Board-level Commitment to ERM is Growing

This week, results from the 2010 Global Enterprise Risk Management Survey were released by Aon and they indicate a growing level of maturity in ERM programs.  In addition, as the program maturity levels increase, board members are becoming increasingly involved in the effort.  Here is a summary of the board-level indicators from the survey results.

Board-level commitment to an enterprise risk management initiative is absolutely critical to achieving the highest value from ERM efforts and investment. Not only does board buy-in establish priorities and sanction resource allocation, it is a key factor in establishing and maintaining an appropriate risk culture and embedding ERM throughout the chain of command. Best-practice organizations ensure that boards and management have defined risk management responsibilities and delegations of authority.

Responsibility for risk management, including internal and external reporting of risk, should be embedded into the organization’s governance structures and discussions, with emphasis at the board level on:„„

1. Confirming the organization’s risk management objectives and strategies.


2. „„Approving the organization’s risk appetite and tolerances.


3. „„Confirming the organization’s risk profile and approving management’s approach for responding to the most critical enterprise-level risks.


4. „Overseeing the organization’s risk governance framework and ensuring that risk management roles, responsibilities and expectations are defined at the senior management level.

Boards that are successful at ERM have established approaches for managing the workload associated with risk governance — including setting expectations for the quality and timeliness of risk reporting from management. When a board is mired in details regarding risk and risk management, decision making can be slow and ineffective. Best-practice boards are able to find an appropriate balance between oversight of risk and risk management (through effective dialogue with and delegation to management) and the board’s practical use of risk information to enhance decision making.

The balance of responsibility between board and management is a crucial element in any successful ERM program.  If your company or board is struggling to achieve this balance, Wheelhouse Advisors can help.  To learn more, visit www.WheelhouseAdvisors.com.

Preparing for the Inevitable Rise in Rates

Last week, the Federal Financial Institutions Examination Council ("FFIEC") issued an advisory to all U.S. financial institutions to prepare for the inevitable rise in interest rates.  Specifically, they provided recommendations for the proper management of market risk or interest rate risk ("IRR").  Here is a summary of their expectations.

Current financial market and economic conditions present significant risk management challenges to institutions of all sizes. For a number of institutions, increased loan losses and sharp declines in the values of some securities portfolios are placing downward pressure on capital and earnings. In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution’s capital and earnings.  This advisory re-emphasizes the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of institutions. It also clarifies various elements of existing guidance and describes selected IRR management techniques used by effective risk managers.

The regulators are certainly concerned about financial institutions becoming complacent due to the historically low funding rates.  In addition, they surely do not want to be criticized again for working to prevent problems that will inevitably occur as part of any business cycle.  Financial institutions of all sizes will be wise to address these recommendations sooner rather than later.  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.

Getting Ahead of the Risk Curve

In an acknowledgement that the problems that led to the financial crisis of 2008 have not been fully resolved, the Bank for International Settlements ("BIS") in Basel, Switzerland is seeking to address a return of excessive risk-taking in meetings this weekend with top financial leaders from around the world.  The Financial Times reported yesterday that the current low rate environment coupled with ample liquidity has set the stage for another potential crisis.  Here is what they had to say.

The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.  In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.  The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment.

It is a good sign that the BIS and others are looking to get ahead of the risk curve.  What remains to be seen is the reaction from the leadership of major financial institutions and the resulting behavior within the markets.

Signs of Increasing Risk Demonstrate Need for Additional Reforms

At the annual meeting of the American Economic Association here in Atlanta this past weekend, economists debated progress on reforms to prevent a repeat financial crisis.  The consensus seemed to be that much work remains to be done.  Here is what the Wall Street Journal reported about the meeting results.

Over the past few days, economists here highlighted the many ways in which the lessons of the crisis have yet to sink in. Few think the U.S. and other governments have made needed repairs to the financial regulatory system. And some suggest governments' response has increased the chances of a repeat, making the banking system more crisis-prone, putting new strains on institutions such as the Federal Reserve and stretching government finances closer to the breaking point (see charts below). "Our response has made us more vulnerable to a bigger crisis," said Tom Sargent, a New York University economist. "It's distressing."

