ก ก Tools and Techniques for Enterprise Risk Management (ERM) Balanced Scorecard for Objective Setting in ERM

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1 ก ก Tools and Techniques for Enterprise Risk Management (ERM) Balanced Scorecard for Objective Setting in ERM :45 12:15. ( ก) ก ก

2 Balanced Scorecard for Objective Setting in ERM Assistant Professor Dr. Nopadol Rompho Department of Operations Management Faculty of Commerce and Accountancy, Thammasat University Topics ERM Balanced Scorecard Integration of ERM and Balanced Scorecard

3 What is happening? Many of the failings of companies can be attributed to the acceptance of excessive risks or the poor management of those risks. Most companies have not formally considered what their true appetite for risk is, accordingly, they do not have effective processes to ensure they operated within the expectations of key stakeholders. Source: Karow, J. C. (2006), Risk Appetite and Tolerance, Ernst & Young ERM Symposium, April 24, 2006 Type of Risk Source: Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group

4 Enterprise Risk Management Source: Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group Enterprise Risk Management A process effected by an entity s board of directors, management, and other personnel, applied in strategy setting and across enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives Source: Committee of Sponsoring Organizations of the Tradeway Commission (COSO) (2004) Enterprise Risk Management Integrated Framework

5 Enterprise Risk Management A core element of ERM is that risks and strategy are aligned. Once strategy choices are made, management identifies risk responses, assigns accountabilities, and monitors implementations in a coordinated and integrated approach to ensure the objectives are met. Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, Topics ERM Balanced Scorecard Integration of ERM and Balanced Scorecard

6 Why do most companies fail to implement their strategies? Vision Barrier Only 5% of the workforce understands the strategy Management Barrier 85% of executive teams spend less than one hour/month discussing strategy Resource Barrier 60% of organization don t link budgets to strategy People Barrier Only 25% of managers have incentive linked to strategy The Balanced Scorecard Balanced Scorecard by translations 17 translations 50% usage in Fortune 500 Harvard Business Review Hall of Fame 50,000+ BSC on-line members

7 What Is a Balanced Scorecard? At the highest level, the Balanced Scorecard is a framework that helps organizations put strategy at the center of the organization by translating strategy into operational objectives that drive both behavior and performance. Balanced Scorecard Framework

8 The Balanced Scorecard Links Vision and Strategy to Employees Everyday Actions MISSION Why we exist VALUES What s important to us VISION What we want to be STRATEGY Our game plan BALANCED SCORECARD Translate, Focus and Align STRATEGIC INITIATIVES What are the priorities TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do STRATEGIC OUTCOMES Satisfied SHAREHOLDERS Delighted CUSTOMERS Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE The Generic Strategy Map Financial Perspective: the drivers of shareholder value Improve Cost Structure Productivity Strategy Increase Asset Utilization Improve Shareholder Value Shareholder Value ROCE Revenue Growth Strategy Enhance Customer Value Cost per Unit Asset Turnover Customer Profitability Customer Market and Account Share Customer Acquisition Customer Retention Customer Satisfaction Product Leader Perspective: Customer Solutions the differentiating Customer Value Proposition Low Total Cost Product/Service Attributes Relationship Image value proposition Price Quality Time Function Service Relations Brand Create Value from New Products & Services New Revenue Sources Internal Perspective: how value is created and sustained Operations Theme (Processes that Produce and Deliver Products & Services) Customer Management Theme (Processes that Enhance Customer Value) Innovation Theme (Processes that Create New Products and Services) Regulatory and Society Theme (Processes that Improve the Environment and Communities) Learning & Growth Perspective: role for intangible assets people, systems, climate and culture Human, Information, and Organizational Capital Information Human Capital Capital Organization Capital

9 Topics ERM Balanced Scorecard Integration of ERM and Balanced Scorecard ERM and Balanced Scorecard share many elements Focus on strategy Holistic Perspective Emphasis on Interrelationships Top-Down Emphasis Desire for Consistency Focus on Accountabilities Continuous Nature Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, 49-55

10 Traditional Balanced Scorecard does not address the followings Target setting does not typically take risks into account, so stretch targets could be set that could drive risky behaviors. External risks are often not adequately captured in the definition of measures or objectives There is a temptation to treat risk management as yet another objective and lose the benefit of an integrated risk and strategy view Source: Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group Key Performance Indicator vs. Key Risk Indicators Source: Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group

