INSTITUTIONALIZING ERM

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INSTITUTIONALIZING ERM
The CFO Summit 2007 6th February, 2007
Larsen Toubro Limited
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Business Environment

• Strong economic growth momentum
• Growth of emerging markets
• Unprecedented liquidity and competitive borrowing
  cost drives up asset valuations
• Prominence of active investors like private
  equity and hedge funds
• Increased level of MA activities
• Conducive conditions for excesses
• Pressure on returns due to high valuations/
  market expectations
• Credit quality deterioration / sub-optimal calls
• Diluted focus on cost management

Prudent liquidity and Risk management are
priorities for these conditions
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Risk Threat Vs opportunity

• Risk Hazard chance of bad consequence or
  loss
• Oxford Dictionary
• Risk is as much a corporate asset as money. Risk
  aversion is taking an important asset away from
  business management.
• Andy Grove
• Founder, Intel
• Case for an intelligent RM system
• Enables prudent risk taking for utilizing
  opportunities
• Guards against downside vulnerabilities

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Enterprise Risk Management

• ERM is
• A process applied by Management across the
  enterprise
• Applied in strategy setting for encashing
  opportunities
• Used for identifying potential events which could
  affect the entity
• Enables Management of risk within the risk
  appetite
• Provides reasonable assurance on achievement of
  the entitys objectives

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Institutionalizing ERMLTs Journey
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Institutionalizing ERM

• Key drivers were
• Regulatory compliance
• Business requirements
• Alignment of risk appetite to business strategies
• Exploiting new opportunities / new markets
• Enhancing competitiveness in an increasingly
  globalized world
• Market expectations
• Improved predictability of business performance
• Higher benefits from growth momentum
• Measure and monitor the risk universe

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Regulatory

• Gamut of governance requirements in Listing
  Agreement

Audit Committee
Board responsibilities
Clause 49
CEO / CFO Certification
Reporting Disclosures
Risk Management

• Assessment of risks
• Procedure to minimize risk
• Framework to monitor and manage risks
• Disclosure on Risk Management

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Regulatory
Mandatory requirements for Risk Management
Annexure I (IV) (C)
The company shall lay down procedures to inform
Board members about the risk assessment and
minimization procedures. These procedures shall
be periodically reviewed to ensure that executive
management controls risk through means of
properly defined framework
Clause 49 requirement for Risk Management
Annexure I (IV) (F)
As part of Directors Report or as an addition
thereto, a management discussion and analysis
report should form part of the Annual Report to
the shareholders. This management discussion and
analysis report should include discussion,
inter-alia, on the risk and concerns within the
limits set by the companys competitive position
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Risk Universe Scan
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ERM Standards

• Few others include
• JIS Q 2001 International Risk Management
  Standards of Japanese Risk Management Standards
  Committee
• Basel III Accord

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ERM Framework
Objectives
Organization level
Process
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ERM Linkages Tolerances
Mission To be a leading producer of premium
Electrical Product X
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Establishment of ERM Process
Risk Measurement and Reporting
Risk Mitigation and Management
ERM Foundations
Risk Identification and Assessment
ERM Foundations

• Governance structure
• Resource allocation
• ERM framework
• Risk policies
• Awareness and training

• Top-down risk assessments
• Bottom-up risk assessments
• Audit reviews
• Independent assessments
• Regulators
• Customers
• Other stakeholders

• Key risk indicators
• Performance vs. standards
• Dashboard reporting
• Management
• Board
• Public disclosure

• Focus on mitigation initiatives
• Risk-adjusted pricing
• Risk transfer
• Knowledge management

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Approach to Institutionalizing ERM
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CEO Speak on Risk Management
Our primary goal is to fundamentally improve risk
management in the group and thereby improve the
predictability of returns to shareholders
David Singleton CEO, Clough
Our risk management program called PROM (Project
Risk Opportunity Management) is a comprehensive
program We looked at several risk management
approaches in use throughout the industry and
concluded that developing our own programs would
best fit our operations and long-term strategies
John Ruckert Director, McDermott
We have an experienced risk management team that
allows us understand risk and manage them. Our
risk management capabilities allow us better
control of cost and schedules, leading to client
satisfaction superior returns to our
shareholders
Directors Report Flour Corporation
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Achieving the ERM Mindset

• To be
• Strategic tool
• Focused on value creation
• Continuous risk assessment, evaluation and
  management
• Transparent communication
• Risk ownership

• As was
• Limited strategic scope
• Narrow focus on profit protection
• Adhoc risk assessment
• Closed communication/risk reporting
• Business unit level attention

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ERM Status at start
Evolved ERM
Risk Management Integration
Stakeholder Value
Enterprise-wide Risk Awareness
Unit Level Risks
Risk Management Sophistication
Unit Level Risks Addressed

• Key financial risk managed through treasury risk
  policy
• SBU / business specific risks management
  initiatives

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ERM Initial Steps
Evolved ERM
Risk Management Integration
Stakeholder Value
Enterprise-wide Risk Awareness
Unit Level Risks
Risk Management Sophistication
Enterprise-wide Risk Awareness

• Risk management identified as a key objective of
  the strategic plan
• Risk management mission statement developed
• Role defined for Corporate Risk Officer (CRO) and
  Divisional Risk Officers
• Risk review meetings covened

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ERM Scaling up
Evolved ERM
Risk Management Integration
Stakeholder Value
Enterprise-wide Risk Awareness
Unit Level Risks
Risk Management Sophistication
Risk Management Integration

• Development of risk categorization framework
• Definition of criteria for rating risk / risk
  appetite at business level
• e-Survey for identification of RTMs
• Workshops for developing mitigation initiatives
• Setting up of RM organization with
  responsibilities
• Development of Risk Manager A management
  dashboard

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ERM Road Ahead
Evolved ERM
Risk Management Integration
Stakeholder Value
Enterprise-wide Risk Awareness
Unit Level Risks
Risk Management Sophistication
Evolved ERM

• ERM becomes a consistent frame of reference
  across entire value chain and risk appetite
  constantly referred to during all key decisions
• Clear linkages established between financial
  performance and risk assessments
• Real time assurance systems in place covering key
  financial / operational risks

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ERM Imperatives
Presence on CEO Agenda
Enterprise-wide Risk Assessment Process
Common Risk Language
Overall Risk Management Policy
Risk Management Organization with clarity of
roles responsibilities

• Integration of risk management with strategy
  setting
• Integration of risk response with business plans
• Alignment of organization behaviour with risk
  appetite
• Risk reporting

• Knowledge sharing process for identifying best
  practices
• Common training
• Tools to portray portfolio view of risk
• Supporting technology

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THANK YOU