Erm adoption and implementation in the higher education environment

Additional Praise for Implementing Enterprise Risk Management

“Educators the world over seeking to make the management of risk an integral part of management degrees have had great difficulties in providing their students with a definitive ERM text for their course. The Standards and associated Handbooks helped, but until the arrival of Implementing Enterprise Risk Management: Case Stud- ies and Best Practices, there has been no text to enlighten students on the application of an effective program to manage risk across an enterprise so that objectives are maximized and threats minimized. Fraser, Simkins, and Narvaez have combined with a group of contributors that represent the cream of risk practitioners, to pro- vide the reader with a clear and concise journey through the management of risk within a wide range of organizations and industries. The knowledge, skills, and experience in the management of risk contained within the covers of this book are second to none. It will provide a much needed resource to students and practition- ers for many years to come and should become a well-used reference on the desk of every manager of risk.”

—Kevin W. Knight AM, chairman, ISO/TC 262—Risk Management

“The authors—Fraser, Simkins, and Narvaez—have done an invaluable service to advance the science of enterprise risk management by collecting an extensive num- ber of wonderful case studies that describe innovative risk management practices in a diverse set of companies around the world. This book should be an extremely valuable source of knowledge for anyone interested in the emerging and evolving field of risk management.”

—Robert S. Kaplan, senior fellow, Marvin Bower Professor of Leadership Development, emeritus, Harvard University

“Lessons learned from case studies and best practices represent an efficient way to gain practical insights on the implementation of ERM. Implementing Enterprise Risk Management provides such insights from a robust collection of ERM pro- grams across public companies and private organizations. I commend the editors and contributors for making a significant contribution to ERM by sharing their experiences.”

—James Lam, president, James Lam & Associates; director and Risk Oversight Committee chairman, E∗TRADE Financial Corporation;

author, Enterprise Risk Management—From Incentives to Controls

“For those who still think that enterprise risk management is just a fad, the varied examples of practical value-generating uses contained in this book should dispel any doubt that the discipline is here to stay! The broad collection of practices is insightful for students, academics, and executives, as well as seasoned risk man- agement professionals.”

—Carol Fox, ARM, director of Strategic and Enterprise Risk Practice, RIMS

“Managing risk across the enterprise is the new frontier of business management. Doing so effectively, in my view, will be the single most important differentiating factor for many enterprises in the twenty-first century. Implementing Enterprise Risk Management: Case Studies and Best Practices is an innovative and important addition to the literature and contains a wealth of insight in this critical area. This book’s integration of theory with hands-on, real-world lessons in managing enterprise risk provides an opportunity for its readers to gain insight and understanding that could otherwise be acquired only through many years of hard-earned experience.

I highly recommend this book for use by executives, line managers, risk managers, and business students alike.”

—Douglas F. Prawitt, professor of Accounting at Brigham Young University, and Committee of Sponsoring Organizations (COSO)

Executive Board member

“The real beauty of and value in this book is its case study focus and the wide variety of firms profiled and writers’ perspectives shared. This will provide readers with a wealth of details and views that will help them chart an ERM journey of their own that is more likely to fit the specific and typically customized ERM needs of the firms for whom they toil.”

—Chris Mandel, senior vice president, Strategic Solutions for Sedgwick; former president of the Risk Management Society

and the 2004 Risk Manager of the Year

“Implementing Enterprise Risk Management looks at many industries through excel- lent case studies, providing a real-world base for its recommendations and an important reminder that ERM is valuable in many industries. I highly recommend this text.”

—Russell Walker, Clinical associate professor, Kellogg School of Management; author of Winning with Risk Management

“The body of knowledge in Implementing Enterprise Risk Management continues to develop as business educators and leaders confront a complex and rapidly chang- ing environment. This book provides a valuable resource for academics and prac- titioners in this dynamic area.”

