ENTERPRISE GOVERNANCE FRAMEWORK

DIFFERENCE BETWEEN GOVERNANCE & MANAGEMENT

GOVERNANCE MANAGEMENT
"Governance" is the strategic task of "Management" is the allocation of
setting the organization's goals, resources and overseeing the day-to-
direction, limitations and accountability day operations of the organization.
frameworks.
Governance is the ‘what’ - the strategic Management is the ‘how’ - the delivery
planning and leadership of of the strategic plans and the work of
an organization that is carried out by the organization. Management of an
the appointed Board. This is organization is overseeing the day-to-
about planning and the overall strategy day running of the organization.
and direction of the organization and Management also plays a crucial role in
ensuring that this is reviewed on a the leadership of the organization
regular basis. The management is through supporting staff and/or ALWAYS CONSIDER THE IMPACT OF DECISIONS TO STAKEHODLERS
supported by the Board to deliver on volunteers to understand and
those strategic plans. implement the strategic vision. This is a ETHICAL BEHAVIOR IN BUSINESS
different leadership role to the Board. 1. TRUTHFULNESS – How honest and accurate is my decision?
GOVERNANCE IS FIDUCIARY DUTY MANAGEMENT IS OPERATIONAL 2. FAIRNESS – Am I being just and reasonable to everyone concerned?
OVERSIGHT 3. GOODWILL – Will it build goodwill and positive image to the
organization?
WHAT IS FIDUCIARY DUTY? 4. BENEFICIAL – Will it be favorable to all parties who have a vested
 A fiduciary duty involves actions taken in the best interests of another interest in the outcome?
person or entity.
 Fiduciary duty describes the relationship between an attorney and a STEPS TO ETHICAL DECISION MAKING
client or a guardian and a ward. Fiduciary duties include duty of care, 1. Identify all components as objectively as possible.
loyalty, good faith, confidentiality, prudence, and disclosure. 2. Consider Options
 It has been successfully argued that an employee may have a fiduciary 3. Decide which option is most ethical
duty of loyalty to an employer. 4. How can the option be implemented
 A breach of fiduciary duty occurs when a fiduciary fails to act 5. What are the consequences of the decision?

THE PHILOSOPHY OF BUSINESS ETHICAL DECISION MODELS

 Utilitarian Model - an ethical decision is one that produces the greatest
 VISION good for the greatest number of people.
 MISSION  Moral Rights Model – an ethical decision is one that best maintains and
 GOALS protects the fundamental rights and privileges of the people affected by
it.
 Justice Model – an ethical decision is one that distributes benefits and
costs among individuals in a fair, equitable, or impartial way.

APPLIED PHILOSOPHY
- Application of principles and concepts stemmed from and based on
philosophy to a study of our practical affairs and activities.
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- The philosophy applied is vital not only to the commercial and monetary
feat of the business, but more so to the consequential influence an effect
of the business undertakings on the community. Such effect may go
whichever way possible. It may either be constructive or destructive.

The 3 Major Components of the Philosophy of Business

1. The essential ideologies that inspire the realization and management of a
business venture.
2. The nature and purpose of the said business.
3. The moral obligation that related to it.

RULES AND UNDERLYING PRINCIPLES OF BUSINESS

1. Rules are subject to change.
2. There is no such thing as absolute business rule in any business model.
3. There are no business rules until you say there are.
4. A business rule should always be feasible.

BUSINESS AS A SOCIAL INSTITUTION 1. ACCOUNTABILITY

 MAKE MONEY - Ensure that Management is accountable to the Board
 NEW PERSPECTIVE - Ensure that the Board is accountable to Shareholders
 PARADIGM SHIFT 2. FAIRNES
- Protect Shareholders rights
CORPORATE GOVERNANCE - Treat all Shareholders equitably
 Corporate governance is something altogether different from the daily 3. TRANSPARENCY
operational management activities enacted by a company’s executives. It - Ensure timely, accurate disclosure on all material matters, including
is a system of direction and control that dictates how a board of directors financial situation, performance, ownership, and corporate governance.
governs and oversees a company. 4. INDEPENDENCE
 Corporate governance is a system of rules, policies, and practices that - Procedures and structures are in place so as to minimize or avoid
conflict of interests
dictate how a company’s board of directors manages and oversees the
operations of a company; - Independent Directors and Advisers – to be free from the influence of
others
 Corporate governance includes principles of transparency, accountability,
and security.
