Coordinating Risk Management and Performance Measurement, written by Brian Ballou, Professor and Dan L. Heitger, Associate Professor, Co-Chairs, Center for Governance, Risk Management, and Reporting Farmer School of Business, Department of Accountancy at Miami University, links two areas of accounting, enterprise risk management (ERM) and performance measurement, traditionally treated separately. 

Based on this linkage, the Portfolio provides a model that should help organizations better understand and perform effective risk management, as well as communicate their risk management efforts to external stakeholders. 

Organizations face increasing pressure from various stakeholder groups to manage business risks effectively and to report their performance transparently across such risk management initiatives.  

This Portfolio supplements and amplifies other portfolios on Enterprise Risk Management (ERM) and Corporate Sustainability Reporting (CSR), respectively, by examining ERM from an external perspective and providing a framework for reporting performance measurement metrics to external stakeholders.  

By linking ERM and performance measurement, organizations can more effectively and efficiently understand the value of implementing an ERM framework. Such understanding is necessary for an organization to consistently invest resources in improving and evolving an ERM framework in order to drive strategy, resource allocation, and other decisions necessary for meeting organizational objectives and maximizing long-term shareholder value. 

Organizations that can verify that the costs of investing in ERM generate value and improve ERM through effective performance measurement have the opportunity to gain competitive advantages.  

This Portfolio focuses on the ability to use transparency in reporting about ERM effectiveness as an additional form of reporting to stakeholders on organizational value. 

Although valuations of enterprises by public markets continually fluctuate, many organizations tend to have market values exceeding their net book values. While market fluctuations and general risk partially explain the difference, unmeasured or unreported intangible assets represent much of it. While ERM does not substitute for measuring and reporting intangible assets, reporting an organization's ERM framework and performance measures relating to the effectiveness of managing risks can convey important information that stakeholders can use in trying to assess the value of an organization and likely changes in its value. 

Coordinating Risk Management and Performance Measurement uses the practice of issuing CSR reports as a point of departure for suggesting a stakeholder accountability report that conveys performance information about ERM, including linkages from performance metrics to overall business objectives and long-term financial performance. As of mid-2007, most organizations have not advanced enough in their development of ERM frameworks to issue stakeholder accountability reports to such a degree. However, organizations can gradually evolve both their ERM frameworks and their approach to CSR so that they continually improve and converge. The ability to link an organization's ERM actions to long-term sustainable value represents the key element to making the blending of ERM and CSR a reality in the form of a stakeholder accountability report. Organizations seeking this goal achieve the additional benefit of elevating the role of performance measurement and ERM at all levels, better enabling organizations to link incentives, plan and structure initiatives, allocate resources, etc. based on their impacts on risk optimization or performance maximization. 

This Portfolio begins by surveying ERM and performance measurement, including corporate sustainability reporting (CSR)—also referred to as triple bottom-line (or TBL) reporting. This explanation draws upon two other BNA Tax and Accounting Portfolios (cited below) that examine ERM and TBL, respectively.  

Coordinating Risk Management and Performance Measurement then posits that limitations associated with ERM and CSR—most notably the lack of support from boards of directors and senior management and the lack of relevant and reliable measures—have prevented ERM and CSR from reaching their full potential.  

This Portfolio addresses these limitations by developing a methodology for applying performance measurement processes to ERM that the authors believe can lead to relevant and reliable measures of ERM effectiveness. These measures then can be utilized as catalysts to create improved mechanisms for developing, formatting, and issuing improved CSR reports.  

Finally, this Portfolio concludes by developing the Stakeholder Accountability Report, an evolved CSR report that incorporates a process for identifying, measuring, and reporting ERM performance that should help create firm value through enhanced corporate reputation and more transparent reporting to stakeholders.

This Portfolio covers the following: 

• describes the evolution of ERM, with an emphasis on viewing it from an external perspective;
• describes performance measurement within organizations, including CSR;
• extols the benefits of linking ERM and performance measurement;
• presents a model for stakeholder accountability reporting, which emphasizes how organizations may benefit by striving to improve ERM through performance measurement such that performance can be conveyed to stakeholders; and
• synthesizes this discussion by explaining how the effects of risk management actions can be communicated to stakeholders via corporate sustainability reports, thereby generating an organizational competitive advantage in the market. 