—Mark L. Frigo, director, Strategic Risk Management Lab, Kellstadt Graduate School of Business, DePaul University

“The management of enterprise risk is one of the most vexatious problems con- fronting boards and executives worldwide. This is why this latest book by Fraser, Simkins, and Narvaez is a much needed and highly refreshing approach to the sub- ject. The editors have managed to assemble an impressive list of contributors who, through a series of fascinating real-life case studies, adroitly help educate readers to better understand and deal with the myriad of risks that can assault, seriously maim, and/or kill an organization. This is a ‘how to’ book written with the ‘risk management problem solver’ in mind. It provides the link that has been missing for effectively teaching ERM at the university and executive education levels and it is an exceptional achievement by true risk management advocates.”

—Dr. Chris Bart, FCPA, founder and lead faculty, The Directors College of Canada

“The Institute of Risk Management welcomes the publication of this highly practi- cal text which should be of great interest to our students and members around the world. Implementing Enterprise Risk Management brings together a fine collection of detailed case studies from organizations of varying sizes and working in differ- ent sectors, all seeking to enhance their business performance by managing their risks more effectively, from the boardroom to the shop floor. This book makes a valuable contribution to the body of knowledge of what works that will benefit the development of the risk profession.”

—Carolyn Williams, technical director, Institute of Risk Management

IMPLEMENTING ENTERPRISE RISK MANAGEMENT

The Robert W. Kolb Series in Finance provides a comprehensive view of the field of finance in all of its variety and complexity. The series is projected to include approximately 65 volumes covering all major topics and specializations in finance, ranging from investments, to corporate finance, to financial institutions. Each vol- ume in the Kolb Series in Finance consists of new articles especially written for the volume.

Each volume is edited by a specialist in a particular area of finance, who develops the volume outline and commissions articles by the world’s experts in that partic- ular field of finance. Each volume includes an editor’s introduction and approx- imately thirty articles to fully describe the current state of financial research and practice in a particular area of finance.

The essays in each volume are intended for practicing finance professionals, grad- uate students, and advanced undergraduate students. The goal of each volume is to encapsulate the current state of knowledge in a particular area of finance so that the reader can quickly achieve a mastery of that special area of finance.

IMPLEMENTING ENTERPRISE RISK MANAGEMENT

Case Studies and Best Practices

Editors

John R.S. Fraser Betty J. Simkins Kristina Narvaez

The Robert W. Kolb Series in Finance

Cover Design: Wiley Cover Image: © iStock.com/clauiad

Copyright © 2015 by John R.S. Fraser, Betty J. Simkins, Kristina Narvaev. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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To Wendy, my wonderful wife and my inspiration, and to my parents who instilled in me a lifelong thirst for learning.

—John Fraser

To my husband (Russell) and our family: sons and daughters- in-law (Luke & Stephanie and Walt & Lauren), daughter and son-in-law (Susan & Jason), and our youngest daughter (April). Thank you for your love, support, and encouragement!

—Betty Simkins

I would like to thank my husband and four children for support- ing me on my journey of writing two chapters and co-editing this book. I would also like to thank the Risk and Insurance Manage- ment Society for supporting me during my educational years and providing great workshops and conferences on enterprise risk management.

—Kristina Narvaez

Contents

Foreword xiii

1 Enterprise Risk Management Case Studies: An Introduction and Overview 1 John R.S. Fraser, Betty J. Simkins, and Kristina Narvaez

PART I Overview and Insights for Teaching ERM 17

2 An Innovative Method to Teaching Enterprise Risk Management: A Learner-Centered Teaching Approach 19 David R. Lange and Betty J. Simkins

PART II ERM Implementation at Leading Organizations 37

3 ERM at Mars, Incorporated: ERM for Strategy and Operations 39 Larry Warner

4 Value and Risk: Enterprise Risk Management at Statoil 59 Alf Alviniussen and Håkan Jankensgård

5 ERM in Practice at the University of California Health System 75 Grace Crickette

6 Strategic Risk Management at the LEGO Group: Integrating Strategy and Risk Management 93 Mark L. Frigo and Hans Læssøe

7 Turning the Organizational Pyramid Upside Down: Ten Years of Evolution in Enterprise Risk Management at United Grain Growers 107 John Bugalla

ix

x Contents

8 Housing Association Case Study of ERM in a Changing Marketplace 119 John Hargreaves

9 Lessons from the Academy: ERM Implementation in the University Setting 143 Anne E. Lundquist

10 Developing Accountability in Risk Management: The British Columbia Lottery Corporation Case Study 179 Jacquetta C. M. Goy