ELEMENTS OF CORPORATE GOVERNANCE
 Poor corporate governance, at best, leads to a company failing to achieve
Six Essential Elements of Effective Corporate Governance
its stated goals, and, at worst, can lead to the collapse of the company
and significant financial losses for shareholders.
1. Director independence and performance
 Corporate governance is the structure of rules, practices, and processes
2. A focus on diversity
used to direct and manage a company.
3. Regular compensation review and management
 A company's board of directors is the primary force influencing corporate
4. Auditor independence and transparency***
governance.
5. Shareholder rights and takeover provisions
 Bad corporate governance can cast doubt on a company's operations and 6. Proxy voting and shareholder influence
its ultimate profitability.
 Corporate governance entails the areas of environmental awareness,
ethical behavior, corporate strategy, compensation, and risk
management.
 The basic principles of corporate governance are accountability,
transparency, fairness, and responsibility.
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ON COMPENSATION REVIEW:
1. Pay should be aligned with performance, with an emphasis on the long
term.
2. Avoid “paying for failure,” by avoiding guaranteed compensation and
excessive severance packages.
3. Create an independent compensation committee for effective oversight.
 A review of audit practices and company accounting can also signal
problems to come.
 Auditors should be independent (with no financial interest in a company)
with the majority of their revenues derived from audit activities, not
consultation services.
 Accounting issues should be handled in a transparent manner, with
complete, detailed information and reports always available to the board
and measures put in place to prevent recurrence of any questionable
findings.
GOOD BOARD PRACTICES
 Well-structured Board with clearly defined roles and authorities
 Appropriate composition and mix of skills
 Evaluation and training in line with best practices
 Code of corporate governance and ethics being practiced
 Formal policies and procedures have been implemented accordingly
 Appropriate resources are committed to carry out corporate governance
 Improvement for corporate governance plan
Well –Defined Shareholder Rights
 Formalized shareholder rights including those of minorities
 Regularly conduct well-organized shareholder meetings
 Discuss policies on all transactions
 Clearly defined and explicit dividend policy
CONTROL ENVIRONMENT
 Internal Control Procedures
 Presence of Risk Management Framework
 Disaster recovery systems in place
 Use of media management techniques
 Establish independent control committee
 Internal audit function
 Establish management information system
 Compliance function
TRANSPARENT DISCLOSURE
 Disclose Financial Report
 Disclose Non-Financial Report
 Prepare financial reports according to International
 Financial Reporting Standards (IFRS)
 Up-to-date corporate registry
 Publish accurate and quality annual report
 Web-based disclosure
BAD CORPORATE GOVERNANCE: POTENTIAL RISKS
 One stakeholder group may benefit unfairly at the expense of other
stakeholder groups due to weaknesses in a company’s control systems.
 Managers could make poor investment decisions that benefit them but
are detrimental to the company’s shareholders.
 A company’s exposure to legal, regulatory, and reputational risks could
become heightened. For example, a company may be subject to an
investigation by a regulatory authority due to a violation of laws and
regulations. The company could also receive lawsuits from one of its
stakeholders due to some form o impropriety. These could potentially
damage the reputation of the company and lead to significant legal costs.
 A company’s ability to honor its debt obligations may become hindered.
This exposes it to bankruptcy risk if its creditors decide to take legal
action against it.
POOR CORPORATE GOVERNANCE CAN LEAD TO
 Corruption and Fraud
 Conflict of Interest
 Tax Evasion or Money Laundering
 Poor Treatment of Employees
 Disregard for Environment
Business Ethics/Social Responsibility/ Environmental Sustainability
- Business ethics can be defined as principles of conduct within
organizations that guide decision making and behavior. Good business
ethics is a prerequisite for good strategic management; good ethics is just
good business!
ETHICS
- AN ETHICS CULTURE
- WHO IS RESPONSIBLE FOR ENSURING ETHICAL STANDARDS IN
ORGANIZATIONS ARE IN PLACE?
- WHAT HAPPENS WHEN ETHICAL STANDARDS ARE NOT CLEAR?
- WHAT IS WHISTLE-BLOWING?
