Topics to reflect on for today · 2020-06-11 · Topics to reflect on for today. #BetterDirectors #WebinarWednesdays #BB@9 effect of uncertainty on objectives Definition of Risk

#BetterDirectors#WebinarWednesdays#BB@9

Creating Value from Risk

• Meeting minds on risk basics

• Strategy, risk and decision making

• Strategy, Risk and Resilience

Topics to reflect on for today


effect of uncertainty on objectives

Definition of Risk


Risk management simplified+veConsequences•Benefit•Happiness•AdvantageLikelihoodLikelihoodRisk• Event

• Change in circumstances

• Change in situation

-ve Consequences

•Harm•Injury•Detriment

Likelihood -ve Consequences

•Harm•Injury•Detriment

Likelihood

Treatment


Coordinated activities to direct and control an organizationwith regard to risk and opportunity (uncertainty)

-A structured and consistent approach that aligns strategy,processes, people, technology and knowledge, with thepurpose of evaluating and managing the uncertainties theenterprise faces to create shareholder value and ensuresustainability.

Risk Management


Why do companies use risk management?• Maintain the confidence of our shareholders

• Risks are being identified, analysed and appropriately treated

• Their investment is being protected

• Their capital being exposed to enough of the right kind of risk

• Better, more confident decision making• … whether about an investment, a new trading procedure or a re-structure.

• No surprises• Consistency, steady growth and no unexpected shocks

• Supports our culture• Not generally a rule book, prescriptive approach, but one involving the allocation of accountability for risks, controls and tasks

• Requires Managers to act with foresight (and hindsight)

• Motivates entrepreneurial activity – prudent risk taking


King III, the Board and risk management• be responsible for the governance of risk

• determine the levels of risk appetite

• delegate to Management the responsibility to design, implement and monitor the risk management plan

• ensure that risk assessments are performed on a continual basis

• ensure that frameworks and methodologies are implemented to increase the probability of anticipating

unpredictable risks

• ensure that Management considers and implements appropriate risk responses

• ensure continual risk monitoring by management

• receive assurance regarding the effectiveness of the risk management process


King IV

• “Cognisance had to be taken of the advances in technology

• that are revolutionising businesses and societies, and transforming products, services and business models

• these advances happen quickly and can cause significant disruption, opportunities and risks

• Organisations should strengthen the processes that help them to …

“anticipate and to respond by capturing new opportunities and managing emerging risks”


• To prosper organisations must be relevant to:

• its customers

• differentiated from its competitors

• economically viable

• Organisations that meet these three requirements create value for their stakeholders

• Turnover on the big indices (S&P 500, FTSE, JSE, etc) indicates how many organisations are struggling - e.g. Sasol, Steinhoff, Stuttafords, Woolworths, Edcon …

• Headline stories or gradual declines that result in value loss are because of:

• misses,

• mistakes, and

• malice

• Misses - when organisations do not do what they should have done, e.g. Stuttafords

• failed to evolve to meet changing customer needs, thus lost relevance and became bankrupt

• Mistakes - when organisations do what they should not have done, e.g. Woolworths acquisition of David Jones

• was an expensive buy that has failed to deliver on all of its strategic objectives and has resulted in impairments of more than half of the purchase price. While misses and mistakes are generally the result of well-intentioned executives,

• Malice - when executives are deliberately acting in their own interest and not that of the other stakeholders, e.g. Eskom, Steinhoff.

Problem statement


• Risk capability mostly concerned with execution activities, i.e. doing things right, and with downside protection - doing less of the bad. Might help to prevent cases of malice, but not at all well positioned to prevent misses and mistakes

• Misses and mistakes result from strategy, i.e. doing right things.

• Moreover, while prevention of mistakes is doing less of the bad, prevention of misses requires doing more of the good, i.e. positioning the organisation to capitalise on upside opportunities.

• For an organisation to survive and thrive it needs to “do the right things” AND “do things right”, and it also needs to “protect against the downside” AND “position for the upside”.

Since strategy is about the future and the future is inherently uncertain, strategic decisions are about making decisions in a context of

uncertainty. Good strategic decisions follow a good process that aims to deliver the highest expected value for the organisation’s strategic

objectives. Due to the uncertainty, sometimes that good process delivers a bad outcome. i.e. “shit happens”. When “shit happens”, an organisation

might handle it well or poorly – indicator of level of resilience

Hypothesis


• Organisations typically employ three capabilities to address the issues above, viz.