11 Starting from Scratch: The Evolution of ERM at the Workers’ Compensation Fund 207 Dan M. Hair

12 Measuring Performance at Intuit: A Value-Added Component in ERM Programs 227 Janet Nasburg

13 TD Bank’s Approach to an Enterprise Risk Management Program 241 Paul Cunha and Kristina Narvaez

PART III Linking ERM to Strategy and Strategic Risk Management 251

14 A Strategic Approach to Enterprise Risk Management at Zurich Insurance Group 253 Linda Conrad and Kristina Narvaez

15 Embedding ERM into Strategic Planning at the City of Edmonton 281 Ken Baker

16 Leveraging ERM to Practice Strategic Risk Management 305 John Bugalla and James Kallman

PART IV Specialized Aspects of Risk Management 319

17 Developing a Strategic Risk Plan for the Hope City Police Service 321 Andrew Graham

18 Blue Wood Chocolates 335 Stephen McPhie and Rick Nason

CONTENTS xi

19 Kilgore Custom Milling 363 Rick Nason and Stephen McPhie

20 Implementing Risk Management within Middle Eastern Oil and Gas Companies 377 Alexander Larsen

21 The Role of Root Cause Analysis in Public Safety ERM Programs 397 Andrew Bent

22 JAA Inc.—A Case Study in Creating Value from Uncertainty: Best Practices in Managing Risk 427 Julian du Plessis, Arnold Schanfield, and Alpaslan Menevse

23 Control Complacency: Rogue Trading at Société Générale 461 Steve Lindo

24 The Role of VaR in Enterprise Risk Management: Calculating Value at Risk for Portfolios Held by the Vane Mallory Investment Bank 489 Allissa A. Lee and Betty J. Simkins

25 Uses of Efficient Frontier Analysis in Strategic Risk Management: A Technical Examination 501 Ward Ching and Loren Nickel

PART V Mini-Cases on ERM and Risk 523

26 Bim Consultants Inc. 525 John R.S. Fraser

27 Nerds Galore 529 Rob Quail

28 The Reluctant General Counsel 535 Norman D. Marks

29 Transforming Risk Management at Akawini Copper 539 Grant Purdy

30 Alleged Corruption at Chessfield: Corporate Governance and the Risk Oversight Role of the Board of Directors 547 Richard Leblanc

xii Contents

31 Operational Risk Management Case Study: Bon Boulangerie 555 Diana Del Bel Belluz

PART VI Other Case Studies 559

32 Constructive Dialogue and ERM: Lessons from the Financial Crisis 561 Thomas H. Stanton

33 Challenges and Obstacles of ERM Implementation in Poland 577 Zbigniew Krysiak and Sl̄awomir Pijanowski

34 Turning Crisis into Opportunity: Building an ERM Program at General Motors 607 Marc S. Robinson, Lisa M. Smith, and Brian D. Thelen

35 ERM at Malaysia’s Media Company Astro: Quickly Implementing ERM and Using It to Assess the Risk-Adjusted Performance of a Portfolio of Acquired Foreign Companies 623 Patrick Adam K. Abdullah and Ghislain Giroux Dufort

About the Editors 649

Index 651

Foreword

E nterprise Risk Management is an evolving discipline focused on a com- plex and still imperfectly-understood subject. In such a situation, science is advanced best by collecting data from multiple, independent sites. A rich

set of observations educates the field’s scholars and practitioners and provides the foundation for them to develop descriptive and normative theories as well as cod- ified best practices about the subject.

