Risk Manager as Value Creator How to Speak the Same Language to Influence the C Suite

1. Risk Manager as Value CreatorHow to Speak the Same Language to Influence the C Suite Rocky Mountain RIMS February 25, 2010 Kathleen Felderman, CRM, CIC, CRIS Aon Risk Services Managing Director National Real Estate Practice Leader Katheen.Felderman@aon.com 303-782-3363

2. Value Creation – Overview • Understanding value creation • CEO vs. CFO value creation strategies • How they’re different • Linking Risk Management into CEO and CFO value streams • Rethinking existing strategies for value preservation vs. value creation distinctions • Additional value creation strategies (including “quick hits”) • Communicating value creation results to internal stakeholders • Top 10 List – Ways to achieve Value Creator status

3. Understanding Value Creation • What it is: • Defining ‘value creation’ • Value preservation vs. value creation • Why value creation matters • 4 main drivers of enterprise value • Profitability • Competition • Growth • Cost of capital • Strategy vs. tactical actions • Measuring value creation

4. A Seat at the Table • “Finance helps to set strategic direction and imperatives for the firm”: • Only 20% of CFOs strongly agreed with this statement • 40% of CFOs were neutral, disagreed or strongly disagreed with this statement • Who IS at the table?? Source: IBM Global Business Services, The Global CFO Study 2008

5. Focus: The CEO • How has CEO role changed? • CEOs now have an active boss • Enterprise risk continues to increase • Many more uncertain variables in running a business than only a few years ago • Time demands are increasing • Observations from IBM Global CEO Survey 2008: • “CEOs anticipate staggering amounts of change ahead. Are CFOs and their organizations shining the headlights in the right direction? Can their analytical expertise help the entire enterprise manage change more effectively?” • “More CEOs than ever – 8 in 10 – not only foresee dramatic change but also plan to make bold moves in response. Yet the confidence of CEOs to enact that change is not nearly as high.” Source: IBM Global Business Services, The Global CEO Study 2008

6. 7 Biggest Worries for Board Members • Risk – Managing it, what it is and isn’t, and committees that should and shouldn’t handle it • The long arm of the government • Executive compensation – to restructure or not? • Economic uncertainties and preparing for the future • Shareholder relations – companies that have constructive dialogue with shareholder bases will be well positioned for legislative changes that may impact the upcoming proxy season • Focusing on the Role of the Board • Succession planning Source: “Seven Smokin’ Hot Buttons” by Laura J. Finn, Corporate Board Member, September 2009

7. Board and General Counsel Concerns Boards and GCs feel these risk areas need the most work: • 45% - Understanding operational risk • 18% - Understanding financial risk • 13% - Understanding M&A risk • 11% - Understanding governance changes • 9% - Understanding HR risk • 4% - Understanding shareholder litigation risk Source: Corporate Board Member/FTI Consulting 2009 Legal Study

8. CFO Perspective on Finance and Risk • CFOs are key owners of risk management in 70% of the enterprises that are very effective to effective at supporting/managing/mitigating risk • However, only 50% of the organizations surveyed had the Risk Management function reporting to the CFO • 52% of CFOs surveyed said their organization encountered a major risk event in the past 3 years that substantially affected their operations and/or results • Only 50% of those who experienced such a risk event said their organization was Very Prepared, Prepared or Adequately Prepared • Only 50% of CFOs surveyed said they factor risk into performance monitoring • 80% of CFOs surveyed said their organizations do not manage risks across functions Source: IBM Global Business Services, The Global CFO Study 2008

9. Focus: The CFO • How has CFO role changed? • Finance is in the spotlight • Risk management is now a priority • Investment decisions are being delayed • The CFO is more involved in strategy (but to what extent?) • Levels of communication have increased, internally and externally • Traditionally focused on credit, liquidity, compliance, but now must: • Address issues that required less attention in the past: cost of capital, optimum leverage, debt maturities, cash flow, arranging financing • Be capable of evaluating a growing list of market, geopolitical and operational risks as well • Must have good understanding of opportunity as well as risk, and the timing implications of both • Need stronger decision-support capabilities: predictive models and tools, and perceptive people Source: IBM Global Business Services, The Global CFO Study 2008

10. High appetitefor risk Image makers Adventuresome visionaries Strategist Sales CEO Marketing Line Executive Risk profile CFO Controller CIO CRO Internal Auditor COO Low tolerancefor risk Daily operators Operational leaders Tactical Strategic Organizational mind-set CFO Perception of Enterprise Risk Roles Source: IBM Global Business Services, The Global CFO Study 2008

11. High appetitefor risk Image makers Adventuresome visionaries Strategist Sales CEO Marketing Line Executive Risk profile CFO Controller CIO CRO Internal Auditor COO Risk Manager Low tolerancefor risk Daily operators Operational leaders Tactical Strategic Organizational mind-set CFO Perception of Enterprise Risk Roles Source: IBM Global Business Services, The Global CFO Study 2008

12. Conclusions • CEO's first foundational task is to achieve a balance between taking economic risk (promoting creativity and innovation) and managing economic risk • The second redefined foundational CEO task is to fuse this high performance with high integrity. That means adhering to the spirit and letter of formal rules, voluntary adoption of ethical standards that bind the company and its employees, and employee commitment to core values of honesty, candor, fairness, reliability, and trustworthiness—which together are in the enlightened self-interest of the corporation and reduce legal, ethical, and reputational risk • The CFO's role in value creation is threefold. • First, the CFO must be certain that controls are in place and that meaningful and timely reporting and analysis occurs. • Second, there is another set of risks--the more traditional set around risk transference whether insurance or financial risks--such as hedging and derivatives.

