The Dynamic Link between ERM and Strategy

Transcription

1 Financial Institutions Conference August 13, 2013 The Dynamic Link between ERM and Strategy Presented by: Jack R. Salvetti, President S.R. Snodgrass, A.C S.R. Snodgrass, A.C. All Rights Reserved

2 Enterprise Risk Management Managing risk is not just about identifying, assessing, and monitoring all the things that could go wrong. It also is about understanding all the things that need to go right for a bank to achieve its mission and objective of safely and profitably serving its customers and communities. Carolyn G. DuChene, Deputy Comptroller Operational Risk, OCC 2013 S.R. Snodgrass, A.C. All Rights Reserved 2

3 Enterprise Risk Management While ERM integrates many of the risk management activities currently in operation, it creates a very different approach. So ERM does have a life of its own S.R. Snodgrass, A.C. All Rights Reserved 3

4 ERM RISKS The risk to earnings or capital arising from: Risks Credit Risk Market Risk Liquidity Risk Definitions An obligor's (e.g., borrower or counterparty) failure to meet the terms of any contract or otherwise fail to perform as agreed. Movements in interest rates (repricing risk; basis risk; yield curve risk; options risk). Changes in the value of traded portfolios of financial instruments. The inability to meet obligations when they come due without incurring unacceptable losses. Changes in funding sources or market values. Operational Risk Compliance & Legal Risk Reputational Risk Strategic Risk Inadequate or failed internal processes, people, systems, or external events. Violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Negative public opinion. Adverse business decisions, improperly implemented business decisions, or lack of responsiveness to industry changes S.R. Snodgrass, A.C. All Rights Reserved 4

5 Five Principles of Revenue Growth # 1 # 2 # 3 # 4 # 5 Double Digit Growth M. Treacy 2013 S.R. Snodgrass, A.C. All Rights Reserved 5

6 Five Principles of Revenue Growth # 1 # 2 # 3 # 4 # 5 Double Digit Growth M. Treacy 2013 S.R. Snodgrass, A.C. All Rights Reserved 6

7 Five Principles of Revenue Growth # 1 # 2 # 3 # 4 # 5 Double Digit Growth M. Treacy 2013 S.R. Snodgrass, A.C. All Rights Reserved 7

8 Technology is one of the countless innovations that Kodak developed over the years but failed to successfully commercialize, the most famous being the digital camera, invented by Kodak engineer Steven Sasson in Digital technology has all but done in the iconic filmmaker. Since 2003, Kodak has closed 13 manufacturing plants and 130 processing labs, and reduced its workforce by 47,000. It now employs 17,000 worldwide, down from 63,900 less than a decade ago. Wharton 2013 S.R. Snodgrass, A.C. All Rights Reserved 8

9 When new technologies change the world, some companies are caught off-guard. Others see change coming and are able to adapt in time. And then there are companies like Kodak which saw the future and simply couldn t figure out what to do. Kodak s Chapter 11 bankruptcy filing on January 19, 2011 culminates the company s 30-year slide from innovation giant to aging behemoth crippled by its own legacy. Wharton 2013 S.R. Snodgrass, A.C. All Rights Reserved 9

10 Adapting to technological change can be especially challenging for established companies like Kodak, because entrenched leadership often finds it difficult to break old patterns that once spelled success. Kodak s history shows that innovation alone isn t enough; companies must also have a clear business strategy that can adapt to changing times. Without one, disruptive innovations can sink a company s fortunes even when the innovations are its own. Wharton 2013 S.R. Snodgrass, A.C. All Rights Reserved 10

11 Enterprise Risk Management Enterprise Risk Management is a process for the measurement of risk associated with achievement of strategic objectives. The Committee of Sponsoring Organizations The Treadway Commission 2013 S.R. Snodgrass, A.C. All Rights Reserved 11

12 Strategic Planning Strategic Planning creates a consensus view of the future, based on a realistic assessment of environmental conditions and corporate capabilities. The result is a clear understanding of the business model, creating a context for decision making in accomplishing the enterprise goals and objectives S.R. Snodgrass, A.C. All Rights Reserved 12

13 Strategic Planning Strategy Business Model Management Model 2013 S.R. Snodgrass, A.C. All Rights Reserved 13

14 Enterprise Risk Management An effective ERM process answers four key questions: 1. Do we understand the risks we are taking across the company (enterprise)? 2. What is the reward? 3. Is the risk acceptable? 4. Is the reward great enough? 2013 S.R. Snodgrass, A.C. All Rights Reserved 14

