1. DFA Capital Management Inc. DFA vs. ERM Is There A Difference? CAS Special Interest Seminar Understanding the Enterprise Risk Management Process San Francisco, CA April 2-3, 2001 André Lefebvre, FCAS, MAAA

2. DFA Capital Management Inc. Changes in the Business World In the new economy, CEOs are facing unrelenting pressure to lead and improve their company’s performance At the same time, the rules are changing: Increasing complexity of the global economy Higher customer expectations Intense competition Rapid changes in technology

3. DFA Capital Management Inc. Master Risk  Create Value Organizations are searching for and developing more comprehensive approaches to monitor and manage business risks Business Risk: The threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully 1 1 Managing Business Risk: An Integrated Approach, The Economist Intelligence Unit, 1995

4. DFA Capital Management Inc. Enterprise Risk Management ERM is an interactive process of well-defined steps which, taken in sequence, support better decision- making by contributing a greater insight into business risks and their impacts

5. DFA Capital Management Inc. Elements of ERM Process Establish Context Identify Risks Analyze/Quantify Risks Assess/Prioritize Risks Treat/Exploit Risks Monitor&ReviewMonitor&Review CommunicationCommunication Integrate Risks

6. DFA Capital Management Inc. Establish Context Understand the: strategic (external) context organizational (internal) context risk management context Develop the risk evaluation criteria Define the structure

7. DFA Capital Management Inc. Identify Risks Document the conditions and events that represent material threats to the organization’s achievement of its strategic objectives or represent areas to exploit for competitive advantage

8. DFA Capital Management Inc. Types of Risks Strategic e.g., competitor risk, shareholder relations risk Operational e.g., customer satisfaction risk, authority/limit risk Financial e.g., price risk, liquidity risk, credit risk Hazard e.g., catastrophic loss risk, health & safety risk

9. DFA Capital Management Inc. Analyze/Quantify Risks Analyze risks in terms of consequence and likelihood in the context of existing controls Quantify the consequence and likelihood using qualitative, semi- quantitative, or quantitative (or a combination of these) analyses

10. DFA Capital Management Inc. Integrate Risks Aggregating all risk distributions, reflecting correlations and portfolio effects

11. DFA Capital Management Inc. Assess/Prioritize Risks Evaluate the risk Prioritize list of risks

12. DFA Capital Management Inc. Treat/Exploit Risks Identify options for risk treatment Assess the options Prepare risk treatment plans Implement treatment plans

13. DFA Capital Management Inc. Monitor & Review It is necessary to monitor the risks, the effectiveness of the risk treatment plan, the strategies, and the management system that is set up to control the implementation Ongoing review is essential to ensure that the management plan remains relevant

14. DFA Capital Management Inc. Communicate Important to develop a communication plan for both internal and external stakeholders at the earlier stage of the process