ERM: Tone at the Top

ERM project, like every other project, is generally faced with some likelihood of implementation success or failure. The probability of success or failure in implementation has a direct link with the tone that is set by the executive and board of the organisation. In addition to organisational tone, a lot of regulated organisations are also awaiting a national or regulatory tone for ERM. What is the place of regulatory tone on ERM? What is best practice in communicating regulatory tone? Should organisations commence ERM implementation only after a regulator’s take-off whistle? We will conclude with these questions. Historically, ‘Tone at the Top’, as a concept, started with the accounting profession. Accountants’-in-practice evaluate clients’ Tone at the Top in order to establish that it is sufficient to prevent fraud and unethical practices.

Tone at the Top has however gained much wider application today. It now describes the corporate culture that an organisation’s leadership have established, generally. Culture is at the heart of the way things are done in organisations. Before ERM is introduced into an organisation, a culture already exists. It may or may not be documented. ERM implementation invariably aims to disrupt an existing culture, albeit with a substitution. This is the change. Ensuring that the organisation’s board of directors and management have a buy-in for the change becomes a first step requirement for every ERM project. When board and management begin to walk the buy-in talk, this is Tone at the Top.

It is important to ensure that there is an appropriate Tone at the Top for ERM implementation because there is usually very little understanding of ERM when it is being introduced into an organisation. If there is no sufficient board and executive support, there could be resistance even from highly important and influential people. The new values may be difficult to embed. The project may also not be appropriately resourced. Disruption may be perceived and the project may not be given priority. Experienced and skilled personnel may not be channelled to the project. The project may also be poorly financed. Appropriate Tone at the Top will therefore focus and sustain the project.

The overall buy-in of the ERM project rests with the board of directors. As a culture, every board has its own way of coordinating executive functions. Most boards would require proposals to be presented to it in a formal way in order for it to make a buy-in. The board’s approval conveys its buy-in and thus sets the tone. There are several executive functions in an organisation. ERM implementation will impact all. We will however demonstrate how a board could make a buy-in for ERM implementation with just one executive function: Financial Reporting.

Solvency capital reforms benchmark minimum capital levels. A common benchmark is the Target Economic Capital level. This requires that the financial reporting system transit, sometimes, from pure historical cost reporting to fair value reporting. And this can be very involving for the CFO who usually has ownership of this aspect of the project. He/she has to demonstrate to the board that the company has the resources to make the transition and that the overall benefit of the transition will exceed what it will cost the organisation. When a formal report is presented to the board and it considers that there is sufficient resources and justification for the proposal, the board will, in this case, make approval for fair value reporting. This is the board’s buy-in that sets the tone to jettison historical cost reporting and to transit to fair value reporting. This is just one example of how an organisation sets ERM project tone for a critical path. The management of the organisation will therefore have to articulate and secure board’s approval for all the critical paths of the ERM project. Board’s approval for the critical paths of the ERM project, put together, forms the organisation’s overall Tone at the Top.

The G-20 lead Global Regulatory Convergence for Financial Professions and Industries has set a tone for ERM amongst other convergences in financial professions and industries. It detests unilateral reforms. It aims to discourage countries and territories from making reforms that widen rather than narrow convergence gaps. It is therefore best practice for economies to demonstrate conformity with a global convergence such as solvency capital reform by passing national laws. This leaves a proof of the needed regulatory tone in such economies. With the global tone that detests unilateral reforms, the coast is clear for ERM implementation by organisations because a global convergence benchmark can be identified and focused. Organisations that therefore await a local regulator’s take-off whistle before it implements ERM will probably crowd up at the rear. Organisations should therefore be proactive and implement ERM as a business enabler for efficiency and resilience rather than solely for regulatory compliance. This way, organisations will, in addition to complying with regulatory requirement, enhance the chances of achieving their objectives and sustain going concern.

 

Steve Nkwor MIRM (UK)

Steve Nkwor a risk management consultant and writes from Lagos, Nigeria. He is a passionate promoter of down side zero tolerance. He holds full membership of the Institute of Risk Management of London. He is also a fellow of the Institute of Chartered Accountants of Nigeria as well as an associate of the Chartered Insurance Institute of Nigeria and can be reached on [email protected]