The U.S. and world economies are walking a tight rope of recovery vs. reform.  While short-term recovery is desirable, it cannot be made at the expense of long-term economic growth and reform.

Reputation Risk Must Be Actively Managed

As the survivors begin to emerge from the carnage of the financial crisis of 2008, corporate reputations are once again viewed as a highly valued asset.  The primary challenge for these surviving companies is to rebuild trust while managing their reputations in a way that aligns with their corporate strategy.  Once they become misaligned, it is very difficult (if not impossible) to bring them back in sync.   Here is what Anthony Johndrow had to say in a recent article from Forbes magazine.

Today it’s about balancing the seven dimensions that make up corporate reputation (product/service, innovation, governance, workplace, citizenship, performance and leadership), namely going beyond product and service promises that are still rooted in 20th-century brand-building assumptions. The evolution of the role of chief reputation officer is still in its infancy, but one thing is clear: It’s not about just getting involved in social media, it’s about giving the company a voice in the formation of its reputation.

Every company has a reputation, regardless of whether or not it has a strategy behind it. Thus, today’s reputation stewards must give voice to their companies. If they do not, their reputations will be driven only by accident (as a result of company actions that don't benefit from expert CRO guidance--see recent financial crisis for numerous examples) and by conversations among people who might not be their best friends. That is a recipe for disaster, no matter who is keeping score.

Many companies may not go as far as creating a full-time chief reputation officer position.  However, it is critical that someone is on point for managing a firm's reputation and that it is actively monitored.  In the highly connected and media driven society that we now live, a company's reputation and brand value can be destroyed in an instant.

Many Companies Still Not Ready For SOX Audits

In last week's issue of Compliance Week magazine, a startling survey result was disclosed.  It seems that almost two-thirds of the smaller public companies that will be facing an audit of their internal control over financial reporting this year are not fully prepared (see chart below).  While some may be looking for the U.S. Congress to exempt them from compliance (a measure that is currently being discussed on Capitol Hill), others may simply be ill-equipped or misdirected.  Here is what was reported in the Compliance Week article.

Of the 210 accountants participating in the recent poll, one-third said their company is less than 25 percent complete in implementing Section 404. Inefficiencies were attributed to problems such as poor training and education in the area of processes and controls, lack of focus on project management and utilizing resources, and a “compliance at all cost” mentality that is focused on effectiveness but not efficiency.

At a recent conference of the American Institute of Certified Public Accountants, Elisse Walter, a commissioner for the Securities and Exchange Commission, said the SEC does not support an exemption for smaller companies. “The SEC supports applying 404(b) to smaller companies, particularly as it applies to the financial crisis we’ve seen,” she said. “But now it’s in the hands of Congress.”

Time will tell the outcome of the congressional debate.  However, the companies that are behind schedule should not necessarily hope for a last-minute reprieve.  The best approach is to address the compliance requirements in a business-focused, practical manner that is effective, efficient and ultimately beneficial to the company's long-term well-being.  If your company is looking for cost-effective solutions, visit www.WheelhouseAdvisors.com to learn how we can help.

Federal Reserve Chairman Kicks Off Year of Change

Kicking off the new year here in Atlanta yesterday, Federal Reserve Chairman Ben Bernanke delivered a speech to the American Economic Association on lessons learned from the financial crisis of 2008.  The focal point of the speech was the role that both monetary and regulatory policy played in the creation of the housing bubble that led to the meltdown.  He admitted that regulatory supervision should serve as the first line of defense in preventing asset bubbles with monetary policy serving as an emergency brake.  Here is his view on the performance of regulatory supervision leading up to the financial crisis.

Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again. Because the crisis was so complex, its lessons are many, and they are not always straightforward. Surely, both the private sector and financial regulators must improve their ability to monitor and control risk-taking. The crisis revealed not only weaknesses in regulators' oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world. For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis.

Based on the view of Chairman Bernanke and many others throughout the world, 2010 will certainly be a year of change as it relates to regulations and risks.  Is your company prepared to address these changes proactively with minimal disruption to business as usual?  Or, will your company be forced to react and change on the fly?  If you are not certain of the answers to these questions, Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.