Executive summary
The General Motor Sports Inc. score of 34 points places the company within the 26 to 45 points range. This maturity level is actually defined as the basic enterprise risk management practice in position. Given that the implementation of the GMS ERM framework has only been developed and improved for a time span of two years, the attained results can be assessed as reasonable outcome. Davi Cruz, who is the chief financial officer, ought to be proud of the evolution of the implemented enterprise risk management that he spearheaded.
That said, it is apparent that such an effort should be handed over to a person who is able to devote extra time exclusively to the responsibilities of facilitating and coordinating the efforts of gathering information that are deemed requisite for the development and emergence of a more classy enterprise risk management framework. Most organizations instigated the process of appointing an executive risk committee or chief risk officer to oversee the GMS ERP implementation and development processes.
Introduction
Every firm has one of the most imperative questions that the management has to incorporate in its decision making process. An example of such questions is, “What quantity of risk is deemed adequate to be accepted by a given firm?” Previously, companies focused on the financial risks when they discussed the risks that a firm faced. Hedging risks or buying insurance became the central instruments that enterprises used to manage such risks (Kaplan & Norton 1996, p.67). However, financial risks are hedged or insured not in time, but in time. This makes the financial risks management to be in a static process instead of being a dynamic procedure (Lombbriser & Abplanalp, 2005).
It is on the basis of this that corporations have opted for the enterprise risk management (ERM) framework (Culp 2001, p.52). Basically, the range of encountered risks and their increasing complexities have forced organizations to recognize the importance of ERM and implement it in order to achieve the set goals and objectives. Different organizations have implemented different ERM frameworks to improve and equally support the levels of risk awareness at each level (Slovic, 1972). This ranges from the employees to management and from operative to strategic. Since ERM is not one time static process, it must always be dynamically adapted and embedded in the organization so as to suit the altering external and internal environment.
Therefore, the aim of the report is to holistically evaluate the maturity level of General Motor Sport (GMS) ERM framework. Conclusions and recommendations will also be offered on how the corporation can enhance or develop the efficiency of the adopted ERM framework.
Background
As a public limited company, Gemini Motor Sports (GMS) produces both off road and on road vehicles for recreation. The vehicles are sold through a network of dealers who are based in Canada and Brazil. Selling vehicles is an optional function and is based on the available credit capacity and individuals’ income (Munzel & Jenny, 2005). The target customer groups for GMS products are fundamentally men who are aged between twenty one and fifty years of age.
An Enterprise Risk Management (ERM) programme was launched by this corporation about two years back. The main aim was to respond to the overt appeal made by the board of directors audit committee (AC) chair. The ERM programme was intended to assess whether the prevailing risk management method available within the GMS might be upgraded via implementing an all-inclusive enterprise wide risk assessment.
Davi Cruz, who was the Chief Financial Officer at GMS, was accountable for overseeing the primary progress of the ERM framework at the corporation. The assumed tasks were to designate very few staffs from the office of Cruz to coordinate the identification of initial risks. They had to assess the risks considered essential to set a logical starting point for implementing an ERM programme. Various resources were presented to the ERM group by Cruz.
The GMS business unit leaders and senior management met the ERM team over a time frame of two months to ask them about the risks which GMS encountered and those that were considered to be detrimental and disrupting the corporation’s financial health and operations. Data concerning how such risks were managed was similarly gathered. The ERM programme implementation team conducted further analysis on the obtained information.
The team ranked the risks founded on the incurred losses that resulted from the events and the total intervals the mentioning of an event took place. A presentation was then developed for Cruz to convey in the subsequently scheduled meeting with the audit committee. Additional training was offered to ERM team to better understand the practices and dimension of the ERM programme. Two years after the ERM programme had been implemented, Cruz and his team finally identified fifteen topmost risks that GMS encountered.
Methodology
Data collection
The organization’s ERM programme implementation information will be collected through administering properly designed ERM assessment tool to the ERM team that is headed by Davi Cruz. The soundly designed ERM assessment tool will constitute key items that suitably attend to the ERM programme assessment components. Conversely, secondary research data will be acquired from the organization’s ERM records and other documents which contain similar information.
Data Analysis
In order to ensure logical completeness and response consistency, the collected information will be analyzed qualitatively and quantitatively. For example, any data that will have been collected through in-depth interviews and secondary sources will be analyzed by means of content analysis along with the logical analysis techniques. Further quantitative data analysis techniques including percentages will be used to determine the research respondent proportions that chose various responses (Kendall, 1998). The method will be applied for each group of items available in the assessment tool. Bar graphs and tables will be used to make sure that quantitative data analysis is simply comprehensible.
Findings and discussions
Cruz acquired an Enterprise Risk Management assessment tool. He then carefully answered all the seventy five elements that were acknowledged as modules of a robust Enterprise Risk Management programme. The following assessments results were obtained.
