Presentation on theme: "Dugald Ross Jeito Board Reviews November 2013"— Presentation transcript:
1 Dugald Ross Jeito Board Reviews November 2013 Risk Management and the role of the Board Risk Oversight and Good GovernanceDugald RossJeito Board ReviewsNovember 2013
2 Expertise in financial market operational risks and board oversight Who are we?Dugald Ross; B.EconJeito Pty LtdAustralian & UKExpertise in financial market operational risks and board oversightConsulting firm with a global focus on the Web delivery of reviews of third sector Boards‘Jeito’ (pronounced ‘J2′ ) is Brasilian/Portuguese slang meaning “the knack,” which sums up our vision to find the right solution to our client’s needs.2
3 Points to Understand – focus that RM begins with good governance Good risk management is a key component of good governanceRisk failures are usually a result of poor governanceThe boards role in risk management is of oversightRisk oversight is a continual process of questions, decisions, feedback and review.
5 Risk Failures at the Heart of the Financial Crisis “It is clear that governance failures contributed materially to excessive risk taking in the lead up to the financial crisis. Weaknesses in risk management, board quality and practice, control of remuneration, and in the exercise of ownership rights need to be addressed in the UK and internationally to minimise the risk of a recurrenceWalker Review of corporate governance of UK banks and other financial entities: July 2009
6 Why the Failures?Why did some financial institutions fail or need public rescue, some came close to the brink but many others weather the storm and continue to operate profitably?Part of the answer is differences in business models….. But a significant part, was the differences in the quality of their corporate governance.THE IMPORTANCE OF GOOD GOVERNANCE speech by JOHN F LAKER Chair of Australian Prudential Regulation Authority to the Australian British Chamber of Commerce, Melbourne 27 February 2013
7 Risk Oversight Failures – a Governance Issue The inability of many Boards to accurately identify and understand the risks inherent in their businesses is seen as the main governance failure leading to the crisis. ……………………. Their risk appetite was vague.THE IMPORTANCE OF GOOD GOVERNANCE speech by JOHN F LAKER Chair of Australian Prudential Regulation Authority to the Australian British Chamber of Commerce, Melbourne 27 February 2013
8 Egregious Cultural failures Corporate culture is widely seen as a difficult and complex issue, but the egregious cultural failures that lie behind the lamentable story that is now emerging in relation to the conduct of some banks make action essential.Values and ethical standards, and the overall culture in which they are embedded, are keystones of governance in any corporate entity.‘Banks must solve the problems of ethics’ by Roger Ferguson, John Heimann, William Rhodes, Sir David Walker .Times newspaper August
9 What is happening in the world today? Focus world wide is increasing on risk management and good governanceWhat is new?Comply or ExplainInsurance wont save you from poor performance
11 Risk Oversight v Risk Management The board should provide oversight and guidance for ‘the systems and processes concerned with ensuring the overall direction, supervision and accountability of an organisation.’Chris Cornforth Governance Overview, Governance and Participation project, Co-operatives UK, 2004Management should provide the risk management implementation
12 There is little variation from a previous study in 2011 Risk Complacency“Just 15 per cent of directors reported a very good understanding of the risks their company faces, 54 per cent a good understanding, while almost one third (29 per cent) said they either have a limited or no understanding. The remaining two per cent said they did not know.”There is little variation from a previous study in 2011Improving board governance Mckinsey global survey results 2013
13 Co-operatives UK Findings The Boards role in risk oversight is misunderstoodThey see it as managements role to report and provide instruction.They forget the board has the ultimate responsibility and is responsible for oversight
14 Risk Governance and Risk Management Cycle BOARD oversight and adequacyBOARD understand and relate to strategyIdentify and Accept RiskControl and Manage RisksMonitor risksTest Review Report ProceduresBoard ReviewsManagement to Implement
15 Risk Oversight Foundations Risk oversight IS NOT a process with a beginning and an end.It is continual process from which to make sound decisions in two areas of oversight.oversight of critical risks and risk decisions (risk governance)oversight of enterprise risk programs (risk management).
16 Appropriate Risk Oversight – ‘No one size fits all’ Strategy and risk management are linked.An Intelligent risk management culture is never an impediment and should more than just a supplement.It should fit the organisation, and the role of the board is to ensure the risk management framework is appropriately designed, adapted, implemented and becomes an integral part of an organisations decision making culture.