15 Balancing Risk & Reward Desired Reward Risk Response Risk Appetite Risk Profile 2013 S.R. Snodgrass, A.C. All Rights Reserved 15

16 Enterprise Risk Management ERM is a management model that leads to action. Accept Reduce Increase Share Avoid 2013 S.R. Snodgrass, A.C. All Rights Reserved 16

17 Process Driven Strategy Current Situation (Facts) Tactical Plan (Execution & Monitoring) Aspirations (Possibilities) Strategy Map (Goals & Objectives) 2013 S.R. Snodgrass, A.C. All Rights Reserved 17

18 Process Driven Strategy Sustainable, Scalable, Relevant Situation 2013 S.R. Snodgrass, A.C. All Rights Reserved 18

19 The Impact of Risk on Strategy Situational 2013 S.R. Snodgrass, A.C. All Rights Reserved 19

20 Enterprise Risk Management Strategic Risk Past Performance & the Ability to Execute Business Growth & Expansion Capital Planning External Environment, Competitive Conditions & Changing Customer Preferences Inherent Risk Significance & Likelihood Mitigation Policies, People, Processes & Systems, Control & Monitoring Residual Risk Reflecting the Effects of Mitigation Risk Trend The Direction and Velocity 2013 S.R. Snodgrass, A.C. All Rights Reserved 20

21 Enterprise Risk Management - Linkage ERM is a dynamic link between strategy, opportunity, risk and reward S.R. Snodgrass, A.C. All Rights Reserved 21

22 Enterprise Risk Management - Linkage RISK Reward The Direct Link Strategy Opportunity 2013 S.R. Snodgrass, A.C. All Rights Reserved 22

23 Strategic Planning & ERM Strategic Planning Long Term View Day-to-Day Operations Opportunities People Place Products Market Share Enterprise Risk Management 2013 S.R. Snodgrass, A.C. All Rights Reserved 23

24 Too Many Deals, Bad Timing Doomed John Koelmel at First Niagara This is the lesson for other serial acquirers from the fate of John Koelmel of First Niagara Financial Group, who lost his chief executive job after more than quadrupling the Buffalo, N.Y. company s assets to $37 billion since Koelmel was heralded as an out-of-the-box thinker during the buildup. His deals stood out because they were large and, perhaps more importantly, they happened when M&A activity was at its low point. Robert Barba Published in American Banker March, S.R. Snodgrass, A.C. All Rights Reserved 24

25 Too Many Deals, Bad Timing Doomed John Koelmel at First Niagara His image changed as First Niagara failed to realize as much profit as hoped and a flat yield-curve environment plagued deposit-heavy deals such as those for branches of HSBC and National City. Meanwhile, First Niagara s fortunes and the overall market headed in opposite directions. Its shares have fallen 42%, while the S&P Bank Index has risen 18%, in the last few years. Robert Barba Published in American Banker March, S.R. Snodgrass, A.C. All Rights Reserved 25

26 G. Thomas Bower, Chairman of the Board Chairman of the Board, G. Thomas Bower said: The Board and I are grateful to John for his leadership through this critical period in our history and for positioning us so that we can focus on enhancing shareholder value through continuing organic growth and the efficient operation of the business we have today S.R. Snodgrass, A.C. All Rights Reserved 26

27 Five Principles of Revenue Growth # 1 # 2 # 3 # 4 # 5 Double Digit Growth M. Treacy 2013 S.R. Snodgrass, A.C. All Rights Reserved 27

28 Enterprise Risk Management In straight - forward terms, Enterprise Risk Management is an integrated approach to identifying, assessing, managing, and monitoring risk in a way that maximizes business success. Carolyn G. DuChene, Deputy Comptroller Operational Risk, OCC 2013 S.R. Snodgrass, A.C. All Rights Reserved 28

29 Jack R. Salvetti, CPA President S.R. Snodgrass, A.C. Jack is a Principal with S.R. Snodgrass, a regional accounting and consulting firm specializing in service to financial institutions. As a consultant to the financial services industry, Jack has led management and director teams in the achievement of high performance in the areas of strategy, enterprise risk management, process improvement and earnings growth. Jack has gained a national industry perspective assisting hundreds of organizations located throughout the country. He combines his background as a CPA with business experiences gained over a career that has spanned four decades, as well as his role leading the firm as President and CEO. Jack s contributions to the financial services industry include his participation on the faculties of ABA Stonier National Graduate School of Banking and the Pennsylvania Bankers Association Advanced School of Banking. He is recognized nationally as an expert to the financial services industry, has authored several articles on bank performance-related topics, and is a frequent speaker at financial management conferences S.R. Snodgrass, A.C. All Rights Reserved 29