KPC ERM conference Kuwait 2014 - Integrating ERM and Strategic Planning - Marc Ronez presentation

ARiMI – Asia Risk Management Institute
By MARC RONEZ
Chief Risk Strategist & Knowledge Leader
ARIMI-Asia Risk Management Institute
NOTES
2nd KPC-ERM Conference 2014
Kuwait, 7 January 2014
Integrating Risk Management into Strategic
Decision-Making

Agenda for this Session
þ Understand the essential connection between ERM and
Strategic Planning
þ Major Obstacles to Effective Strategic Decision-Making
þ How to overcome the Obstacles with ERM
Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014 2

1 - Understanding the link between
ERM and Strategic Planning

ERM & Strategic Decision-Making
INTEGRATING risk management into the strategic
planning & decision-making process of an organization
should be considered to be a very essential component of
any ERM implementation/improvement projects.
The RATIONALE is… simply that since Taking Risk is in the
nature of Business…
…. Hence Understanding & Managing Risks is therefore
INHERENT to the Strategic Planning process

Indeed TAKING RISKS without managing them
properly should be called…
GAMBLING!

66
Financial & Hazard
Need to Expand the Scope of ERM
Finance Losses
Operational Strategic
Protect & Sustain
Operations
Create Value with
effective Risk-taking
& Management
VALUE
increase
➜  From Value PROTECTION to Value CREATION expanding to
all risk domains
Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014

Strategic Planning is based on the
understanding that…
You CANNOT keep doing the SAME
THING
when everything is changing around
you!

Strategic Planning starts by analyzing the CURRENT REALITY
& Projecting Forward to Identify the Possible FUTURE(S)
TODAY
CURRENT
POSITION
Where are you
Now?
Time
Range of
Possible
FUTURE(S)
Threats
Performance
Opportunities

Strategic Planning is therefore..
an Opportunity & Risk Management
Process..
aimed at adjusting or changing an
organization’s Business Model

Risk – Threats & Opportunities Management
10
- +
Target
Performance
Expected
Potential
Losses
Expected
Potential
Opportunities
Unexpected
Catastrophic
Losses
Transformational
Blue swans
Catastrophic
Losses
Black swans
Unexpected
Opportunities
LOSS GAIN
Risk will Lead You & your Organization to either Negative or
Positive impacts depending on the environment and how it is
managed..

11
Cost
Overruns
Accounting
irregularities
Manage-
ment
ineffective-
ness
Supply
Chain Issues
Competitive
Pressure
M&A
Integration
Problems
Mis-
aligned
Products
Customer
Pricing
Pressure
Loss of
Key
Customer
Supplier
Problems
R&D
Delays
Customer
Demand
Shortfall
% of top 100
Regulatory
Problems
Strategic Operational Financial Hazard
Foreign
Macro-
Economic
Issues
Interest
Rate
Fluct-
uation
High
Input
Comm-
odity
Price
Law-
suits
Natural
Disasters
Fortune 1000 - Primary Cause of Stock Drop (# of
Companies)
Source: Compustat, Mercer Management Consulting analysis – May 1999
Which Risks are responsible for most Value Loss in
organizations?

12
A STRATEGY is a „Road Map“ that provides a
Pathway from CURRENT REALITY to VISION
Time
VISION
Where you want
to Be? (Possible
Future)
INGREDIENTS
Resources, Capital,
People, Culture,
SystemsSTRATEGY
How to get
There?
RISKS
RECIPE
Processes, Structure,
Marketing, Products,
Pricing, Distribution.
TODAY
CURRENT
POSITION
Where are you
Now?
“Strategy is how to get from where
you are now to where you want to
be!”
A Strategy defines and articulates the value proposition that an
organization brings to its market – a description of its business model.