Risk Culture
The raw score which is the total risk culture attained a score of 6. When the raw score was divided by 12, the percentage risk culture was 50%. See table 1 in the appendices. When the critical risk culture elements were read through, it appeared that Cruz was just capable of affirmatively responding to a half of them. Cruz was clearly responsible for the ERM process and had to report directly to the CEO. He believed that the senior management team and the board of directors were knowledgeable and supportive to the ERM goals.
However, Cruz hardly felt that GMS Corporation was strategically placed to apply ERM programme and the ERM philosophy was neither well assimilated in the whole corporation. Of great significance perhaps, was the recognition by Cruz that the expertise of the board had not yet been tapped in the risk assessment and identification efforts thus far. Furthermore, the board hardly devoted their particular time during conferences to deliberate on the substantial risks.
Identification of risks
Table 2 in the appendices indicates that the identification of risks scored a total of 5 out of 10. The risk identification percentage score was 50%. From the risk identification assessment practices completion, various significant insights emerged. For instance, Cruz could not realize that “risk” should be defined cautiously to confirm responses that were consistent. Besides, Cruz over the preceding two years framed the risk questions to merely focus on the failures. It occurred that eventual prospects might have been disregarded with such one sided risks assessment.
Cruz did not seem to be aware of the current efforts that could explicitly help him in linking the process of identifying the risks to the GMS Corporation’s strategic goals. It was equally apparent that Cruz ought to have instigated the involvement of additional board members and employees in the process of identifying risks so as to be sure that the an inventory of complete risks was collected.
Risk assessment
In table 3 in the appendices, it is clear that the risk assessment totaled to 7 out of 13. The percentage risk assessment score was 54%. Cruz had the feeling that the developed assessment guideline met various assessment tool standards. Explicit guidance was offered in regard to the considered to time horizon which was two years. The impact measurements were determined by the amount of income loss that could have been incurred when an event occurred. The impacts and probabilities were as well combined multiplicatively to generate prioritized top risk scores. Similar to the previous assessment, it emanated that Cruz was supposed to board members in the process of assessing the risks.
Cruz was particularly concerned with the desire to consider carefully the low profitable high-impact events. This was to happen even if the risk scores failed to identify events as principally risky. In fact, Cruz just wanted to incorporate questions concerning the onset speed as well as the risk events persistence. He had not reached any explicit agreement with the GMS board as regards whether the recognized and evaluated risks were indeed topmost risk exposures that the corporation faced. Finally, there were not attempts made in considering the correlations of a portfolio based risks.
Articulations of the risk appetite
In table 4 in the appendices, it is clear that the risk appetite score totaled to 1 out of 5. This implies that the risk appetite percentage score is 20%. Upon completing the appraisal, Cruz noticed that the risk appetite articulation was indeed an imperative area that needed much attention. While Cruz had the feeling that senior management team and the board had deliberated on risk taking, it is still evident that a lot of work needs to be carried out in this particular area. To the knowledge of Cruz, there was no precise risk tolerance statement or the risk appetite was developed to offer guidance in the process of making decisions.
Risks response
Table 5 in the appendices shows that, the risks response totaled to 6 out of 12. This gave rise to risk response percentage score of about 50%. According to Cruz, there was a remarkable attention given to the topmost fifteen risks that had been acknowledged thru appraisal and identification procedures with regard to the designation of responsibilities and designed responses. Above the topmost fifteen risks, Cruz noticed that a lot of extra tasks had to be carried out to warrant the subsequent risk levels were equally assigned to the risk owners and effectively monitored. The prospect of performing simulations to test the planned responses effectiveness intrigued Cruz but he had not hitherto executed such an approach.
Risk reporting
Table 6 in the appendices risk reporting score totaled to 3 out of 6. The percentage risk reporting score was 50%. This implies that, Cruz was effectively working with GMS ERM staffs to assist in adjusting the risks metrics which characterized particular risk actions which took place and had significant effects on the corporation. Such an appraisal helped Cruz in recognizing the value of and the need for acute risk indicators which were more nature projecting and permitted the corporation to proactively rise to the risks which emerged. A quarterly updated report is provided to the senior GMS management team by Cruz. The report always comprise of reports roll-ups that Cruz obtains from risks holders who are accountable for specific risk monitoring responsibilities.
Moreover, Cruz received more concise dashboard or report requests which offer a flawless status view as regards to significant exposures to risks. This denotes that, the GMS board of directors does not get consistent reports apart from the verbal presentations that are made by Cruz when the AC chairs requests. In 10-K report, the disclosure of the risk factors dubbed as Item 1A becomes the responsibility of the legal. However, the legal has never requested any risks info from Cruz.
