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What all managers need to know about growth in a turbulent world
Especially in these turbulent times, good risk management is about exploiting opportunities for growth while protecting value already created. To do this, corporate leaders must, first and foremost, learn to manage the chain of cause and effect between risk and shareholder value. Now Risk shows them how. As vice chairs of the international consulting giant KPMG L.L.P., authors Mary Pat McCarthy and Tim Flynn are ...
What all managers need to know about growth in a turbulent world
Especially in these turbulent times, good risk management is about exploiting opportunities for growth while protecting value already created. To do this, corporate leaders must, first and foremost, learn to manage the chain of cause and effect between risk and shareholder value. Now Risk shows them how. As vice chairs of the international consulting giant KPMG L.L.P., authors Mary Pat McCarthy and Tim Flynn are uniquely qualified to offer executives and senior managers this ultimate primer on risk and its optimization and management.
"If everything seems under control, you're just not going fast enough."
A great many approaches for discussing and modeling risk have been born over the years, in many cases springing from discrete industry or functional concerns. This has led risk management to be perceived as an arcane, technical subject germane to financial risk managers with an appetite for actuarial mathematics. This book suggests otherwise. We believe the business of risk management is undergoing a fundamental sea change. At the tiller are CEOs and boards that have been awash in a roiling surge of new or emerging risk realities for over a year. From them, it is clear that more than ever the risk discipline is converging at the top of the organization, linked inextricably to strategy and stakeholders.
Risk from the CEO and Board Perspective is a response to these changes. It is designed as a primer for senior corporate management to streamline the many diverse threads that exist on the subject, and to focus attention on the key risk questions and considerations.
We'll begin with an agenda for leadership; a look at some things to come and at changes already underway in boards and executive suites around the world.
OVERVIEW OF COLLECTIVE WISDOM
The views in this section, gathered from our conversations with CEOs and board members, illustrate some of the higher-level thoughts and issues being discussed and championed today. Together, they demonstrate that meaningful dialogue on risk management is occurring, and they highlight a growing sensibility of the transformation of risk management from conformance to performance.
What Can Bring Your Business Down?
One of the board's primary tasks is to understand and approve both the risk appetite at current and future stages of evolution and to understand the monitoring processes in place that keep risk and risk appetite in alignment. Among their considerations, boards need to ask themselves how much risk the company can absorb. They need to ask questions like:
 "Are you okay if some risks can't be controlled?"
 "Are you overcomplying or undercomplying with the recent slate of regulations?"
 "How much is that costing you?"
 "Are your PR offices poised to handle crisis management effectively when intangibles like reputation and brand take a hit?"
 "Is the management of these intangibles factored into your business continuity plans?"
We know even more keenly now that damage to a company's integrity can fell an organization if enough blows are sustained. Yet, many businesses have still to formally assess how much risk their company can or should absorb, and their risk conversations suffer for that.
Robert Woods, CEO of shipping and container giant P&O, says: "We do quarterly reforecasts for our business with the board, and at those reforecasts, we talk about the major variables to our risk analysis, the variables to our cargo flow, growth, oil prices, currency swings, and the like. But the major point of emphasis, the major thing we discuss, is the question of what can destroy our forecast? What can bring the business down?"
Risk Is the Art of Balancing Interests
Corporations are not democracies, but the right separation of powers is important to balance every group's self-interest. Formal partitioning of the Chairman and Chief Executive offices will be advocated by some to allow for greater oversight and impartiality. Others will prefer to add nonexecutive or outside directors to provide the needed objectivity and perspective.
Within the organization, many executives agree that the process of reporting, measuring, and controlling risks should be managed separately and independently from those who generate them. Just as an independent board, audit committee, and auditor are critical to effective corporate governance, an independent risk management function is essential to effective operations. Complex multinationals may decide that a separate risk management team is required. Smaller companies may designate a member of management not involved with the day-to-day activities that might generate risk for the company. Independence is advanced when the company's organizational, reporting, and compensation structure are properly aligned in support of it.