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WHISTLEBLOWER
On the simplest level, a whistleblower is someone who reports waste,
fraud, abuse, corruption, or dangers to public health and safety to someone who is
in the position to rectify the wrongdoing. A whistleblower typically works inside of
the organization where the wrongdoing is taking place; however, being an agency
or company “insider” is not essential to serving as a whistleblower. What matters is
that the individual discloses information about wrongdoing that otherwise would
not be known.
Enron Scandal: The Fall of a Wall Street Darling
The story of Enron Corporation depicts a company that reached dramatic
heights only to face a dizzying fall. The fated company's collapse affected
thousands of employees and shook Wall Street to its core. At Enron's peak, its
shares were worth $90.75; just prior to declaring bankruptcy on Dec. 2, 2001, they
were trading at $0.26.
 Historical cost accounting to mark to market
 America's Most Innovative Company" by Fortune for six consecutive
years between 1996 and 2001.
 Enron Broadband Services and Blockbuster entered a partnership to
enter the burgeoning VOD market.
 Fall 2000: CEO Jeffrey Skilling hid the financial losses of the trading
business and other operations of the company using mark-to-market
accounting.
 Enron and Arthur Andersen
SOCIAL RESPONSIBILITY
 Do you agree that organizations have tremendous obligations to society?
 Example: Ayala Corporation’s AC Energy
 What about Facebook and other Social Media Companies?
 What about San Miguel Corporation? (1,471% increase from Q1 2020 vs.
Q1 2021)
What is a Sustainability Report?
 A sustainability report reveals how a firm’s operations impact the
environment
 This report should disclose to shareholders information about labor
practices, product sourcing, energy efficiency, environmental impact, and
business ethics practices.
EXAMPLE
Wal-Mart also now encourages and expects its 1. million U.S. employees
to adopt what it calls Personal Sustainability Projects, which include such measures
as organizing weight-loss or smoking-cessation support groups, biking to work, or
starting recycling programs. Employee wellness can be a part of sustainability.
Wal-Mart is installing solar panels on its stores in California and
Hawaii, providing as much as 30 percent of the power in some stores. Wal-Mart
may go national with solar power if this test works well. Also moving to solar
energy is department-store chain Kohl’s Corp., which is converting 64 of its 80
California stores to using solar power. There are big subsidies for solar installations
in some states.
Reasons why firms should be “Green”
1. Consumer demand for environmentally safe products and packages is
high.
2. Public opinion demanding that firms conduct business in ways that
preserve the natural environment is strong.
3. Environmental advocacy groups now have over 20 million Americans as
members.
4. Federal and state environmental regulations are changing rapidly and
becoming more complex.
5. More lenders are examining the environmental liabilities of businesses
seeking loans.
6. Many consumers, suppliers, distributors, and investors shun doing
business with environmentally weak firms.
7. Liability suits and fines against firms having environmental problems are
on the rise.
How to Design an Ethical Organization (Harvard Business Review)
 Unethical behavior takes a significant toll on organizations by damaging
reputations, harming employee morale, and increasing regulatory costs—
not to mention the wider damage to society’s overall trust in business.
 Creating an ethical culture thus requires thinking about ethics not simply
as a belief problem but also as a design problem.
Pillars of an Ethical Culture
1. Explicit Values - Strategies and practices should be anchored to clearly
stated principles that can be widely shared within the organization. A
well-crafted mission statement can help achieve this, as long as it is used
correctly.
2. Thoughts During Judgment - Ethical lapses can therefore be reduced in a
culture where ethics are at the center of attention.
3. Incentives - It is a boring truism that people do what they’re incentivized
to do, meaning that aligning rewards with ethical outcomes is an obvious
solution to many ethical problems. That may sound simple (just pay
people for acting ethically), but money goes only so far, and incentive
programs must provide a variety of rewards to be effective.
4. Cultural Norms - Most leaders intuitively recognize the importance of
“tone at the top” for setting ethical standards in an organization. Easily
overlooked is “tone in the middle,” which may actually be a more
significant driver of employees’ behavior.
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Putting Ethical Design Into Practice
 HIRING - First impressions are inordinately powerful. For many
employees, an organization’s values were revealed during the hiring
process. Although interviews are typically treated as opportunities for
identifying the best candidate, they also begin the acculturation process.