Strategic Planning Process & Tools available
CURRENT
POSITION
Fishbone
Analysis
Porter Five
Forces
Vision &
Objectives
Force Fields
Analysis
FUTURE
OPTIONS
SWOT, PEST
STRATEGIC
POSITIONING
IMPLEMENTATION
MONITORING &
LEARNING
þ  Strategic planning will identify future opportunities/Threats as well as
the critical strengths and weaknesses of the organization.
þ  It will identify the structures, systems and processes that will help the
organization achieve its intended outcomes both in the short and long
term while mitigating the risks identified.
Strategic
Options Grid
Business Model
Analysis
Gap Analysis
Scenario
Analysis
Stakeholder
Analysis
Gap
Analysis
KPIs

Decision-makers can optimize the tradeoffs…
between Risk and Return.
By Making INFORMED Decisions!
HOW?
… by identifying, measuring and managing risks
consistently and systematically, and ensuring the
timely communication of risk related information to the
decision-makers in a transparent manner.

The Limitation of the Role of Risk Management
¤ IMPORTANT: The final decision to TAKE RISKS rests
NOT with the risk manager, but with top management
and BOD.
þ This decision depends on the risk appetite or tolerance
of an organization,
þ Hence defining that APPETITE is one of the most
important responsibilities of management and the
board.
þ It is at the heart of the firm’s strategy and how it creates
value for its shareholders
15Marc Ronez - ERM & Strategic Planning – Copyright @ ARiMI 2014

2 – Major Obstacles to Effective
Strategic Decision-Making

A FLAWED Strategy is a Key Strategic Risk
A flawed strategy may result from essentially 2 groups of
causes:
 First a flawed process, including an incomplete or
inaccurate assessment of strategic risks.
 Second a flawed people who develop an inappropriate
strategy even though the "input" to the process is
complete & accurate.
It translates into 4 major obstacles to Strategic Decision-
Making

4 major Obstacles to Effective Strategic Decision-
Making
1.  the Complexity Fog: Growing business environment and
organizational complexity makes it difficult to comprehend
2.  The Biases Short-Cut: Human cognitive limitations leads
to improper decision-making
3.  the Alignment Gap: Perceived self-interested drives
people’s behavior even when it contradict the group
interests
4.  The Ethical Gap: Relativism in application of moral values
and principles open the door to moral flexibility

19
1 – The Complexity Fog
Increasing size, complexity &
dependencies
Increased Pressures on
Resources & Environment
Globalization & Increasing
Competition
Rising value of Intangible
Assets
Increased Stakeholder
Expectations
Increasing Regulatory
Requirements
Continuous Technological
Change
Need for
BETTER Risk
Management
Growing Gap
With
Capabilities
“Business as usual” presents organisations with a new level of Risks
Challenges.

KEY Drivers/factors: Organizations face a COMPLEX,
UNCERTAIN always CHANGING environment
Human & Social
Factors
Political &
Regulatory
Climate
Resources &
environmental
Factors
Economic
Environment &
market Forces
Technological
innovations
Source of both Risks & Opportunities
Global
Domestic

EMERGING RISKS on a 1 to 15 years + Horizon (ARiMI
perspective)
Cyber attack,
IT failure
Disruptive
Technological &
Business
Innovations
Terrorism
Regulatory
changes
Human
Capital
Challenge
Political /Social
upheaval, war
Business
Ethics, Fraud
Customer
changing
expectations
Credit
Availability
Infectious
Diseases

2 - The Biases Short-Cut - Flaws in Decision-making
processes
When confronted with uncertainty, decision makers are
often unaware that.. Pressures from psychological bias are
underestimated, and will compromise their professional
judgment.
Self-interest, Moral Hazard, Greed, Illusion of Control
(Overconfidence), Collective Blindness to risk… We are
often not very ‘OBJECTIVE’ when making decisions…
In fact, people typically RELY on Psychological Programming
SHORT CUTS to make split second decisions… that they will
rationalize later.

Individual vs Group Cognitive Biases
23
VS
Group
Biases
Individual
Biases
Human
Behaviors
?