13. Conclusions (cont.) • Third, and this is where the CEO and CFO come together, is that the CFO must be ready to support initiatives meeting the strategic needs of the organization. Credit must be available, working capital managed. But more than that, the CFO must be a main player in the risk identification process partnering with the CEO.

14. Top 10 Strategies to be a Value Creator • Understand distinction between value preservation and value creation • Understand the dynamics of your C-Suite leaders and how their roles have changed or are changing • Anticipate the evolving interest of your Board as respects risk management and position your department and your C-suite leadership to proactively address those concerns • Recognize the distinctions of the CEO and CFO value creation strategies for your own organization • Know how to evaluate and measure your value creation project results

15. Top 10 List (cont.) • Know how to identify and implement new value creation strategies that may be appropriate • Incorporate key learnings to make your value creation strategies resonate • Develop a communication template that highlights your quantitative decision process when communicating value creation proposals and/or results to internal stakeholders • ERM can provide the infrastructure to underpin your value creation strategies; look at your current ERM implementation status and consider next steps along the roadmap to maturity • Speak the language of your audience, and facilitate your CFO’s move towards an Integrated Finance Organization

16. Basic Functions (Examples) Evaluate vendors based on cost. Cost of Purchase insurance. Collect exposure information for renewal. Have broker obtain quotes at different retentions. Report claims. Value-Added Contrast (Examples) Evaluate vendors based on balance of cost, ability to achieve strategic objectives, quality of team, innovation. Evaluate insurance purchasing decisions that optimize risk transfer costs vs. retained liabilities, tax & cash flow goals. Evaluate risks, including contingent loss exposures and other hidden costs, as well as emerging risks. Request, analyze and communicate results of decision-support tools such as actuarial analyses, financial modeling, benchmarking, etc. Analyze claims results and trends and develop risk control plans that mitigate loss. Interview and select TPA to maximize claim management. Basic vs. Value-Added Functions of Risk Manager – Sample list

17. Sample Template to Inventory Existing Work

18. Determining Value Creation Potential - Template Source: Beiersdorf AG; CFO Executive Board research, “Ten Questions You Are Probably Asking Yourself About Improving Decision Support”, Corporate Executive Board, 2007

19. Optimizing Risk Management Outputs • Risk Manager is an internal service provider to the company. You need to sell yourself to C-level mgmt and others. • Goals and objectives should align with corporate goals and objectives. • Focus on analysis – not just collecting and providing information. • Provide a context to make decisions. • Decision-support analytics bring statistical credibility to results and recommendations. • Content is important, but how you deliver service distinguishes between perception of competent vs. outstanding. • Utilize technology to help you merge information for analysis, measure results and create meaningful reports. • Ensure your communications (written and verbal) achieve strategic goals and articulate the value RM brings to the table.

20. Speak in Your CFO’s Language

21. Satisfaction = Perception - Expectation • Neither perception nor expectation necessarily reflects reality. Both are psychological states of mind. • People and organizations turn to professional services providers (such as the Risk Manager or Broker) for matters of significant uncertainty, importance and risk. • Quality work doesn’t necessarily mean quality service. • The practical meaning of good service and “outstanding” vs. “competent” extends far beyond technical excellence. • Responsiveness and attitude will drive more trust, confidence, peace of mind. C-level management assumes technical competence. • 3 most important keys to success are availability, affability and ability, in that order. Source: Managing the Professional Service Firm, David Maister

22. Value Creation – Recap • Understanding value creation • CEO vs. CFO value creation strategies • How they’re different • Linking Risk Management into CEO and CFO value streams • Rethinking existing strategies for value preservation vs value creation distinctions • Additional value creation strategies (including “quick hits”) • Communicating value creation results to internal stakeholders • Top 10 List – Ways to achieve Value Creator status 22

23. Extras……

24. CEO Value Creation Strategies Source: IBM Global Business Services, The Global CEO Study 2008

25. CEO vs CFO Value Creation Strategies Source: IBM Global Business Services, The Global CFO Study 2008

26. How CFOs view the Finance Organization Source: IBM Global Business Services, The Global CFO Study 2008

27. CFO Efforts to improve Decision Support Source: “Ten Questions You Are Probably Asking Yourself About Improving Decision Support”, Corporate Executive Board, 2007

28. Some Metrics Don’t Measure Value Well Source: “EVA Momentum: The One Ratio That Tells the Whole Story” by Bennett Stewart, EVA Dimensions, Journal of Applied Corporate Finance, Volume 21 Number 2, Spring 2009

29. Speak in Your CFO’s Language

30. The Money Sheet