 EVALUATION - Ethics can also be woven into the design of performance
evaluations to highlight their importance to an organization as well as to
reward and encourage good behavior.
 COMPENSATION - Aligning financial incentives with ethical outcomes
may sound easy in principle, but it is tricky in practice. This is where a
mission statement can help.
Why Strategies Fail
A SNAPSHOT OF THE PROBLEM
 All too often, failures occur because the CEOs’ approach to strategy isn’t
holistic.
 Leaders either ignore some components of the complete strategy
landscape or do not recognize the interdependencies among them.
THE SOLUTION
 A complete strategy has to encompass carefully coordinated choices
about the business model with the highest potential to create value, the
competitive position that captures as much of that value as possible, and
the implantation processes that adapt constantly to the changing
environment while building the capabilities needed to realize value over
the long term.
HOW?
 IDENTIFY OPPORTUNITIES
 DEFINE THE BEST WAY TO TAP A GIVEN OPPORTUNITY
 FIGURE OUT HOW TO CAPTURE THE VALUE
 GENERATED IN THE NEAR TERM
 REALIZE VALUE OVER TIME
 BUILD A FOUNDATION FOR LONG-TERM SUCCESS
FIGURE OUT HOW TO CAPTURE THE VALUE GENERATED IN THE NEAR TERM
 INDUSTRY ATTRACTIVENESS: Regardless of the value created, an
industry will be attractive only if its structure allow participants to earn
decent returns.
 COMPETITIVE POSITIONING: Identifying a unique value proposition for a
defined customer group
 COMPETITIVE INTERACTION: Predict how interactions among rivals will
play out.
INCUMBENT’S MISTAKE
 CEOs of established companies often pay too much attention to defining
how their firms will capture value and too little to new ways to create
value and how firms’ activities and capabilities need to evolve over time.
 CEOs of mature companies should ask themselves, “when did our annual
strategy process last generate a truly breakthrough idea”?
LARGEST U.S. COMPANIES BY MARKET CAP, 2021 (Valuation in $ Trillions)
1. Apple - $ 2.2
2. Microsoft - $ 1.9
3. Amazon - $ 1.7
4. Alphabet - $ 1.5
5. Facebook - $ 0.9
 The good news for leaders of incumbent companies is that the
emergence of new approaches doesn’t have to doom their enterprises.
Indeed, if they take a holistic perspective on strategy, they may discover
that those business models present attractive opportunities because they
create more value.
 No incumbent should respond to every new business model—that would
simply be playing whack-a-mole. Instead, a firm must develop a strategic
approach to identifying the value-creation potential of models and then
determining whether to pursue any new ones by predicting the outcome
of competition among alternative models.
EXAMPLES
 Netflix vs. Blockbuster Video and Hollywood Video
 Amazon vs. Walmart: Both will survive. Each company is rushing to
replicate the other’s asset base.
ENTREPRENEUR’S MISTAKE
 In their excitement to exploit new opportunities they spotted before
anyone else, many entrepreneurs fail to see that the more value their
business model creates, the more competition they’re likely to face.
 When a firm is pursuing a successful new business model against intense
competition, it’s vital to apply the three value-capture frameworks in the
middle of the landscape:
 What are those 3 again?
ENTREPRENEUR’S MISTAKE: Important Note
 To capture sufficient value, a firm has to be in an industry with an
attractive structure and possess a sustainable competitive advantage.
 What about the electric vehicle industry?
 If you simply cannot achieve operational efficiencies, you are condemned
to fail, regardless of how exciting your business model is!!!
 What is operational efficiency?
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IMPLEMENTATION: THEY KEY TO REALIZING VALUE OVER TIME
 Identifying a viable business model and a distinctive competitive position
that captures value today doesn’t ensure success when companies
confront ever-changing opportunities.
 To realize value over the long term, firms have to balance agility and
control, by giving project teams the authority to experiment with new
configurations while consistently investing in the capabilities needed for
the future.
Global/International Issues
MULTINATIONAL FIRMS
 Organizations that conduct business operations across national borders
are called international firms or multinational corporations. The strategic-
management process is conceptually the same for multinational firms as
for purely domestic firms; however, the process is more complex for
international firms due to more variables and relationships.
