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					               Actuarial Society of Hong Kong



Risk Management from the
Corporation’s Perspective –
What are the Hot Buttons


Mr. Bernard Fung
Chairman & CEO - Aon Asia Pacific
29th January, 2008 - Venetian Macau

                                            1
Major Trends

 80’s – Age of Quality



 90’s – Age of Reengineering



 Millennium – Age of Speed & Velocity!!




                                          2
Major Trends
Speed & Velocity a result of :-
  Globalisation
  Technology
  Value Creation and Destruction
  Emerging Markets – China, India
  Stakeholder Activism
  Climate Change




                                    3
Result of Speed & Velocity
 The elimination of time and distance will result in shorter
 decision time frame
 Shorter decision time frame will result in more mistakes
 The prevention, mitigation of mistakes will be a key
 focus for organisations.




                                                            4
Hot Buttons
1. Natural Disasters / Climate Change
2. Corporate Governance
3. Food and Products Safety




                                        5
Major Risks
1. Natural Disasters
     San Francisco Earthquake
                                       US$6 billion event
     Hurricane Hugo in 1989
     9/11
                                       US$20 billion event
     Hurricane Andrew
     Katrina, Wilma and Rita           US$60 billion event
     California Fire



     The Magnitude of risk is increasing
     The frequency of major Natural Disasters is less
     predictable
     The impact of climate change on natural disaster is
     unknown (complexity is rising)


                                                             6
Major Risks
1. Natural Disasters
   Given changing frequency and severity
   – Adequacy of conventional insurance as effective mean of risk
     transfer has to be re-evaluated
   – Financial instrument, e.g. Catastrophic Bonds, Contingent
     Capital, Option, becoming more popular, e.g. The Catlin Cat
     Bond
   – Habitats and urban planning need to take new factors into
     considerations, e.g. Singapore
   – New predictive models needs to be built
   – Loss prevention needs to receive National level attention and
     collaboration



                                                                     7
Major Risks
2. Corporate Governance
  – “A system of structures and processes to direct and control
    corporations and to account for them”
                                                   Neubauer and Lank, 1998

  – “Corporate governance is concerned with the processes by which
    corporate entities, particularly limited liability companies, are governed;
    that is, with the exercise of power over the direction of the enterprise,
    the supervision of executive actions, the acceptance of a duty to be
    accountable and the regulation of the corporation within the jurisdiction
    of the states in which it operates…”
                                                         Robert Tricker, 1994




                                                                              8
  The Modern Corporation
                    System and Accountability


                          Owners (Shareholders)
                          Owners (Shareholders)

                                      appoints
                            Board of Directors
                            Board of Directors
                                      appoints
                              Management
                              Management


Government
Government   Employees
             Employees   Customers
                         Customers     Community
                                       Community   Suppliers
                                                   Suppliers   Shareholders
                                                               Shareholders




                           Stakeholders

                                                                      9
Some Cases of CG Failure
Enron
 Unremitted quest to improve financial performance and share
 price (ethics)
 Weak accounting control, complex transactions and use of
 SPVs
 Senior management with weak ethics
 Lack of independence of Board members & Audit committee
 Complicity of bankers, business partners, auditors
 Lack of independence between Chairman & CEO


 Stakeholders injured – shareholders, staff, bankers, auditors
   (Arthur Anderson), Pensioners, Counterparties to derivative
                             trades

                                                                 10
Some Cases of CG Failure
Worldcom
 Telecom being a highly competitive and complex business
 The consolidation of the industry meant survival for fittest
 Need to keep share price high for acquisitions, e.g. MCI
 Failure to integrate business (operationally & culturally)
 resulted in failure to serve customers
 Complex nature of accounting for telecom business
 Board’s support of CEO without sufficient objectivity
 Support by analysts (Smith Barney)


  Stakeholders injured – shareholders, staff (stock option),
           business partners, bankers, auditors etc

                                                                11
Cases of CG Failure
Closer to Home
  Bank of China HK – misuse of funds
  海域集團 – disappearing funds

  Public Company / Private Company phenomena in Asia

  Insider trading, minority interests right

  Employment of child labour in emerging countries, e.g. China, India

  Environment degradation as a result of development, e.g. Coal,
  Nuclear power




                                                                    12
Major Risks
3. Food and Products Safety
     The Melamine Contamination – An example of speed of spreading
         We are not prepared to effectively manage and rapidly mitigate
         the effects of a major bio-event within the food supply
         infrastructure!
         Products Recall
     Animal and plant diseases and pests
     Smuggling of prohibited food items
     Impact of emerging markets, e.g. China
     The Global system of food trading