Blindness to Risk – Herding
As long as the music is playing, we have to keep on
dancing!
Statement by Chuck Prince in 2007, former CEO of
Citibank Group

25
Illusion of Control
"It's only when the tide goes out that … you learn who's been
swimming naked."
Warren Buffett, Berkshire Hathaway

3 – The Alignment Gap – An Agency Problem
Agency relationships occur when …
þ … one partner in a transaction (the principal)
þ … delegates authority to another (the agent)
to do something on the principal’s behalf. As a result the
principal is effectively putting his/her welfare under the
CARE of the agent (Example Employment).
What is the Problem?

What is the Agency Problem? Can you TRUST your
Agent?
1.  Conflict of Interest: The interests of principal
(shareholders) and agent (Management) will DIVERGE
2.  Lack of Control: With its delegation of authority, the
agent can make the decisions he wants and it is difficult
for the Principal to interfere and organize effective
control.
3.  Lack of Transparency & Information asymmetry: The
agent’s actions are HIDDEN from the principal or are
costly to observe. The agent possesses information that
is, for the principal unobservable or costly to obtain

Essential Consequences of Agency Problem
Return $
Risk
High
Zone 1
Insufficient
Risk Taking
Low
High
Zone 2
Optimal
Risk Taking
Zone 3
Excessive
Risk Taking
Gambler
Effective
Risk Taker
With ERM
Risk
adverse “Sweet
Spot”
  Financial & other Asset Loss of the principal due to excessive risk-
taking, incompetence or fraud of agents
  Opportunity costs due to missed opportunities because of risk averse
agents
28

4 – The Ethical Gap
One of the reasons why ERM is difficult to implement is
because it is based on and promotes a Value System that
many people find hard to accept in today’s organizations… :
þ Think in terms of Shared Value and Sustainability
þ Act with Integrity and Discipline
þ Be Responsible & Accountable for what they do
þ Be Open & Transparent about how they do things
þ Share information and knowledge proactively
The Wrong Value Systems can prevent the Effective
Management of Risk
29

Can you trust a corporate leader when he says..
“Risk Management is part of our Corporate DNA”
Statement by Dick Fuld, CEO of Lehman in 2006

WHY too often Unethical Gamblers are the ones
Hired & Promoted?
Ken Lay, Enron Chuck Prince, Citi
Group
TT Durai, NKF
Bernie Ebbers
WorldCom
Dick Fuld,
Lehman Bros
Alan Greenspan,
Chairman FED
Bernard Madoff, BM
Investment
Ramalinga Raju,
Satyam

Root causes for many Organization's Problems
The examinations that followed many corporate collapses
revealed a common theme behind the institutions‘ troubles i.e.
The People’s Factor!:
 high-profile scandals involving unethical abuse of
corporate power due to greed and conflict of Interests,
 In a number of cases, fraudulent/criminal activities by
corporate officers.
 A lack of responsibility, accountability and oversight of
corporate operations at every level of management;
 An inherent Blindness and human Complacency to Risk;
 A people issue circumventing control systems in place

“To educate a man in knowledge but NOT in morals
is to create a menace to society. “
Theodore Roosevelt, USA president

3 - How to overcome the
Obstacles with ERM

In short, How to overcome the obstacles?
1.  UNDERSTAND the “BUSINESS MODEL”:
þ  By Identifying & Analyzing the REAL Value Drivers and Key
Vulnerability Points of an organization to clear the fog of
complexity and guide decisions
2.  BE AWARE of BIASES:
þ  By taking into account and compensating for the Subjective
and Irrational dimensions of Decision-Making
3.  CREATE REAL ALIGNMENT:
þ  By tying value drivers to performance drivers and REWARDS
4.  MAKE RATIONALIZATION DIFFICULT:
þ  By creating the appropriate risk-aware cultural environment
with zero tolerance for unethical behaviors

The Objective of Risk Management is that …
.. an organisation takes risk and manage risk
exposure INTELLIGENTLY
.. in a controlled (or balanced) manner so that the
business is viable for a longer term (SUSTAINABILITY)
while meeting the expectation of all the relevant
stakeholders by CREATING SHARED VALUE
(i.e., shareholders, customers/policyholders, employees,
regulators, rating agencies, suppliers, etc).