Strategic planning integration
The results in table 7 in the appendices indicate that out of 10 elements, strategic planning received a total score of 4. This means that the strategic planning percentage score was 40%. Basically, from these results, it appears that the GMS senior management annually becomes engaged in the exercise of strategic planning. The freshly reviewed and premeditated plan is usually shared with the GMS board of directors for purposes of reviewing and endorsement. Based on Cruz assertions, it emanates he had the feeling that the ensuing risks exposures were constituents of the BOD deliberations, yet not a prescribed designed approach.
The GMS fraternity actually understands the concept of the accruing returns versus the encountered risks. Often, the business entities are appraised while resource apportionment decisions are made bearing in mind the risk modification performances. Such an appraisal made it obvious that any determination to better incorporate risk info from the enterprise risk management procedure is likely to enhance the senior management strategic decision making course. This effort could be well described by Cruz at this moment as an ad-hoc in nature as opposed to being definable and robust. As initially noted, the GMS Corporation has no explicitly developed risk appetite statement.
Assessing the effectiveness of the ERM
Table 8 in the appendices indicates that, out of the total 7 elements, an assessment of the effectiveness of the ERM scored only 2. This means that ERM effectiveness appraisal received a percentage score of 29%. From the findings, it is clear that subsequent to completing the ultimate appraisal, Cruz noted that a significant portion of the undertaken task still remained unaccomplished. Thus, for the GMS enterprise risk management procedure to evolve to the succeeding stage, the remaining tasks must be accomplished. There is doubt according to the claims made by Cruz that the ERM programme is still perceived like a detached venture. For instance, when Cruz was asked to deliberate on the time or date when he expected the ERM programme to be completed, he hardly gave a precise date.
Finishing the ERP programme is a daunting task because Cruz realized that more capital would still be devoted to ensuring that additional members from GMS will be needed. In fact, such new members will have titles below the board of directors, business unit leaders and the senior management. Their tasks will be to annually update the topmost fifteen risks being faced by General Motor Sports Corporation. Cruz must realize that it is time for drawing on expertise from the outside to assist in scheming the functioning of the ERM which could place General Motor Sports Inc. in better point for advance evolution. See table 9 in the appendices for a summary of the findings and table 10 which shows the category of the ERM maturity.
Conclusions and recommendations
Two areas were not surprisingly identified to be rather weak: a) the integration of the strategic planning with the ERM process and b) the absence of a formal risk appetite statement to assist in guiding the decision making process. These two areas are basically linked with a fully evolved and more refined ERM programme. Thus, it is advisable that General Motor Sport instigate discussion at the senior management and board levels to be able to articulate the risk taking appetite. This will enable the executives and managers to fully comprehend that taking the risks is an inherent process to triumphant business operations (Crouhy et al. 2001, p.36). This implies that, when the risk taking is better informed, the results are that it would lead to elevated success incidences.
A robust ERM strategy might offer the necessary information required to develop the decision making process. As noted by Cruz, risks are portions of the management discussions during the strategic plan debate and it is bound to be settled at the level of senior management. What might be required is an official approach to warrant that each participant in the ERM planning processes has a regular understanding of the risk appetite and risk profiles that takes place within the organization.
The ERM assessment tool also made apparent that the GMS board of directors lacked the momentous participation in the assessment and risk identification process. It similarly emanates that the GMS board have no devoted formal agenda time intended to discuss the substantial risks. One major way the GMS board might use to feel more contented with their expulsion of the risk oversight accountabilities is by actively getting involved in the collection of information piloted by ERM staffs. They should equally be engaged in the documentation of the time spent when discussing the significant risks that the company faces. Most of these actions are bound to help the BOD to assertively report its participation in the process and the risk management oversight function as required in its proxy disclosures.
Within the GMS Company, ERM should be observed as an evolutionary progression. Often, the process is observed as a biddable focused implementation to be undertaken, acknowledged and filed. In fact, there are doubts that more values could be extracted from such kind of determination. The enterprise risk management procedures ought to be permitted to incessantly revive the risk inventories that exist and reexamine impacts and probabilities assessments to warrant that the potential and significant appalling risks are hardly overlooked (The Committee of Sponsoring Organizations of the Treadway Commission, 1992, 2004).
For the ERM to be a central view in the corporation, the CEO and the BOD must openly approve the enterprise risks management framework and offer ample resources that would permit the ERM personnel to utterly implement the mature ERM procedural elements that have been discussed in this report.
It should be finally noted that, it is impractical to believe that an ERM development can advance to the maturity state in a comparatively shorter time period. For instance, most corporations have incorporated the ERM programmes for a longtime and they are still refining and learning the assumed processes. The profiled company in this report, GMS, has evidently made considerable steps to develop a mature Enterprise Risks Management framework. However, the company still has an ample space to develop the ERM process and create additional value which can be derived from making risks informed decisions that would steer the corporation in a strategic direction.
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