Management Framework
Why do Businesses Take Risk?
3
Why do Businesses Take Risk?
? ?
Competition for resource
- Financial, human and vendors priority
Competition for markets
Creating new markets Higher promise to customers Introduction of new technology Investment in R&D
?
Gunning for higher growth / profitability
- Acquisitions - Diversifications
Risk, The Source of All Profits
4
But, What is risk?
Loss or damage Cause for loss or damage Past Past
History- You cannot do anything Logically not feasible
Present
Accountingrecognize & provide
Future
Contingent liability –track & contain
Present
Operations: Policies & training Logically not feasible
Risk management: Identify areas where mitigation needed Strategic management: Initiating action in anticipation
Future
Logically not feasible
Risk Management Follows Strategy Selection 5
When Do Risks Arise?
EXTERNAL FACTORS
?
?
Event based - what happens around us
Competitive action based –what other do to
you
INTERNAL FACTORS
?
At every opportunity for a decision –credit
approval
?
Irrespective of whether decision is taken or
6
Deciding on Risks to Take
Risk = Ambition Environment
? ? ?
X
Competence
X
Higher Ambition increases risk Higher Competence decreases risk Turbulent Environment increases risk
7
Risk, source Italian word ‘risicare’ which means ‘to dare’
Risk assessment & Response: First Filter -Ambition
Low Impact High Impact
Action: - Accept if competent - Share if unclear - Reduce or avoid if unknown
Action: - Transfer, if price acceptable
High likely hood
Action: - Refine Controls - Training to enhance competence
Action: Accept and Monitor to quantify the impact and watch trends
Low likely hood
• High likely hood low impact - Machine break downs, goods damaged in transit • Low likely hood high impact - Fire, cyclone, earthquakes • Low likely hood low impact - Bundh, employees absence • High likely hood high impact – Product failure, acquisition failure
8 Perception of Risk a Function of Competence
Risk assessment and Response: Second Filter -Competence
Competence
Low Good Track record Poor
Low competence - good track record: Reduce risk, wait and reassess
High
High competence – good track record: Accept /Increase risk
Low competence –poor track record: Avoid / transfer risk
High competence – poor track record: share risk
• Track record is a fact
• Competence is a judgment • Sustained track record is Competence
9
When do Entities think of Risk Management
After being confronted by a big loss 2. After they see their “peer” confronted by a big loss 3. Enlightened management start with a well designed risk management system
1.
Even for enlightened managements Risk management systems evolve to considering new risk factors based on the first two situations
Experience is an effective teacher
10
What is Hedge-able Risk
?
A risk that can be hedged is a risk that can be transferred Features of a hedge-able risk
- Risk identified to an event
- Impact quantifiable before the event - Need felt to hedge - Market exist to hedge risk –can be either OTC / Exchange - Reasonable Price
11
?
Isolating Un-hedged Risk
?
Total Risk less hedged risk = unhedged risk
?
Un-hedged risk is the potential for
value creation
?
For maximizing value creation Un-
12
Quantifying Risk
Based on Likely hood of the event and impact of its occurrence ? Likely hood can be assessed through
?
- Probabilistic models - Judgment calls or non probabilistic models - Benchmarking –across industry
?
Impact assessed through quantification
- Direct impact
13
Classification of risk
?
?
Market risk ? Credit risk, Interest rate risk, Foreign exchange risk. Equity risk, Commodity risk Operational risk ? Failure of internal process, people or systems or external events,
? Contractual risk or legal exposures ? Catastrophic risk
?
?
Trading book ? Assets held with trading intent Two major global initiatives on risk management ? Basel Accord for Banks ? Committee of Sponsoring Organizations (COSO) ERM Framework for Other entities
14
Enterprise Risk Management COSO ERM
?
? ?
?
Developed by a committee consisting of American Institute of Public Accountants, Institute of Internal Auditors, Financial Executive International, Institute of Management Accountants & American Accounting Associations The report in summary: Environment uncertainty arises from Globalization, technology, regulation, restructuring, changing markets and competition No management operates in risk free environment. ERM will
1. 2. 3. 4. 5. 6. 7. 8.
Align risk appetite and strategy Link growth, risk and returns Enhance risk response decisions Minimize operational surprises and loss Identify and manage cross enterprise risk Provide integrated response to multiple risk Seize opportunity Rationalize capital
15
COSO Enterprise Risk Management
?
Components of risk management: ? Internal environment: Risk philosophy, risk appetite, risk culture ? Objective setting –Strategic, Operational, Reporting & Compliance ? Event identification ? Risk Assessment
? Risk Response
? Control activities ? Information and Communication
? Monitoring
Primary role of management
16
Risk Management Today
When are Risks Identified
?
When Raising Funds – Reported in
the Prospectus
?
Annually - Risk Management Report in Annual Reports
17
doc_280922588.ppt