Risk DIAGNOSTIC
Risk SOLUTION/TREATMENT MIX
Business Model
& Strategy
Organizational:
People/Culture,
Processes & Systems
Understanding Business Model as Risk-Taking &
Management Positioning
Risk –Taking &
Management
Decisions
37
Risk
Universe
+ Financial:
Insurance, ART,
Capital Market
KEY OBJECTIVES
KEY OBJECTIVES
Source: Marc Ronez – Asia Risk Management Institute
Risk
Appetite
Risk
Tolerance

Key Value Drivers

Key Processes
& Resources
Risk Exposure
Profile

Clarifying your Organization Context (External & Internal)
Key Partners:
(Supply
Chain)
Raw Materials,
Goods &
Services
Competitors
& New Entrants
YOUR
ORGANIZATION
Key Partners:
(Routes to
Markets, Channels)
Distributors,
Complementors,
Vendors, etc.
Customers
(Segments &
Profiles)
Prospectivecustomers
External Macro Forces: Global, national, natural, economic, Technoligy and political influences…
Substitutes
Source: Marc Ronez – Asia Risk Management Institute

Strategic Planning & Performance Management
Organization Mission, Vision &
Shared Values
Determine Business Model
(CCS - Value Creation, Value Capture,
Value Sustainability)
Drives Business &
Operational
OBJECTIVES
Map associated Key Resources, Activities & Processes
Financial Customer
Internal
processes
Employee /
HR
Community
and
Environment
Key Performance Indicators & Standards
Identify CSFs (Critical
Success Factors)
Drives Long-term
STRATEGY &l
GOALS

Strategic Planning & Risk Management
Key Risk Indicators
What FACTORS influence
our objectives and ability
to succeed by disrupting
key resources & processes
Key Control Indicators
What CONTROLS we need
to put in place to mitigate
our risks
Critical Success & Failure Factors

Root Causes & Events Scenario Analysis
Financial Customer
Internal
processes
Employee /
HR
Community and
Environment

Performance Management
Organization Mission, Vision &
Shared Values
Determine Business Model
(Value Creation, Value Capture,
Value Sustenance)
Drives Strategy &
Objectives
Map Key Resources & Processes to Identify Critical Success Factors
Financial Customer
Internal
processes
Employee / HR
Community and
Environment
Key Performance Indicators
Risk Management
Critical Success vs Failure Causes / Factors
Financial Customer
Internal
processes
Employee / HR
Community and
Environment
What FACTORS influence our
objectives and ability to
succeed by disrupting key
resources & processes
What CONTROLS we need to
put in place to mitigate our
risks
Knowledge &
Information
Management
Enterprise Risk Management (ARiMI Model)
Drives Key Business
Objectives
Key Risk Indicators
Key Control Indicators

In summary, Enterprise Risk Management (ERM) is…
A TOOL BOX that includes a formalized framework that
organize the Principles, Methodologies, Processes,
Infrastructure and culture used by organizations to DEAL
with RISK issues effectively in order to:
þ Maximize upside opportunities
þ minimize negative surprises and
In relation to the achievement of their OBJECTIVES
But like any tool, its effectiveness depends on what the
User do with it!

Dealing with the Human side: Human Capital
Risk Management
Attracting the
Right
Human
Capital
Developing
Human
Capital
Protecting &
Retaining
Human
Capital
Three Interdependent Activities

A framework for Building a Risk Culture supporting
effective Decision-Making
Code Conduct
& Ethics
Management
Leadership
FOUNDATIONS OF
ETHICAL RISK
MANAGEMENT
Communication
& Training
Set clearly the
principles &
values to guide
behaviors
Top
Management
must lead by
example
Provide
information,
induction,
training &
mentorship
EMBED in PROCESSES, SYSTEMS & CULTURE
STEPS TO MANAGE
ETHICAL RISK
Human Capital
Cycle
Management
Hire, Reward &
Promote the
right employees
HEALTHY SUSTAINABLE ORGANIZATION

For Organization to manage Strategic Risk
Effectively, they need to..
Stop THINKING like
Mechanics…
Start ACTING like
Gardeners.