                                                                          13
   Melamine Contamination Timeline
                                                                    Hogs Confirmed Contaminate
Gluten Contaminated In China
                                                              Company Recall

                                        Poultry Fed Melamine Feed



2006                                              2007
Aug     Sep      Oct           Nov     Dec        Jan      Feb           Mar    Apr     May


                Pet Food Produced                 First Death Reported


                                Animal Illnesses Begin           Melamine Identified


                                                                               Confirmed Poultry
                                                                               Fed Melamine Feed




                                                                                          14
China’s Position in Food Exports to USA
   There were over 4,500 importers of food & agriculture products
   from China in 2006 - accounts for 3.5% of food & agriculture
   products imports
   China is in the top 5 in imported:
   Fish/Crustaceans (#2)        Vegetables (#3)        Cereal/Starch (#4)
   Meat/Fish Preps (#3)         Vegetable/Fruit Preps (#2)
   Actual imports from China unknown due to ingredients & trans-
   shipments
   FDA rejected more than twice as many food shipments from China
   as from all other countries combined
   Growth of Chinese food product exports to the US will grow
   exponentially in the next decade!

       CBP is developing rapid response procedures to food
       contamination events and mechanisms to address risks
                    from Chinese food products


                                                                        15
                   Growth in Asian Food Exports to USA

                       $4,000,000
Food Imports ($1000)




                                                                            China Total
                       $3,000,000
                                                                            Indonesia Total
                                                                            Malaysia Total
                       $2,000,000
                                                                            Philippines Total
                                                                            Korea Total
                       $1,000,000                                           Thailand Total
                                                                            Vietnam Total
                               $0
                                    2001   2002   2003 2004   2005   2006

                                                    Year

                                                                                          16
International Food Contamination
An Ongoing Issue in China
  1997: Insecticide contaminated pork provided to villagers by
  another resident (44 ill)
  1999: Nitric acid contamination of donkey soup by competitors to
  the food vendor (148 ill)
  1999: Rat poison contamination of sweet rolls by competitors to the
  food vendor (48 ill)
  2001: Rat poison contaminated noodles by a competitor to the food
  vendor (120 ill)
  2002: Rat poison contaminated school lunch (92 ill)
  2002: Rat poison contaminated breakfast by a competitor to the
  food vendor (400 ill, 41 dead)
  2003: Rat poison contaminated school breakfast (>60 ill, 15 dead)
  2003: Rat poison contaminated dinner at a funeral (23 ill, 10 dead)
  2007: Rat poison contaminated breakfast cereal (202 ill, 1 dead)

                                                                        17
China’s Food Safety System
Complex & Distributed
      5 ministries hold responsibility for food safety
      Much of the authority is at the local level (800 national vs 8,000 local
      agricultural standards)


System Is in Transition
      China shuts 180 food factories for using illegal chemicals
      China inspectors find one-fifth of goods substandard
      Formaldehyde found in Chinese cookies
US Executive Order – July 18, 2007
Establish an Interagency Working Group on Import
   Safety


                                                                                 18
Global Food Trade Moving Forward
 Regulatory mechanisms are necessary, but insufficient,
 for rapid, global trade system supportive, risk
 management for imported food safety
 – How can the private sector drive implementation of “best
   practices”?
 – Are there insurance mechanisms that can incentivize migration
   to safety focused, trade supportive practices?




            Inadequate responses to risks



                                                                   19
Top Ten Risks




      Source : AON Global Risk Management Survey 2007



                                                        20
Balancing Risks with Growth
 There are inherent risks associated with every
 organisation’s desire to grow
 The risks landscape is changing (increasing)
 Speed and velocity is adding complexity to risks
 Social tolerance for the consequence of risks is changing
 Risks are converging. eg physical risks, credit risks,
 speculative risks, political risks, reputational risks,
 technology risks, climate risks, IP & talent risks



     A new, holistic approach to managing risks is
                        required

                                                             21
Changing Face of Global Risk
 Misunderstanding risk could be fatal to a business
 Magnitude of risk is rising
 Complexity is rising
 Scrutiny is rising




         The desire to take risk & the ability to
       understand it are the fundamental drivers
             behind our global economy.



                                                      22
Enterprise Risk Management
 Companies need to understand how different sources and
 magnitude of risk could impact their long-term success and
 survival

 Companies should take a holistic approach to risk and
 sustainability

 Because risks are so complex and inter-related, companies
 will need to collaborate with partners and other responsible
 bodies in order to effect change

 Companies should engage with stakeholders to assess,
 manage and share risk.



                                                                23
THANK YOU
  Xie Xie




 谢谢
            24

				
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