11 Financial Perspective To succeed financially, how should we appear to our shareholders? Goals: Measures: To obtain higher profit margins Profit margin To improve cash flows Net cash generated To generate revenue growth Increase in number of customers and sales per customer Enterprise Risk Management Components Risk Related Goals: To reduce threats due to price competition To reduce cost overruns Risk Related Measures: Number of customer defections attributed to price Extents of surcharges paid, holding cost incurred, or overtime charges Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, Customer Perspective To achieve our vision, how should we appear to our customers? Goals: Measures: To improve product/service quality Number of customer contact points To improve timeliness of product/service delivery To improve customer perception of value Length of time from customer order to customer delivery Customer scores about product/service value Enterprise Risk Management Components Risk Related Goals: To reduce customer defections To monitor threat to product/service reputation Risk Related Measures: Number of customer retained Extent of negative coverage in business press about product and service quality Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, 49-55

12 Internal Business Processes Perspective To satisfy our stakeholders and customers, where must we excel in our business processes? Goals: To reduce waste generated To shorten the time from start to finish across the supply chain To achieve unit cost reduction Risk Related Goals: To reduce high probabilities and impact threat to processes Measures: Pounds of scrap sent for disposal Length of time from purchase of raw material to delivery of product/service to customer Unit costs per product/service Enterprise Risk Management Components To identify specific tolerances for risk for key processes Risk Related Measures: Number of employees attending risk management training Number of process variances that exceed specified acceptable risk tolerance range Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, Goals: Learning and Growth Perspective To achieve our vision, how will we sustain our ability to change and improve? To increase employee ownership of the process To improve information flows across stages of the supply chain Measures: Employee survey scores related to ownership and responsibility for processes Changes in information reports and frequency of reports Enterprise Risk Management Components Risk Related Goals: To increase employee awareness of risks To increase suppliers accountabilities for disruptions in the supply chain Risk Related Measures: Number of employees attending risk management training Provisions in contracts with suppliers addressing risk management accountabilities and penalties Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, 49-55

13 Example of Risk Management Balanced Scorecard Financial Risk Perspective Risk Financial Market Solvency Tax Measure WACC Debt-to-Equity Cost of Debt Expected-to-actual effective tax rate Customer Risk Perspective Risk Portfolio Competition Marketing Measure % customer satisfied # of new entrant % share lost Actual-to-Expected Revenue Source: Calandro, J and Lane, L. (2006) Insights from the Balanced Scorecard An Introduction to the Enterprise Risk Scorecard, Measuring Business Excellence, Example of Risk Management Balanced Scorecard Internal Process Risk Perspective Risk Technological Human Resource Process Organizational Measure # of security breaches Employee turnover # of unsatisfactory internal audit findings # of regulatory complaints Learning and Growth Risk Perspective Risk Learning Growth Measure Productivity of trained employees % of suggestions implemented Expected-to-Actual Growth Expected-to-Actual process improvement benefits Source: Calandro, J and Lane, L. (2006) Insights from the Balanced Scorecard An Introduction to the Enterprise Risk Scorecard, Measuring Business Excellence, 31-40

14 Balanced Scorecard and ERM Balanced Scorecard: Cascading and Feedback ERM: Information and Communication Source: Nagumo, T. and Donlon, B. (2006) Integrating the Balanced Scorecard and COSO ERM Framework, Cost Management, Integrate Risk into Your Strategy Map Source: Karow, J. C. (2006), Risk Appetite and Tolerance, Ernst & Young ERM Symposium, April 24, 2006

15 Benefit of Integration Risks are events that impact the achievement of your objectives. Balanced Scorecard is the driver of your objectives. There is a natural link between the Balanced Scorecard and ERM objective setting. References Ballou, B., Brewer, P., and Heitger, D. (2006) Integrating the Balanced Scorecard and Enterprise Risk Management, Internal Auditing, 21 (3): Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, BRC Resolver Inc. (2011) White Paper: Integrating of Balanced Scorecards with Enterprise Risk Management. Calandro, J and Lane, L. (2006) Insights from the Balanced Scorecard An Introduction to the Enterprise Risk Scorecard, Measuring Business Excellence, 31-40

16 References Committee of Sponsoring Organizations of the Tradeway Commission (COSO) (2004) Enterprise Risk Management Integrated Framework Karow, J. C. (2006), Risk Appetite and Tolerance, Ernst & Young ERM Symposium, April 24, 2006 Killackey, H. (2009) Integrating Enterprise Risk Management with Organizational Strategy, The RMA Journal, 91 (8). Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group. Nagumo, T. and Donlon, B. (2006) Integrating the Balanced Scorecard and COSO ERM Framework, Cost Management, References Paladino, B., Cuy, L., and Frigo, M. (2009) Missed Opportunities in Performance and Enterprise Risk Management, Journal of Corporate Accounting & Finance, Shenkir, W.G. and Walker, P. L. (2006) Enterprise Risk Management and the Strategy-Risk-Focused Organization, Cost Management, 20 (3):

17 Questions and Answers 31