Return $
Risk
High
Zone 1
Insufficient
Risk Taking
Low
Achieving Optimal Risk vs RETURN
High Zone 2
Optimal
Risk Taking
Zone 3
Excessive
Risk Taking
Gambler
Winner
Risk adverse
“Sweet
Spot”
Risk Aversion &
Control: protect their
position, build
structures to increase
their capabilities of
control.
Excessive Risk Taking:
Unaware of ‘real’ level of
risk, incentivized to take
risks.

The role of ERM in the Strategic Planning process
Is to ensure that the strategic planning process has:
þ A comprehensive view of the relevant risk issues and
a framework for their management including common
terminology, common measurement, risk appetite, a
target risk profile; a desired risk culture.
þ The right processes and tools for the various aspects of
risk & performance management (identification,
assessment, addressing, measurement and monitoring).
þ A system and culture to support full and unbiased
discussion and evaluation of opportunities & risks.
þ The people with the right values & risk-aware culture
involved in the process

Marc Ronez - Chief Risk Strategist &
Knowledge Leader at ARiMI - Asia Risk
Management Institute
An ERM & Governance expert with over 20 years of experience both as a
practitioner & trainer for large MNCs, Governments & Charities. Marc has an MBA
from the University of Chicago GSB, an MSc in Insurance & a LLM from the University
of La Sorbonne
What do I do? Help managers & leaders to use Risk Management to:
þ  Resolve difficult operational and business challenges
þ  Take & manage risks effectively to build sustainable & profitable growth models
Marc’s specific areas of expertise include ERM, risk decision-making processes,
data analytics, corporate governance, business ethics, social responsibility, risk-
aware culture, risk communication and crisis management, business model/strategy
risk management, corporate learning systems development.
48

Risk Management is a continuous journey, not a
destination!
Marc Ronez is on Linked in & WordPress
You can find his profile & read his blogs at:
P: www.linkedin.com/in/marc-ronez
B: theriskmanagementparadox.com
B: riskmanagementdemystified.com
49

ARiMI – Asia Risk Management Institute

ARiMI is an applied research and business studies institute that
was set up in 2003 (in partnership with NUS) and has established
itself as the Institute of Reference for Enterprise Risk Management
studies in Singapore and in the region.

We FOCUS on programs:

1.  For Decision-Makers (Middle to Top Management):
Developing PRACTICAL Knowledge & Skills in Risk & Crisis
Management

2.  For Organizations: Building CAPABILITIES for Sustainable
and Profitable Growth by EMBEDDING Control Systems
with a Risk Aware & Crisis Readiness Culture
ARiMI, Asia Risk Management Institute

ARiMI - Focus and Expertise
● Crisis management &
Business Continuity
● Leadership risk decision-
making and Social Capital
● Reputational Risk &
stakeholders management
● Corporate governance &
business ethics
● Business Innovation &
Corporate Transformation
Research
● Professional Designation
Programs
CERM (Certified
Enterprise Risk Manager),
CPRM (Certified
Professional Risk
Manager), ARM
(Associate in Risk
Management), FSRM
(Fellow in Strategic Risk
Management)
● Public Seminars and
Workshops
● Corporate Training &
learning Programs
Education Expertise
● Risks Analytics & Decision-
making
● Crisis & Business
Continuity Mgt
● Reputation Risk Mgt & CSR
● Business Ethics, Fraud
Risk & Compliance Mgt
● Risk Appetite & Risk Aware
Culture Readiness
● Project risk management
● ERM Design &
Implementation
● Innovation & Change Mgt
● Information & Cyber Risk
Mgt

53
For more information on ARiMI,
check our website at:
www.arimi.org
Developing Effective Leaders & Decision-
makers for complex & volatile times

Important Note: Please note that that this presentation and its
contents, is the intellectual property of the Asia Risk Management
Institute Pte Ltd. It has been prepared for this KPC ERM Conference
2014 session and it cannot be used for any other purposes without
the specific written consent of the Asia Risk Management Institute.

KPC ERM conference Kuwait 2014 - Integrating ERM and Strategic Planning - Marc Ronez presentation

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