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The Better the Brakes, the Faster the Car

- adding value through improved ERM

by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman EACT

European companies have been using Enterprise Risk Management (ERM) to varying degrees as part of an ongoing effort to raise awareness and promote appropriate risk management responses and deliver value for stakeholders. More recently rating agencies have added to the clamour for increased transparency of risk management, providing senior management with an increased incentive to revise and improve ERM processes.

ERM is an initiative that, by definition, is never complete

Some European companies, including RTL Group (RTLG), have decided to embrace Standard & Poor’s (S&P) initiative to assess ERM processes of non-financial companies as being an opportunity to revise and improve their existing practice.

In November 2007, S&P consulted users of their rating services in order to validate their approach to benchmarking ERM processes across non-financial institutions. S&P have subsequently developed their ERM assessment - the outcome of which is a rating of a company’s ERM competency as being either ‘weak’, ‘adequate’, ‘strong’, or ‘excellent’. It appears the S&P assessment will concentrate on the culture of risk management and governance concentrating on specific examples to demonstrate how this works on a day-to-day basis. The adoption of a recognised unifying standard such as COSO ERM Framework or the Australian and New Zealand Standard on risk management (AS/NZS4360/2004) is helpful but is not a pre-requisite nor sufficient proof of having adopted good practices1.

RTLG has used the pending S&P assessment to review existing practice in order to be able then to revise internal control processes to make them more effective and efficient. This step was taken as part of a continuous process of improvement initiative.

The first step in evolving ERM at RTLG was to understand where the gaps were…

It was decided at the outset to undertake a review of existing risk management capabilities to determine where improvement effort should be focused. There was a strong desire to build a business case for improvement in ERM but without having to resort to using a myriad consultants. Further, a strong emphasis was put on having practical and pragmatic solutions for improvement.

A decision was made to work with Avantage Capita2, whose methodology and approach based on comparison (benchmarking) was found to be fairly unique in execution in that the output is presented on ‘one page’ which was useful when discussing risk with senior stakeholders who had little time to read a detailed analysis. A long form report on suggestions for improvement was discussed with those of us more heavily involved in the improvement effort. The outcome of the joint effort was to identify any weaknesses or gaps and to define a roadmap with priorities for improvement for the next two years.

Avantage Capita’s IRPM (Integrated Risk & Performance Management) approach, adapted for RTLG, is shown in Figure 1.

The approach enabled the weaknesses in the current risk infrastructure and capabilities to be identified and compared to good practice in peer organisations. The listing of actions to address weaknesses served as the basis for the business case aimed at defining the prioritised improvement initiatives.

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