 Multinational corporations (MNCs) face unique and diverse risks, such as
expropriation of assets, currency losses through exchange rate
fluctuations, unfavorable foreign court interpretations of contracts and
agreements, social/political disturbances, import/export restrictions,
tariffs, and trade barriers. Strategists in MNCs are often confronted with
the need to be globally competitive and nationally responsive at the
same time.
1. International companies are importers and exporters, they have no
investment outside of their home country.
2. Multinational companies have investment in other countries, but do not
have coordinated product offerings in each country. More focused on
adapting their products and service to each individual local market.
3. Global companies have invested and are present in many countries. They
market their products through the use of the same coordinated
image/brand in all markets. Generally one corporate office that is
responsible for global strategy. Emphasis on volume, cost management
and efficiency.
4. Transnational companies are much more complex organizations. They
have invested in foreign operations, have a central corporate facility but
give decision-making, R&D and marketing powers to each individual
foreign market.
ADVANTAGES OF INTERNATIONAL OPERATIONS
1. Firms can gain new customers for their products.
2. Foreign operations can absorb excess capacity, reduce unit costs, and
spread economic risks over a wider number of markets.
3. Foreign operations can allow firms to establish low-cost production
facilities in locations close to raw materials and/or cheap labor.
4. Competitors in foreign markets may not exist, or competition may be less
intense than in domestic markets.
5. Foreign operations may result in reduced tariffs, lower taxes, and
favorable political treatment.
6. Joint ventures can enable firms to learn the technology, culture, and
business practices of other people and to make contacts with potential
customers, suppliers, creditors, and distributors in foreign countries.
7. Economies of scale can be achieved from operation in global rather than
solely domestic markets. Larger-scale production and better efficiencies
allow higher sales volumes and lower-price offerings.
8. A firm’s power and prestige in domestic markets may be significantly
enhanced if the firm competes globally. Enhanced prestige can translate
into improved negotiating power among creditors, suppliers, distributors,
and other important groups.
DISADVANTAGES OF INTERNATIONAL OPERATIONS
1. Foreign operations could be seized by nationalistic factions.
2. Firms confront different and often little-understood social, cultural,
demographic, environmental, political, governmental, legal,
technological, economic, and competitive forces when doing business
internationally. These forces can make communication difficult in the
firm.
3. Weaknesses of competitors in foreign lands are often overestimated, and
strengths are often underestimated. Keeping informed about the number
and nature of competitors is more difficult when doing business
internationally.
4. Language, culture, and value systems differ among countries, which can
create barriers to communication and problems managing people.
5. Gaining an understanding of regional organizations such as the European
Economic Community, the Latin American Free Trade Area, the
International Bank for Reconstruction and Development, and the
International Finance Corporation is difficult but is often required in
doing business internationally.
6. Dealing with two or more monetary systems can complicate international
business operations.
THE GLOBAL CHALLENGE
 how to gain and maintain exports to other nations and;
 how to defend domestic markets against imported goods.
***The economy as a whole and even monetary markets
 Protectionism refers to countries imposing tariffs, taxes, and regulations
on firms outside the country to favor their own companies and people.
Most economists argue that protectionism harms the world economy
because it inhibits trade among countries and invites retaliation.
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GLOBALIZATION
 is a process of doing business worldwide, so strategic decisions are made
based on global profitability of the firm rather than just domestic
considerations. A global strategy seeks to meet the needs of customers
worldwide, with the highest value at the lowest cost.
 A global strategy includes designing, producing, and marketing products
with global needs in mind, instead of considering individual countries
alone. A global strategy integrates actions against competitors into a
worldwide plan. Today, there are global buyers and sellers, and the
instant transmission of money and information across continents.
Communication Differences Across Countries
1. Italians, Germans, and French generally do not soften up executives with
praise before they criticize. Americans do soften up folks, and this
practice seems manipulative to Europeans.
2. Israelis are accustomed to fast-paced meetings and have little patience
for American informality and small talk.
3. British executives often complain that American executives chatter too
much. Informality, egalitarianism, and spontaneity from Americans in
business settings jolt many foreigners.
4. Europeans feel they are being treated like children when asked to wear
name tags by Americans.
5. Executives in India are used to interrupting one another. Thus, when
American executives listen without asking for clarification or posing
questions, they are viewed by Indians as not paying attention.
