Integrating ERM into Strategic Planning and Company … ERM into StrategicIntegrating ERM into Strategic Planning and Company Culture: A Case Study Sim Segal, FSA, CERA President SimErgy

Integrating ERM into StrategicIntegrating ERM into Strategic Planning and Company Culture: A Case Study

Sim Segal, FSA, CERAPresidentSimErgy Consulting LLC

ERM Symposium 2011March 15, 2011

Risk cultureRisk culture

Extent to which ERM is integrated into:Extent to which ERM is integrated into: Decision making

– “Risk-priority” (to manage exposure levels– Risk-priority (to manage exposure levels, e.g., mitigation)

– “Return-priority” (to increase value, i.e., Today’s focus

strategic planning / other business decisions) Internal risk messaging

– Business performance analysis– Incentive compensation

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Traditional approach fails to integrate ERM i t d i i kiERM into decision making

Traditional Approachpp

Do metrics supportdecision-making?

Not for operational or strategic risks Only risk, not return

Do ERM models k?

ComplexUnreliable qualitySlow response time

work? Lack of transparencyViolates significant digits

rule

Corporate-driven notIs there buy-in from business units?

Corporate driven, not enough business segment input Compliance-oriented


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Risk Appetite

Value-Based ERM Framework

Qualitative

RiskMgmt

TacticsERM

Committee

Strategy

Value ImpactEnterprise Risk

Exposure

ScenarioDevelopment

Assessment

rity Exposure

Like

lihoo

d

Enterprise ValueX

AllRisks

Key RiskScenariosMostly Objective

Correlation

6

Likelihood

Sev

er

Individual Risk

“Pain Point” Likelihood

ΔValue ≤ -10% 15%

ΔValue ≤ -20% 3%

ERMModelBaselineMostly SubjectiveStrategy

STRATEGIC

…

Credit

Market

FINANCIAL

Strategy

STRATEGIC

…

Credit

Market

FINANCIAL

KeyRisks

1+ events / sim

1 event / simIndividual Risk

ExposuresValue▪ ΔValue

Mostly Subjective

…

Process

HR

OPERATIONAL

…

Execution

…

Process

HR

OPERATIONAL

…

Execution

International Risk 1

Execution Risk

M&A Risk

Loss of Critical EEs

Legislation Risk

IT Risk 1

Company Value Impact

Quantification Decision-MakingIdentification-25.0%-20.0%-15.0%-10.0%-5.0%0.0%

Consumer Relations Risk

Competitor Risk 1

Union Negotiations

International Risk 2

IT Risk 2

Loss of Key Distributor

Loss of Key Supplier

Value-based approach supports i t ti f ERM i t d i i ki

Traditional ERM Value-Based ERM

integration of ERM into decision making

Do metrics supportdecision-making?

Not for operational or strategic risks Only risk, not return

Metrics for all risks ΔValue = rigorous

business case

Do ERM models k?

ComplexUnreliable qualitySlow response time

PracticalReliable qualityFast response time

work? Lack of transparencyViolates significant digits

rule

TransparencyBalance of significant

digits

Corporate-driven not Business unit-driven /Is there buy-in from business units?

Corporate driven, not enough business segment input Compliance-oriented

Business unit driven / Corporate for consistency Supports business

segment goals (FMEA)


5

Value-based approach strengthens th t t i l ithe strategic planning process Aligns baseline assumptionsAligns baseline assumptions Aligns scenario assumptions

P id d i l i Provides dynamic planning


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Aligns baseline assumptionsAligns baseline assumptions

Aggregating projections– Identifies internal inconsistencies (sales force projection example)

Analyzing trends– Comparing plan period projection to (a) recent financials; (b) industry p g p p p j ( ) ; ( ) y

sector expectations; and (c) projections beyond plan period Analyzing the valuation

– Reasonability check versus market capitalizationy p– Results by business segment

Documenting and disseminating– Broadens awareness/understanding of baseline strategic planBroadens awareness/understanding of baseline strategic plan

Developing stress tests– Strengthens understanding of what is, and is not, included in baseline


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Aligns scenario assumptionsAligns scenario assumptions

Consistent rigor in developing risk scenarios (FMEA)g p g ( )– Guided by FMEA expert– Consistent presence of corporate ERM team

Standardized definitions of risk scenarios Standardized definitions of risk scenarios– Relies on potential quantitative impact on value (and to lesser extent

likelihood) rather than rely on subjective labeling, such as “pessimistic”

U if ti b t t l i t Uniform assumption about external environment– Assumptions shared across enterprise, allowing reconciliation of any

differences


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Provides dynamic planningProvides dynamic planning

Ad hoc ability to develop and evaluate strategicAd hoc ability to develop and evaluate strategic decisions, rather than once-a-year exercise– Reflects changes in external or internal environment – Reflects changes in strategy or tactics– Models “what if” scenarios

o On a consistent and integrated basiso At enterprise and business segment level


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Value-based approach also supports b i d i i kibusiness decision making Analogous to strategic planningAnalogous to strategic planning

– Evaluate impact on baseline company value (return) and value volatility (risk)(return) and value volatility (risk)

Other aspectsThe need for speed (tech firm case study)– The need for speed (tech firm case study)

– Dealing with soft assumptions (telecomm case study)case study)

– Stock buy-back or issuance


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Contact informationCo tact o at o

Sim Segal, FSA, CERAPresident

SimErgy Consulting LLCSimErgy Consulting LLCChrysler Building405 Lexington Ave., 26th FlrNew York, NY 10174

(646) 862-6134 Office(917) 699-3373 Mobile(347) 342-0346 Fax( )

[email protected] www.simergy.com


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Documents

Integrating ERM into Strategic Planning and Company … ERM into StrategicIntegrating ERM into Strategic Planning and Company Culture: A Case Study Sim Segal, FSA, CERA President SimErgy