The CEO and Board Are Ulitmately Responsible
Jay Keyworth, chairman of the Progress & Freedom Foundation and a member of Hewlett-Packard's board, states: "I think the most important lesson of the last few years is that board members can no longer dismiss being knowledgeable about business risk." He's saying that when something goes wrong—and it inevitably will—you will be held accountable.
The solution is not only to make sure that you learn of adverse risk conditions, but that you are sufficiently attuned to the environments that generate these conditions in the first place, and in time to take preemptive action. Understand what red flags can derail your strategy and, just as important, can derail the execution of that strategy. Then make sure you have a mechanism in place to alert you if those flags start waving.
You Don't Have to Be a Bean Counter, But You Need to Understand the Numbers
The CFO may be the top accountant, but every board member has a responsibility to understand accounting basics. Many do not. Two-thirds of the executives at a recent University of Chicago course on corporate governance—many from Fortune 500 companies—failed to correctly answer a multiple-choice question on retained earnings. Although audit committees in particular need a thorough knowledge of the company and its industry, the board as a whole must understand the financial instruments the company uses and owns, and be familiar with the control environments in place.
Have an Exit Strategy
While management and boards may have disaster recovery procedures to protect and back up key assets, they need to bring the same contingency planning to their strategic discussions. An exit strategy and plan is essential when considering any large scale initiative or transformation.
Peter Oppenheimer, Apple Computer's SVP of Finance, has made this his credo: "Companies should only take risks that they have the core competencies and skills to manage, have clearly thought through, including an exit strategy, and that are strategically aligned with their business." He adds: "When you go into something new, it has to be really well thought out, and if for some reason it doesn't work out, you have to know what the back door is."
This is true of most strategic undertakings, but is particularly prudent when embarking on any type of merger or acquisition. Given managers' proclivity to keep their sights trained on the next deal, this can be hard to do. Success involves discipline, and lots of it. Otherwise, when you take on more individual risks than you have the capacity to manage, Oppenheimer notes, "You get yourself into trouble."
Good Disclosure Lies in What, Not How Much, Is Revealed
Many executives agree that there is too much emphasis on the quantity of disclosure and too little on the quality of information being disclosed. To achieve quality disclosure, there must be an underlying infrastructure that produces accurate information and is supported by adequate controls and fundamentally sound business operations.
Investors, we know, are not always helped by reams of pages to pore through. They are looking for clear, concise information,
Excerpted from RISK FROM THE CEO AND BOARD PERSPECTIVE by Mary Pat McCarthy. Copyright © 2004 by KPMG LLP, the U.S. member firm of KPMG International. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Section I: Companies at Risk
Chapter 1: Executive Agenda
Chapter 2: The Salt Lake Olympics and Risk's Shifting Sands
Chapter 3: Risk in a Modern Global Business Context
Section II: Mitigating Pervasive Risk
Chapter 4: Treatment Options
Chapter 5: The Numbers Game—Responding to Financial Risk
Chapter 6: The Enemy Within—Responding to Operational Risk
Section III: Governing Principles
Chapter 7: We the People of the Board
Chapter 8: The Audit Committee, Risk and Regulation
Chapter 9: Inside Section 404
Chapter 10: Internal Control—Insights from the Field
Chapter 11: Holistic, Integrated Approaches to Risk Management
Chapter 12: The End of the Beginning
Posted April 21, 2004
This is an easily accessible, short and reasonably thorough introduction to the subject of risk. The authors touch on almost every dimension of the topic, including financial risk, operational risk, reputation risk, governance risk and even the risk of terrorist attack. The book might have been quite a bit shorter and somewhat more focused on corporate management if the authors, KPMG vice chairs Mary Pat McCarthy and Timothy P. Flynn had tightened their anecdotes about anti-terrorist preparations at the Olympic Games. However, they seem to have believed that they would lose readers unless they provided a few entertaining distractions, and they could be right. Though it breaks little new ground, it plows the old ground interestingly. We recommend this portable summary of useful information to the CEOs and board members who are its intended audience, as well as to anyone responsible for risk management.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.