The authors—Fraser, Simkins, and Narvaez—have done an invaluable service to advance the science of enterprise risk management by collecting an extensive number of wonderful case studies that describe innovative risk management prac- tices in a diverse set of companies around the world. This book should be an extremely valuable source of knowledge for anyone interested in the emerging and evolving field of risk management. We should be grateful to the editors and to each chapter author for expanding the body of knowledge for risk management professionals and academics.

Robert S. Kaplan Senior Fellow, Marvin Bower Professor of Leadership Development, Emeritus

Harvard University

xiii

CHAPTER 1

Enterprise Risk Management Case Studies An Introduction and Overview

JOHN R.S. FRASER Senior Vice President, Internal Audit, and former Chief Risk Officer, Hydro One Networks Inc.

BETTY J. SIMKINS Williams Companies Chair of Business and Professor of Finance, Oklahoma State University

KRISTINA NARVAEZ President and Owner of ERM Strategies, LLC

Businesses, business schools, regulators, and the public are now scrambling to catch up with the emerging field of enterprise risk management.

—Robert Kaplan (quote from Foreword in Fraser and Simkins, 2010)

Most executives with MBA degrees were not taught ERM. In fact, there are only a few universities that teach ERM. So some business school graduates are strong in finance, marketing, and management theory, but they are limited in terms of critical thinking, business acumen, and risk analysis skills.

—Paul Walker1

THE EVOLUTION OF ENTERPRISE RISK MANAGEMENT Over the past two decades enterprise risk management (ERM) has evolved from concepts and visions of how risks should be addressed to a method- ology that is becoming entrenched in modern management and is now increasingly expected by those in oversight roles (e.g., governing bodies and regulators). As Felix Kloman describes in his chapter “A Brief History of Risk Man- agement,” published in Fraser and Simkins (2010), many of the concepts go back a very long time and many of the so-called newly discovered techniques can be

1

2 Implementing Enterprise Risk Management

referenced to the earlier writings and practices described by Kloman. However, it is only from around the mid-1990s that the concept of giving a name to manag- ing risks in a holistic way across the many operating silos of an enterprise started to take hold. In the 1990s, terms such as integrated risk management and enterprise- wide risk management were also used. Many thought leaders, for example, those who created ISO 31000,2 believe that the term risk management is all that is needed to describe good risk management; however, many others believe that the latter term is often used to describe risk management at the lower levels of the organiza- tion and does not necessarily capture the concepts of enterprise-level approaches to risk. As a result, the term ERM is used throughout this book.

As ERM continues to evolve there is still much discussion and confusion over exactly what it is and how it should be achieved. It is important to realize that it is still evolving and may take many more years before it is fully codified and practiced in a consistent way. In fact, there is a grave danger now of believing that there is only one way of doing ERM. This is probably a mistake by regula- tors who have too eagerly seized some of these concepts and are trying to impose them when the methods are not fully understood, and in some cases the require- ments are unlikely to produce the desired results. As Fraser and Simkins (2010) noted in their first book on ERM: “While regulatory interest can force ERM into companies, if not done well, it can become another box-ticking exercise that adds little value.”3

The leading and most commonly agreed4 guideline to holistic risk manage- ment is ISO 31000. However, it should be mentioned that in the United States the COSO 2004 Enterprise Risk Management–Integrated Framework has been the dominant framework used to date. Many organizations are currently adopting one or the other of these frameworks and then customizing them to their own context.

WHY THE NEED FOR A BOOK WITH ERM CASE STUDIES? Following the success of the earlier Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives by Fraser and Simkins (2010), we found through our own teaching experiences, and by talking to others, that there was an urgent need for a university-level textbook of ERM case studies to help educate executives, risk practitioners, academics, and students alike about the evolving methodology. As a result, Fraser and Simkins, together with Kristina Narvaez, approached many of the leading ERM specialists to write case studies for this book.