6. When negotiating orally with Malaysian or Japanese executives, it is
appropriate to allow periodically for a time of silence. However, no pause
is needed when negotiating in Israel.
7. Refrain from asking foreign managers questions such as “How was your
weekend?” That is intrusive to foreigners, who tend to regard their
business and private lives as totally separate.
EMERGING MARKET
An emerging market economy is the economy of a developing nation that
is becoming more engaged with global markets as it grows. Countries classified as
emerging market economies are those with some, but not all, of the characteristics
of a developed market.
 BRIC countries or Brazil, Russia, India and China. These countries are
currently considered the top four emerging markets.
 CIVETS countries or Colombia, Indonesia, Vietnam, Egypt, Turkey and
South Africa.
RISK MANAGEMENT
Introduction
Effective corporate governance cannot be attained without the
organization mastering the art of risk management. Risk management is
recognized as one of the most important competencies needed by the board
of directors of modern organization, large as well as small and medium sized
business firms.
The levels of risk faced by business firms have increased because of the
fast-growing sophistication of organization, globalization, modern technology
and impact of corporate scandals. In addition therefore to compliance with
legal requirements, top management should consider adequate knowledge of
risk management.
Risk Management is the process of measuring or assessing risk and
developing strategies to manage it.
 It is a systematic approach in identifying, analyzing and controlling areas
or events with a potential for causing unwanted change.
 It is the act of practice of controlling risk.
 It includes risk planning, assessing risk areas, developing risk handling
options, monitoring risks to determine how risks have changed and
documenting overall risk management program.
 As defined in the International Organization of Standardization (IS
31000), Risk Management is the identification, assessment, and
prioritization of risks, followed by coordinated and economical
application of resources to minimize, monitor and control the probability
and/or impact of unfortunate events and to maximize the realization of
opportunities.
Basic Principles of Risk Management
The International Organization of Standardization (ISO) identifies the basic
principles of risk management.
Risk management should:
1. Create value
2. Address uncertainty and assumptions
3. Be an integral part of the organizational processes and decision-making
4. Be dynamic, iterative, transparent, tailorable, and responsive to change
5. Create capability of continual improvement and enhancement
considering the best available information and human factors
6. Be systematic, structured and continually or periodically reassessed
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Process of Risk Management Relevant Risk Terminologies
According to the Standard ISO 31000, Risk Management – Principles and Guidelines I. Risks Associated with Investments
on Implementation, the process of risk management consists of several steps to
follow: Factors usually considered with respect to the investments are:

1. Establishing the Context.  Business Risk – refers to the uncertainty about the rate of return caused
A) Identification of risk in a selected domain of interest by the nature of the business.
B) Planning the remainder of the process  Financial Risk – the firm’s capital structure or sources of financing.
C) Mapping out the following:  Liquidity Risk – is associated with the uncertainty created by the inability
i. The social scope of risk management to sell the investment quickly for cash.
ii. The identity and objectives of stakeholders  Default Risk – is related to the probability that some or all of the initial
iii. The basis upon which risks will be evaluated, constraints investment will not be returned.
D) Defining a framework for the activity and an agenda for identification.  Interest Rate Risk – is most commonly associated with bond price
E) Developing an analysis of risks involved in the process movements, rising interest rates cause bond prices to decline and
F) Mitigation of solution of risks using available technological, human declining interest rates cause bonds prices to rise.
and organizational resources.  Management Risk – decisions made by a firm’s management ad board of
directors materially affect the risk faced by investors.
2. Identification of Potential Risks. Risk identification can start with the  Purchasing Power Risk – is more difficult to recognize than the other
analysis of the source of problem or with the analysis of the problem types of risk.
itself.
