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The Rise andEvolution of the
Chief Risk Officer
Enterprise Risk
Management at Hydro
One
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Chinese boards of directors -
need to have a
thorough understandingof the key risks in theorganization and whatis being done to
manage such risks.
Security rating agenciesbegun to take account
of ERM systems in theirratings methodology.
The first symbolrepresents dangerand the second
opportunity. past - address risk in
silos,.
new (ERM) approach-
all would function asparts of an integrated,strategic, andenterprise-wide system.
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More firms are notdoing ERM
One deterrent is thescarcity of case studiesdescribing successfulimplementations of
ERM. Joint Australian/New
Zealand Standard forRisk Managementprovides the firstpractical prescriptionfor implementation of ERM using genericexamples.
Articles and reportsprovide examples and
insights into thepotential benefits of ERM.
Best practices of
successful firmsCorporate RiskManagement Group
Head of internal audit,
John Fraser (one of theauthors of this article),was asked to take onthe additional role of chief risk officer (CRO).
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Two full-timeprofessionals, one witha degree in industrialengineering and onewith an MBA in processreengineering andorganizational
effectiveness. Given six months to
prove its worth.
(1) an ERM policy and
(2) an ERM framework The Executive Risk
Committee
for discussion andapproval.
Pilot Study 80 potential risks or
threats to the businesswas developed and e-
mailed to themanagement team of the subsidiary.
Voting - Delphi method
Issues never openlydiscussed wereaddressed.
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Common understandingof risks and of a
corporate plan forprioritizing action andresources to managesuch risks.
Identification andAssessment of Risks andControls
In assessing risks, the
aim is to understandthe size of the potentiallosses and the
probability of occurrence.
Probability curve -reflects the potentialoutcomes and theprobabilities.
Determine the impact of specific risks on variousobjectives.
Probability of outcomesis evaluated for a
specific time frame.
Produce a risk map(RM)
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Risk map - track thehistorical developmentof particular risks andproject expected futuredevelopments.
The company has acontrol strengthmodel that complementits risk tolerances.
Tolerability of Risk andRisk Mitigation
rank-ordered list of residual risks isassembled.
The Risk-owner determinesthe firms tolerance foreach risk.
Seven possible ways of dealing with significantrisks:
Retain
Retain, but changemitigation
Increase
AvoidReduce the likelihood
Reduce the consequences
Transfer
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Monitor, Review and
Report
Fundamental toeffective management
of business risks.
Risks may not always be
categorized correctly in
the first place.
Prediction is very
difficult, especially aboutthe future.
Niels Bohr
CORPORATE RISK PROFILE
Purpose - to ensure that
the senior managementteam shares a common
understanding of the
principal risks facing the
organization and toprovide a basis for
allocating resources to
address risks based on
their priority.
no means a static
document
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Describes the corporateobjectives that are likely
to be most affected bysuch risks and thecorporate controlsbeing used to mitigatesuch risks.
In June 2000, Hydro oneevaluated 11 major risksand the corporatemeasures to manage
such risks.11 Major Risks:
Growth
Regulatory uncertainty
Organizational readiness
Network services launchAsset conditions
Catastrophic events
Environmentalcontamination
Hazardous operatingenvironment
Market Ready Project
New electricity market
Economy/financialmarkets (See notes attached : Note 1)
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QUANTIFYING THEUNQUANTIFIABLE
Hydro One is inherentlyan asset managementcompany.
Assets life expectancy
is 30 to 70 years. Investment Planning
Department of HydroOne with the Corporate
Risk ManagementGroup developed a risk-based approach forallocating resources.
The approach rests onthree pillars:
Five-point risk tolerancescale (from Minor toWorst Case)
Five-point probability
rating scale (fromRemote to VirtuallyCertain)
Quality of controls (or
other risk managementmechanisms)
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DETERMINING CAPITAL
EXPENDITURES (RISK-
BASED APPROACH): Levels of funding:
Highest Risk Exposure -
unacceptable risk level
and must be funded as
a priority.
Minimum Funding Level
(barely tolerable)
Level 1 Materially
lower than the
Minimum Funding
Level.
Levels 2 and 3 - Materially
lower than at Level 1.
Bang for the Buckequals risk divided by
dollar cost.
BENEFITS OF ERM AND
OUTCOMES AT HYDRO ONE
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DETERMINING CAPITAL
EXPENDITURES (RISK-
BASED APPROACH): Levels of funding:
Highest Risk Exposure -
unacceptable risk level
and must be funded asa priority.
Minimum Funding Level
(barely tolerable)
Level 1 Materially
lower than the
Minimum Funding
Level.
Levels 2 and 3 - Materially
lower than at Level 1.
Bang for the Buckequals risk divided by
dollar cost.
BENEFITS OF ERM AND
OUTCOMES AT HYDRO ONE
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Chris Naval