• a strategy capability to focus the organisation on the right things so that it might prosper and create value for stakeholders,

• a risk management capability to protect against downside events that could erode value, and,

• a business continuity management capability to deal with issues that have arisen that, unless addressed, will undermine value

• In most organisations these three capabilities run independently

• Arguably this problem would not have arisen had strategy, risk management, and business continuity management functioned in an integrated way.

• Given the prevalence of misses, mistakes, and malice, IRMSA hypothesises that organisations would benefit from an integrated capability of strategy, risk, and resilience.

• Driving up the maturity of each of those three capabilities independently is less beneficial than integrating the capabilities.

• Integrating and maturing these capabilities in an integrated way, the outcome may be considered as

organisational resilience

Hypothesis

• More than process …

• … becoming a risk intelligent and resilient organisation means integrating strategy, risk and resilience

• It has to be about decision making

• Risk intelligent leadership from the CRO’s office

• Sitting at the right tables

• … what is the value proposition – don’t tell me –show me!

• Tools allowing for scenarios, modelling and ultimately predictive capabilities

• People/skills/adaptability/creativity/technology/information

The “future fit” Risk ManagerBeing future fit in a changing world – beyond the basics


Value destruction results from misses, mistakes, and malice

Mergers & Acquisitions

“M&A is a mug’s game, in which typically 70%–90% of acquisitions are abysmal failures” [HBR, 2016]

Cost of the project exceeded $8bn (3x original estimate), impaired $4bnLost 80% of the acquisition value

100% shareholder value destruction of $190m

AOL suffered huge losses, and the merged company posted a $99bn loss

Impaired 55% of the acquisition price of R20bn

Sprint lost 2 million subscribers, cut 800 jobs and $1.6bn

Outcome-focused rather than process-focused

Your decision

The outcome Drive yourself home Take an Uber

You have an accident Likely Unlikely(bad luck)

You get home safely Unlikely(good luck)

Likely

Always a good decision, irrespective of the outcome

Always a bad decision, irrespective of the outcome

How do we determine whether a good strategic decision was made?

Outcome = function( process, “luck” – strategy, risk and resilience )

https://www.liveslides.com/download

https://www.liveslides.com/download

Invest in defining and following a good process

Poetic justice

Deserved success

Bad outcome

Good outcome

Shit happens!

Dumb luck

Good processBad process

Individual outcomes are not guaranteed, but the probability of a good outcome for each decision is improved, and overall the outcomes of a set of decisions will be better, if a good process is followed


• Strategist: Participating in setting strategic direction and aligning risk and strategies

• Catalyst: Engaging leadership in defining and executing strategic objectives

• Steward: Protecting and challenging the organization through effective risk management; ensuring

appropriate oversight and governance of risk-taking activities

• Operator: Balancing structure, capabilities, talent and technology

Building Closer Alignment Between Value Creation and Risk - Establishing and optimizing the leadership role of the CRO


• Discovery: Developing and deploying “risk sensing” mechanisms providing early warnings

• Preparation: Scenarios presenting potential alternate futures and their implications for markets, business

models, supply chains and so on

• Response: Developing response plans corresponding to the alternate futures—ready for implementation the

moment early warning indicators begin flashing

Building Closer Alignment Between Value Creation and Risk

- Establishing and optimizing the leadership role of the CRO


This is about knowing what the organisation wants and giving them what they need?

• Culture

• Strategy, Risk and Resilience

• Data, analytics, and technology

• Monitoring Key Emerging Risks – smart analytics

Risk Transformation trends - Cornerstones of risk transformation


FUTURE OF RISK MANAGEMENT … (strategy)


Those who achieved decision influence, did it by …• Adding to the Strategy and Resilience Playbook

• Transferring ownership and hold line accountable – 20 – 30 – 50!

• Cultivating and growing strong risk culture

• Collective Risk Management (integrated risk management)

• Transform RM to effective RM through more open and collaborative approaches

• Adding quantitative risk intelligence and predictive capability and getting as real-time as possible

• Linking risk to what matters and reporting of information that matters


Q&A Session


Thank you for joining us for today's webinar.

Contact Christopher Palm via www.irmsa.org.za

Please complete the IoDSA Event Satisfaction Survey at the end of this webinar or from the QR code here:

http://www.irmsa.org.za/

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Topics to reflect on for today · 2020-06-11 · Topics to reflect on for today. #BetterDirectors #WebinarWednesdays #BB@9 effect of uncertainty on objectives Definition of Risk