Common risk identification methods are: II. Risks Associated with Manufacturing, Trading, and Service Concerns
A) Objective-based risk
B) Scenario-based risk A. Market Risk
C) Taxanomy-based risk  Product Risk
D) Common-risk checking  Complexity (complicated)
E) Risk charting  Obsolescence
 Research and
3. Risk Assessment. Once risks have been identified, their potential severity Development
of impact and the probability of occurrence must be assessed.  Packaging
 Delivery of Warranties
Elements of Risk Management
In practice, the process of assessing overall risks can be difficult, and  Competitor Risk
balancing resources to mitigate between risks with a high probability of occurrence  Pricing Strategy
but lower loss versus risk with high loss but lower probability of occurrence can  Market Share
often be mishandled.  Market Strategy
The performance of assessment methods should consist of C. Financial Risk
the following elements:
 Interest Rates Volatility
1. Identification, characterization, and assessment of threats
 Foreign Currency
2. Assessment of the vulnerability of critical assets to specific threats
 Liquidity
3. Determination of the risk
 Derivative
4. Identification of ways to reduce those risks
5. Prioritization of risk reduction measures based on a strategy  Viability (ability to work
successfully)
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Potential Risk Treatments
ISO 31000 also suggests that once risks have been identified and
assessed, techniques to manage the risks should be applied. These techniques can
fall into one or more of these four categories:
1. Risk Avoidance – includes performing an activity that could carry risk.
2. Risk Reduction – involves reducing the severity of the loss or the
likelihood of the loss from occurring.
3. Risk Sharing – means sharing with another party the burden of loss or the
benefit of gain, from a risk, and the measures to reduce a risk.
4. Risk Retention – involves accepting the loss or benefit of gain from a risk
when it occurs.
Areas of Risk Management
- As applied to corporate finance, risk management is the technique for
measuring, monitoring and controlling the financial or operational risk on
a firm’s balance sheet.
- The Basel II framework breaks risks into market risk (price risk), credit risk
and operational risk and also specifies methods for calculating capital
requirements for each of these components.
The most commonly encountered areas of risk management includes:
1. Enterprise risk management
2. Risk management activities as applied to project management
3. Risk management for megaprojects
4. Risk management for information technology
5. Risk management techniques in petroleum and natural gas
SEC Requirement Relative to Enterprise Risk Management of Publicly-Listed
Corporation
- SEC Code of Governance Recommendations 2.11 and corresponding
explanation provides that “the Board should oversee that a sound
enterprise risk management (ERM) framework is in place to effectively
identify, monitor, assess and manage key business risks. The risk
management framework should guide the Board in identifying
units/business lines and enterprise-level risk exposures, as well as the
effectiveness of risk management strategies.
- Risk management policy is part and parcel of a corporation’s corporate
strategy. The Board is responsible for defining the company’s level of risk
tolerance and providing oversight over its risk management policies and
procedures.”
- Principle 12 which deals with strengthening the Internal Control System
and Enterprise Risk Management Framework states that “to ensure the
integrity, transparency and proper governance in the conduct of its
affairs, the company should have a strong and effective internal control
system and enterprise risk management framework.”
Risk Management Framework
Subject to a corporation’s size, risk profile and complexity of operations:
- The Board should oversee that a sound enterprise risk management
(ERM) framework is in place to effectively identify, monitor, assess and
manage key business risks.
- The risk management framework should guide the Board I identifying
units/business lines and enterprise-level risk exposures, as well as the
effectiveness of risk management strategies.
- The Board should establish a separate Board Risk Oversight Committee
(BROC) that should be responsible for the oversight of the company’s
Enterprise Risk Management system to ensure its functionality and
effectiveness.
- The BROC should be composed of at least three members, the majority of
whom should be independent directors, including the Chairman.
- The Chairman should not be the Chairman of the Board or of any other
committee.
Subject to its size, risk profile and complexity of operations:
- The company should have a separate risk management function to
identify, assess and monitor key risk exposures.
Steps in the Risk Management Process
To enhance management’s competence in their oversight role on risk
management the following steps may be followed:
1. Set up a separate risk management committee chaired by a board
member.
2. Ensure that a formal comprehensive risk management system is in place.
3. Assess whether the formal system possesses the necessary elements.
4. Evaluate the effectiveness of the various steps in the assessment of the
comprehensive risks faced by the business firm.
5. Assess if management has developed and implemented the suitable risk
management strategies and evaluate their effectiveness.
6. Evaluate if management has designed and implemented risk
management capabilities.
7. Assess management’s efforts to monitor overall company risk
management performance and to improve continuously the firm’s
capabilities.
8. See to it that best practices as well as mistakes are shared by all.
9. Assess regularly the level of sophistication of the firm’s risk management
system.
10. Hire experts when needed.