17 The Upside to Oversight and Good Governance Healthy risk oversight is not just about risk avoidanceSetting CultureImproved education, communication and innovationPreparation for crisisBetter understanding of processes across an organisationBuilding MoraleBetter decision making
19 Good GovernanceGood governance should be thought of as a floor – not as a ceilingGood Governance is all aboutRecognising and accepting risk – don’t be afraidSetting the appropriate risk oversight.Setting the culture from the topQuestion, question, questionEnsuring the board is a high performance boardReview and assessment
20 What the code wants from Societies High Performance Board meeting minimum standardsSupport the code in your rulesComply with requests for InformationProvide statements of recommendationsProvide reasons for non complianceProvide Reasons for appropriateness
21 Four Themes to Improve Risk Oversight Board CapabilitiesBoard Values and CultureBoard InformationRisk GovernanceFinancial Stability Board (FSB) Thematic Review on Risk Governance Peer Review Report 12 February 2013
22 Board Capabilities‘Many boards simply lacked the financial industry experience and understanding of market complexities needed to ensure they could perform their fundamental role of independent and objective oversight. They had inadequate skills, technical expertise or confidence — to challenge a dominant or ‘imperial’ chief executive officer (CEO) pursuing aggressive growth strategies.JOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the Australian British Chamber of Commerce, Melbourne February 2013
23 Not Just Skills - but Behaviour Too often directors were unable to dedicate sufficient time to understand the firm’s business model and too deferential to senior management.Financial Stability Board (FSB) Thematic Review on Risk Governance Peer Review Report 12 February 2013
24 Understanding Your Board Capabilities Attitudes & ValuesKnowledgeSkillsPerformance Assessments of Board & MembersSkills Self Assessments by Members
25 Board Values - Culture and Ethics ‘The crisis exposed significant shortcomings in the governance and risk management of firms and the culture and ethics which underpin them. Thisis not principally a structural issue. It is a failure in behaviour, attitude and in some cases, competence.’Sants, H, Delivering effective corporate governance: the financial regulators role, Speech at Merchant Taylors’ Hall, April 2012.
26 Board Values - Culture and Ethics Values and ethical standards, and the overall culture in which they are embedded, are keystones of governance in any corporate entity.‘Banks must solve the problems of ethics’ by Roger Ferguson, John Heimann, William Rhodes, Sir David Walker .Times newspaper August
27 Risk Culture – an example of poor standards A poor risk culture was not consistent with the risk appetite and can manifest itself in a number of ways.Lack of understandingLack of candour in the relationship between board and managementHeadstrong front-office leaders always looking to push the risk control boundaries, that passes the ownership of risk to the risk management function or internal audit. Business areas must be the owners of risk.JOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the Australian British Chamber of Commerce, Melbourne February 2013
28 Setting corporate culture as ‘Risk Intelligent’ The board should encourage and set the tone for an organisations risk culture.The board should understand how their strategies and incentives reward and encourage people to take risks intelligently.This is why risk oversight is a continual process of defining, measuring, reviewing and questioning.
29 Board Information - What is Needed Timely, relevant & comprehensive informationReports that can be easily digested by the boardA holistic view of the risk exposures of their institution ReportsInformation not heavily filtered by management hierarchy nor reaching the board late and/or distorted.JOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the Australian British Chamber of Commerce, Melbourne February 2013
30 Board Information - Integrity in Financial Reporting Can I trust the data?Does it cover the critical issues?Is it sufficiently up to date?Can I digest it quickly ?Does it cover future as well as historical?Does it include a holistic perspective?Is it in relevant time context?CIMA Performance Reporting to Boards. A Guide to Good Practice
31 Risk Governance Issues Inability to accurately identify and understand risksInability to ensure robust structures for managing and reporting on these risksUnclear definitions as to the degree and nature of risks.Vague risk appetite.Lacking the stature, authority and independence to challenge the business areas;Unclear accountability and lines of reporting to the boardInadequate experience or independence from management or the boardJOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the AustralianBritish Chamber of Commerce, Melbourne February 2013
32 Independent Assessment of Risk Framework Independent assurance that the risk governance framework works and works as intended.However, such internal or external audits and assessments tend to be compliance-focussed.Internal audit don’t reveal external trends and/or align with best practices.JOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the Australian British Chamber of Commerce, Melbourne February 2013
33 Questions About Your Risk Processes Does your risk management method work?Would anyone on the Board know if it didn’t work?If it didn’t work what would be the consequences?
35 Assessing Board Performance – is your board adding value in terms of its risk management and performance?The most valuable outcome of a board evaluation is that it helps to bring “issues to the surface”; and allows directors to “stand back” from day to day matters and improve the performance of the board as a whole.Evaluating the Performance UK Boards: Lessons from the FTSE350 – The All Parliamentary Corporate Governance Group 2007.