Vinay Kalia / Roland Müller. Risk Management at Board Level A Practical Guide for Board Members

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1 Vinay Kalia / Roland Müller Risk Management at Board Level A Practical Guide for Board Members

2 Dr. oec. HSG Vinay Kalia Vinay Kalia is currently a Senior Associate in the International Auditing firm KPMG Fides Peat, Switzerland and portfolio partner at the IFPM, Center for Corporate Governance, University of St. Gallen ( in Enterprise Risk Management. He has dedicated last 4 ½ years on researching risk management at the Board and management level in Swiss and international organizations while closely collaborating with the leading companies in Switzreland and Europe. Prior to this, Vinay has attained an MBA from the Nanyang Business School, Singapore and has diverse experience in Hospitality and Tourism industry in Asia including India and Singapore. PD Dr.iur. Roland Müller Roland Müller is Chairman and Member of the Board of Directors of several Swiss Companies with a keen interest in establishing best practice risk management values. His background includes law studies at the universities of Geneva and Zurich and he has attained Master of Law and PhD from the University of Zurich. Since 1985 he has been a lawyer and notary public. Since 1992, he is senior partner in the law firm Müller Eckstein Rechtsanwälte, Staad. In 2005, he has completed his habilitation at the University of St.Gallen and has been appointed lecturer at the University of St.Gallen for private law, commercial law and air law. 1. Auflage 2007 Bibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über abrufbar. ISBN: Alle Rechte vorbehalten Copyright 2007 by Haupt Berne Jede Art der Vervielfältigung ohne Genehmigung des Verlages ist unzulässig Printed in Switzerland

3 Vinay Kalia Roland Müller Risk Management at Board Level A Practical Guide for Board Members HAUPT VERLAG BERN STUTTGART WIEN

5 Table of Contents Foreword I. Introduction General Overview Importance of Risk Management a) Help for Company b) Bank Rating c) Insurance Role of Board Members in Risk Management a) Risk Management as a Part of Good Corporate Governance.. 14 b) 360º Direction and Control c) Setting the Tone of Risk Management d) Dealing Effectively with Strategic Issues e) Fostering Openness and Creativity f) Guidelines and Policies for Risk Management g) Serious and Extraordinary Decisions h) Supervision of the Company Performance vis-à-vis Strategy. 19 i) Organisation and Structure of Risk Management Definitions and Concepts a) Definition of Risk and Security b) Definition of Risk Controlling c) Definition of Risk Management d) Definition of Emergency Management e) Definition of Crisis Management f) Definition of Operational Risk Management g) Concept of Value-at-Risk Table of Contents 5

6 h) Concept of a Risk Map i) Concept of Business Continuity Management (BCM) Risk Management Standards a) Committee of Sponsoring Organisations (COSO) Framework 31 b) Sarbanes Oxley Act c) The Austrian Standards Institute Rules (ONR) II. Development of Risk Management Overview of the Development Stages a) Stage 1: New Concepts b) Stage 2: Credit Risk Management c) Stage 3: Financial Risk Management d) Stage 4: Operational Risk Management e) Stage 5: Enterprise Risk Management Risk Management and Corporate Governance a) Overview of ERM and Corporate Governance Interdependence 42 b) The Cadbury Report c) The Combined Code and Hampel Report d) The Turnbull Report e) The King II Report f) The Basel Committee Reports III. Driving Forces of Risk Management in Switzerland General Overview Law as a driving force a) Importance of Several Regulations b) Swiss Code of Obligations c) Bank Regulations d) German Law for Control and Transparency (KonTraG) Institutional Investors Impact of US Developments Press Others

7 IV. Risk Management Implementation General Overview Objective Setting a) SWOT-Analysis b) Risk Management Policy c) Risk Management Guidelines/ Directives d) Risk Management Handbook Risk Identification Risk Assessment and Prioritisation Risk Analysis a) Key Drivers Analysis/ Root Cause Analysis b) Suitable Actions to Respond to the Key Drivers In-depth Risk Analysis Action Planning Monitoring, Reporting and Supervision Culture Tools V. Summary and Advice Summary a) Key Messages b) Organisation at Board Level c) Organisation at the Management Level d) Risk Management in the company Advice a) Integrated ERM b) Decision-Making Under Time Pressure c) Whistleblowing d) Checklists e) Advice for Small and Medium Companies f) Managing Impediments g) Self-Appraisal h) Keep it Simple Table of Contents 7

8 Epilogue Bibliography Appendix : Checklist for Implementing Enterprise Risk Management : Risk Management Policy and Guidelines : Internal Regulations for Risk Management Committee : Board Responsibility in Risk Management (King II Report) : Risk Identification Form : Checklist for IT Risks : Whistleblowing Policy Document : ERM Self-Appraisal Questionnaire Abbreviations

9 Foreword By the Editor of this Series, Professor Martin Hilb Managing Partner, IFPM Center for Corporate Governance University of St. Gallen ( Board of Directors (BoD) effectiveness is currently one of the few subjects that are topical for both research and practice globally. In this series, our Center for Corporate Governance presents the results of studies conducted by its partners. Our approach to Board of Directors (BoD) effectiveness is based on the following guiding principles: Keep it situational; Keep it strategic; Keep it integrated; and Keep it controlled. This edition, presented by our two partners Dr. Vinay Kalia (who wrote his doctoral thesis on the subject of Risk Management on the Board of Directors (BoD) and Executive Board (ExB) level under my supervision) and PD Dr. Roland Müller (who was Chairman of the Risk Management Committee of SR Technics from 2001 to 2006), fits into the last principle, «keep it controlled». Keeping it controlled includes auditing, Risk Management, communication, compliance and evaluation on the Board of Directors (BoD) level. One result of the Board evaluations we conducted in many organisations is that Risk Management on the Board level is an area for development. Foreword 9

10 «An error alone is never the cause of company s collapse.» The cause often lies in the lack of an effective and systematic Risk Management function at the Board of Directors (BoD) level. Noteworthy is that: Risk Management is a new development in Corporate Governance. The new phase in Risk Management started in the 1970s with the growth of credit Risk Management. The Risk Management approach in the 21 st century takes a holistic view of all risks concerning a company. The New York Stock Exchange (NYSE), through its Securities Exchange Commission (SEC), sponsored legislation such as the Sarbanes Oxley Act (SOX) to put additional and mandatory pressure on companies to manage risks on the operational and Board of Directors (BoD) levels and provide totally transparent information to shareholders. Essentially, small and medium companies (SMEs), and very small companies, feel that Risk Management does not have any meaning for them. However, Risk Management can be implemented even in such companies both on operational and Board of Directors (BoD) levels with great effectiveness and added value for the company. Effective Boards need both: Members with profound entrepreneurial spirit and Risk Management know-how. This will decide if companies are the masters or victims of change. St. Gallen/ Switzerland, March 2007 Martin Hilb 10

Table of Contents. Foreword by the Editor of this Series...5 Foreword by the Authors...7 Table of Contents...11 Abbreviations...21

Table of Contents. Foreword by the Editor of this Series...5 Foreword by the Authors...7 Table of Contents...11 Abbreviations...21 Table of Contents Foreword by the Editor of this Series...5 Foreword by the Authors...7 Table of Contents...11 Abbreviations...21 I. Introduction...25 1. General Overview...25 2. Importance of Risk Management...28