Corporate Value of Enterprise Risk Management

The ultimate guide to maximizing shareholder value through ERM

The first book to introduce an emerging approach synthesizing ERM and value-based management, Corporate Value of Enterprise Risk Management clarifies ERM as a strategic business management approach that enhances strategic planning and other decision-making processes.

• A hot topic in the wake of a series of corporate scandals as well as the financial crisis
• Looks at ERM as a way to deliver on the promise of balancing risk and return
• A practical guide for corporate Chief Risk Officers (CROs) and other business professionals seeking to successfully implement ERM

ERM is here to stay. Sharing his unique insights and experiences as a recognized global thought leader in this field, author Sim Segal offers world-class guidance on how your business can successfully implement ERM to protect and increase shareholder value.

Foreword ix

Preface xi

Acknowledgments xix

Part I: Basic ERM infrastructure

Chapter 1: Introduction 3

Evolution of ERM 4

Basel Accords 4

September 11th 5

Corporate Accounting Fraud 7

Hurricane Katrina 9

Rating Agency Scrutiny 10

Financial Crisis 11

Rare Events 13

Long-Term Trends 14

Challenges to ERM 15

Summary 16

Notes 16

Chapter 2: Defining ERM 18

Definition of Risk 18

Definition of ERM 24

Summary 58

Notes 59

Chapter 3: ERM Framework 61

Value-Based ERM Framework 63

Challenges of Traditional ERM Frameworks 63

Value-Based ERM Framework 65

Overcoming the Challenges by Using a Value-Based

ERM Framework 83

Summary 109

Notes 110

Part II: ERM Process Cycle

Chapter 4: Risk Identification 113

Components of Risk Identification 113

Five Keys to Successful Risk Identification 114

Risk Categorization and Definition 114

Qualitative Risk Assessment 129

Emerging Risk Identification 153

Killer Risks 155

Summary 166

Notes 167

Chapter 5: Risk Quantification 168

Practical Modeling 169

Components of Risk Quantification 174

Calculate Baseline Company Value 174

Quantify Individual Risk Exposures 185

Quantify Enterprise Risk Exposure 207

Summary 223

Notes 224

Chapter 6: Risk Decision Making 226

Defining Risk Appetite and Risk Limits 227

Integrating ERM into Decision Making 239

Summary 269

Notes 270

Chapter 7: Risk Messaging 271

Internal Risk Messaging 271

External Risk Messaging 280

Summary 292

Notes 293

Part III: Risk Governance And Other Topics

Chapter 8: Risk Governance 297

Focusing on Common Themes 298

Components of Risk Governance 298

Roles and Responsibilities 298

Organizational Structure 319

Policies and Procedures 325

Summary 327

Notes 327

Chapter 9: Financial Crisis Case Study 329

Summary of the Financial Crisis 330

Evaluating Bank Risk Management Practices 332

Summary 342

Notes 343

Chapter 10: ERM for Non-Corporate Entities 344

Generalizing the Value-Based ERM Approach 344

Complexities of Objectives-Based ERM 350

Examples of NCEs 351

Summary 369

Conclusion 369

Notes 369

Glossary 371

About the Author 389

Index 391

SIM SEGAL, FSA, CERA, is President and founder of SimErgy Consulting, which provides ERM consulting services and executive education seminars. With twenty- five years of experience in measuring and managing risk, Segal is a globally‑recognized ERM thought leader with experience in a variety of industry sectors, such as manufacturing, energy, entertainment, technology, services, telecommunications, banking, insurance, non-profit organizations, and government bodies. Prior to SimErgy, he led ERM consulting practices at Deloitte Consulting, Aon, and Towers Watson. Segal also serves as an adjunct professor at Columbia Business School, where he teaches an MBA/EMBA course on ERM. He has also led and co‑authored ERM research studies.

Corporate Value of ENTERPRISE RISK MANAGEMENT

The Next Step in Business Management

While enterprise risk management (ERM) programs have a great deal of potential, traditional ERM approaches often struggle to generate sufficient buy-in from internal stakeholders. Corporate Value of Enterprise Risk Management responds to this challenge with a value-based ERM approach that transforms ERM into a strategic management process that enhances strategic planning and other business decision making.

Demystifying the complex and wide-ranging topic of ERM, this practical guide is informed by the author's twenty-five years of professional experience in this arena and introduces 10 key ERM criteria as a foundational element to evaluate the robustness of any ERM program.

Filled with case studies illustrating key elements of the value-based ERM approach, this insightful book reveals:

• Secrets to quantifying all types of risks, whether strategic, operational, or financial
• What risk appetite is, how to clearly define it, and how to quantify it for use in the risk governance process
• How to integrate ERM information into decision-making processes
• Techniques to avoid the five common mistakes in risk identification
• How to apply ERM to nonprofit organizations, government bodies, and individuals

Disastrous events both man-made and natural, as well as pressures from shareholders, bondholders, directors, rating agencies, and regulators have raised management’s awareness of the need for an integrated approach to managing risk. With an important chapter evaluating bank risk management practices in light of the financial crisis that began in the United States in 2007, Corporate Value of Enterprise Risk Management provides timely direction for the risks your organization faces.

Praise for Corporate Value of ENTERPRISE RISK MANAGEMENT

The Next Step in Business Management

“I have read nearly every book related to this topic, and I heartily recommend this one. This could well be the only ERM book you will ever need.”
—Dave Ingram, CERA Senior Vice President, Willis Re Former leader of Standard & Poor’s insurance ERM evaluations

“An excellent book on ERM! This book is highly accessible to a wide range of professionals, from technical personnel to senior executives to board members. Its principles-based approach and excellent real-world examples make it a highly practical guide for those who want to understand ERM without getting lost in technical jargon.”
—Adam Litke Chief Risk Strategist, Bloomberg

“Finally, a comprehensive guide to implementing ERM. This book offers an advanced but practical solution to successfully implementing ERM based on a disciplined, measured approach. In my nearly two decades as a board member, chief risk officer, and chief audit executive, I’ve been presented with many risk management frameworks, but this is the best I have seen.”
—Leslie Bauer, CPA Vice President and Chief Risk Officer, ARC

“A firm’s value is based on its risk-adjusted return. The traditional focus on return (P&L) addresses only half the picture, at best; ERM completes it. Segal, one of the world’s leading authorities on managing risk, provides a comprehensive and practical guide to ERM strategy and implementation. It is essential reading for anyone concerned with managing risk and return.”
—Garrett Van Ryzin, PhD, SM, BSEE Chair of Decision, Risk, and Operations Division Columbia Business School

“Segal’s value-based ERM approach gives readers a truly integrated road map for risk management. It employs practical and holistic techniques for improving how risk and return are considered, evaluated, and managed in business decision making, from day‑to‑day decisions to strategic planning.”
—Rob Pollock, FSA President and Chief Executive Officer, Assurant