Coordinating Risk Management and Performance Measurement allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Purposes, Role, and Scope of Portfolio

II. Enterprise Risk Management From an External Perspective

Introductory Material

A. Frameworks of ERM

1. Traditional ERM Frameworks-Financial Reporting

a. Financial Reporting Measurement Techniques

b. COSO 1992 (i.e., Internal Controls)

2. Business Risk as the Driver of Control and Risk Management

3. Summary of COCO 1995 Components

a. Purpose

b. Commitment

c. Capability

d. Monitoring and Learning

e. Utilization of COCO 1995

4. Summary of COSO 2004 Components

a. Internal Environment

b. Objective Setting

c. Event Identification

d. Risk Assessment

e. Risk Response

f. Control Activities

g. Information and Communication

h. Monitoring

5. Crisis Management ERM (Low Probability/High Financial Impact Risks)

a. Avoidance

b. Preparation

c. Recognition

d. Containment

e. Resolution

f. Reputation Advancement (i.e., Profiting)

B. Challenges to Effective ERM

1. Barriers to Effectively Implementing COSO 2004

a. Board of Directors or Senior Executive Resistance

b. Improper Understanding of the Need for Top-Down Buy-In

c. Overly Narrow Perceptions of ERM

d. Rushing the Implementation of a Framework

e. Use of ERM as a Dynamic Process

f. Poor Understanding of Formal Risk Measurement Tools

2. Developing a Risk Portfolio Perspective

3. Moving From Risk Assessment to Risk Management

4. Monitoring and Improving ERM Framework

C. Summary

III. Performance Measurement From an Internal and External Perspective

Introductory Material

A. The Relationship Between Internal and External Performance Measurement

1. The Changing Business Environment

2. External Nonfinancial Information Reporting

B. Measuring and Communicating Performance Internally

1. Understanding Business Processes (vs. Functional Departments)

a. Business Process Identification

b. Process Owner Selection

c. Harmonizing Core Processes and Organizational Management Structures

d. Potential Benefits of a Business Process Orientation

2. Coordinating Performance Measurement With Organizational Strategy

a. Balanced Scorecard

b. Beyond the Balanced Scorecard: Performance Measurement Models

(1) Strategy Maps

(2) Causal Models

C. Reporting Performance Externally

1. External Pressure to Report Transparent Performance Measurement Information

a. Opposing Viewpoints Concerning Increased Information Reporting

b. The Demand for More Transparent Reporting

c. Financial Reporting to Shareholders

(1) Economic Value Added

(2) Pro Forma Reporting

(c) Limitations of Financial Reporting

d. Incorporation of Nonfinancial Performance Measures

e. Reporting to Stakeholders Other Than Shareholders

(1) Companies as Countries Analogy

(2) Stakeholder Concerns vs. Shareholder Concerns

(2) New Public Demands for Accountability

(a) Case Study: Coca-Cola

(b) Case Study: Wal-Mart

(c) Case Study: Gap Inc.

2. Corporate Sustainability Reporting (CSR)-a.k.a. Triple Bottom Line (TBL)

a. Frameworks for CSR/TBL

(1) Global Reporting Initiative

(2) Other Frameworks

(a) Social Reporting

(b) Environmental Reporting

c. Economic Reporting

3. Limitations of CSR/TBL

a. Board of Director or Senior Management Resistance

b. Lack of Reliable Measures

c. Lack of Agreed-Upon Standards/Framework

d. Lack of Independent Assurance

IV. Benefits of Linking ERM and Performance Measurement

Introductory Material

A. Transparency as a Reputation Driver for Companies

1. ERM More Transparent Than Traditional Financial Reporting

2. Performance Measurement Critical for Relevant and Reliable ERM Reporting

3. Linking ERM and CSR Through Effective Performance Measurement Enhances Perceived Value to Boards of Directors and Senior Management