Surveys have also shown that there is a dire need for more case studies on ERM (see Fraser, Schoening-Thiessen, and Simkins 2008). Additionally, surveys of risk executives report that business risk is increasing due to new technologies, faster rate of change, increases in regulatory risk, and more (PWC 2014). As Paul Walker of St. John’s University points out in the opening quote of the 2014 American Pro- ductivity & Quality Center (APQC) report on ERM, “Most executives with MBA degrees were not taught ERM. In fact, there are only a few universities that teach ERM. So some business school graduates are strong in finance, marketing, and

ENTERPRISE RISK MANAGEMENT CASE STUDIES 3

management theory, but they are limited in terms of critical thinking, business acu- men, and risk analysis skills.” Learning Centered Teaching (LCT), as discussed in Chapter 2, is an ideal way to achieve this. Using LCT and the case study approach, students actively participate in the learning process through constructive reflective reasoning, critical thinking and analysis, and discussion of key issues. This is the first book to provide such a broad coverage of case studies on ERM.

The case studies that follow are from some of the leading academics and prac- titioners of enterprise risk management. While many of the cases are about real-life situations, there are also those that, while based on real-life experiences, have had names changed to maintain confidentiality or are composites of several situations. We are deeply indebted to the authors and to the organizations that agreed so kindly to share their stories to help benefit future generations of ERM practition- ers. In addition, we have added several chapters where we feel the fundamentals of these specialized techniques (e.g., VaR) deserve to be understood by ERM stu- dents and practitioners. Each case study provides opportunities for executives, risk practitioners, and students to explore what went well, what could have been done differently, and what lessons are to be learned.

Teachers of ERM will find a wealth of material to use in demonstrating ERM principles to students. These can be used for term papers or class discussions, and the approaches can be contrasted to emphasize different contexts that may require customized approaches. This book introduces the reader to a wide range of con- cepts and techniques for managing risks in a holistic way, by correctly identifying risks and prioritizing the appropriate responses. It offers a broad overview of the various types of ERM techniques, the role of the board of directors, risk tolerances, profiles, workshops, and allocation of resources, while focusing on the principles that determine business success.

Practitioners interested in implementing ERM, enhancing their knowledge on the subject, or wishing to mature their ERM program, will find this book an abso- lute must resource to have. Case studies are one of the best ways to learn more on this topic.

This book is a companion to Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives (Fraser and Simkins 2010). Together, these two books can create a curriculum of study for business students and risk practitioners who desire to have a better understanding of the world of enterprise risk management and where it is heading in the future. Boards and senior leadership teams in progressive organizations are now engaging in building ERM into their scenario-planning and decision-making processes. These forward- looking organizations are also integrating ERM into the business-planning pro- cess with resource allocation and investment decisions. At the business unit level, ERM is being used to measure the performance of risk-taking activities of employees.

As these case studies demonstrate, ERM is a continuous improvement process and takes time to evolve. As can be gleaned from these case studies, most firms that have taken the ERM journey started with a basic ERM language, risk identification, and risk-assessment process and then moved down the road to broaden their pro- grams to include risk treatments, monitoring, and reporting processes. The ulti- mate goal of ERM is to have it embedded into the risk culture of the organization and drive the decision-making process to make more sound business decisions.

4 Implementing Enterprise Risk Management

SUMMARY OF THE BOOK CHAPTERS As mentioned earlier, the purpose of this book is to provide case studies on ERM in order to educate executives, risk practitioners, academics, and students alike about this evolving methodology. To achieve this goal, the book is organized into the following sections:

Part I: Overview and Insights for Teaching ERM Part II: ERM Implementation at Leading Organizations Part III: Linking ERM to Strategy and Strategic Risk Management Part IV: Specialized Aspects of Risk Management Part V: Mini-Cases on ERM and Risk Part VI: Other Case Studies

Brief descriptions of the contributors and the chapters are provided next.

PART I: OVERVIEW AND INSIGHTS FOR TEACHING ERM The first two chapters provide an overview of ERM and guidance on ERM educa- tion. As we have pointed out, education on ERM is crucial and more universities need to offer courses in this area. Our conversations with many ERM educators and consultants highlight how extremely challenging it is to achieve excellence in ERM education.