a. Case Study: Wal-Mart

b. Case Study: Costco

B. Need to Report ERM Performance Externally

C. Unresolved Issues

V. A Model Linking ERM and Performance Measurement

Introductory Material

A. Adapting COSO 2004 for Performance Measurement Application

1. Specifying Measures for Residual Risks Within an ERM Framework

a. Internal Environment

b. Objective Setting

c. Event Identification

d. Risk Assessment

e. Risk Response

f. Control Activities

g. Information and Communication

h. Monitoring

2. Measuring Costs of Risk Responses

3. Assessing Costs Versus Benefits of Risk Management Strategies

a. Accepting a Risk

b. Avoiding a Risk

c. Sharing a Risk

d. Reducing a Risk

e. Wendy's Chili Crisis

B. Linking Actions to Value

1. Quantifying Performance Measurement

2. Actions to Value Model

a. Time Horizon

b. Applying the Actions-to-Value Model to a Risk Management Scenario

C. Preparing to Communicate ERM Performance

1. Assessing Validity and Reliability of ERM Performance Metrics

2. Assessing Risks of Publicly Releasing ERM Performance Metrics

D. Evolving CSR/TBL-Reporting ERM Performance Through the Stakeholder Accountability Report

1. Format of the Stakeholder Accountability Report

a. Identifying Stakeholders

b. Identifying and Mapping Issues

b. Linking ERM Performance Measures to Stakeholder Concerns

2. Sample Stakeholder Accountability Report

VI. Conclusions

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 COSO 1992 Internal Control Framework

Worksheet 2 COCO 1995 Control Framework

Worksheet 3 COSO 2004 ERM Framework

Worksheet 4 ROSECO's Core Business Processes

Worksheet 5 Mobil Corporation, U.S. Marketing and Refining, Balanced Scorecard

Worksheet 6 St. Mary's / Duluth Clinic Health System's FY 2002 Strategy Map

Worksheet 7 The Revised Model: The Employee-Customer-Profit Chain

Worksheet 8 Comparison of Revenue of Top 10 U.S. Publicly Held Companies to Gross Domestic Product of Various Countries

Worksheet 9 Typical Stakeholders for U.S. Publicly Owned Organizations

Worksheet 10 GRI 2002 Guidelines - Suggested Social Performance Measures

Worksheet 11 Excerpt From ExxonMobil's 2005 Corporate Citizenship Report (p. 25)

Worksheet 12 Excerpt From ExxonMobil's 2005 Corporate Citizenship Report (p.68)

Worksheet 13 GRI 2002 Guidelines - Suggested Environmental Performance Measures

Worksheet 14 Auditors' Report of Starbucks' Corporate Sustainability Report

Worksheet 15 General Electric's Corporate Governance Commitment to Transparency

Worksheet 16 Benefits of Transparency Commitment at General Electric

Worksheet 17 Hypothetical Examples of Balanced Scorecard Measures for COSO ERM Framework Risk Categories for Wal-Mart

Worksheet 18 Example of Integrated Balanced Scorecard and ERM Framework for Supply Chain Management

Worksheet 19 Excerpts From Al Gore and David Blood's Wall Street Journal Op-Ed on Accounting and Reporting on Environmental Costs

Worksheet 20 Excerpts From USA Today Cover Story on Starbucks

Worksheet 21 Stakeholder Engagement at General Electric

Worksheet 22 Wendy's Wall Street Journal Opinion Editorial

Worksheet 23 General Electric's Approach to Stakeholder Engagement

Worksheet 24 Excerpt From GE 2006 Citizenship Report on Stakeholder Engagement

Worksheet 25 2005 CSR Report for Shell

Worksheet 26 Student Example - Stakeholder Accountability Report for Pfizer

Worksheet 27 Student Example - Stakeholder Accountability Report for Timberland

Worksheet 28 Student Example - Stakeholder Accountability Report for Ben & Jerry's

Bibliography

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UNOFFICIAL

Books and Articles