Tamer Saka, winner of the StrategicRISK European enterprise-wide risk programme of the year award, describes how he helped to install enterprise risk management in Sabanci Holding

In order to understand how enterprise risk management (ERM) developed in Sabanci Holding, one needs to look at the background.

The group devoted much time and energy in 2003 to enhancing its corporate risk unit. The need for an integrated, systematic and proactive risk management system covering all possible exposures of the group companies was recognised by the senior management. It decided to implement the ERM methodology in an effort to more effectively apply sound risk management methods across the spectrum of the group companies, thus preserving the investments of its shareholders and partners.

In order to coordinate and improve existing risk management practices in the Sabanci Group and its subsidiaries under the surveillance of the CEO, it established its risk management department by the end of 2003. The Sabanci Group, firm to its philosophy of innovative leadership, was the first example of its kind in the Turkish business environment in establishing a risk management department as well as creating the position of chief risk officer (CRO). Within this structure, the CEO is the person ultimately responsible for the success of ERM and the CRO coordinates ERM practices for the efficient implementation of the processes.

Another important unit regarding the organisation of ERM is the risk management committee which consists of executives such as the CEO, CRO, CFO, CIO, COO and CLO. This committee is responsible for identification and implementation of risk management policies and strategies. The organisational structure of the committee is shown in Fig 1.

The main goal of the department is to efficiently implement ERM practices and thus to establish the risk management concept as an indispensable part of the decision-making process throughout our organisation. The key objectives of the risk management approach at Sabanci Holding are as follows:

- to develop a widespread, systematic risk management concept throughout the organisation
- to establish general policy and standards relating to risk management
- to manage risks within defined risk tolerance levels
- to design and implement an effective risk management reporting and information management system
- to integrate ERM, as a proactive process, within the corporate culture so it becomes an important part of the strategic business planning and operational management processes
- to ensure that risks are understood by the practitioners and decision takers at the same level and content.
- to ensure that managers at all levels take risk - that they take the relationship between risk and reward into account in the decision taking process, with performance related to decisions being monitored by the holding group.

ERM framework

In line with its objectives, Sabanci Holding risk management department completed the infrastructure for the Sabanci Holding enterprise risk management system (SA-ERM) as a first step. Deployment of the infrastructure included establishing the methodology, policy, procedures and guidelines necessary for a successful implementation. The system's methodology and resources were shared with a number of the holding's subsidiaries, and this year, the process is continuing with the rest of the Group. Sabanci Holding risk management applications were transformed utilising a six-step plan. (Fig 2)

Within the scope of ERM, Sabanci Holding has set the following foundation principles.

- Risk management is everyone's responsibility; therefore it is an important performance measure
The board of management, senior management and managers of functional units are responsible for understanding and monitoring critical risks relating to their business and taking effective managerial decisions about these risks. Thus, the risks are managed locally but practices and outcome are surveyed centrally.
- Sabanci Holding manages its significant risks through an integrated or portfolio approach
Business processes are established and improved in a manner where the risk-return relationship is maximised and the company gets the maximum benefit. Risks are managed based on the integrated solutions which take all the holding's needs and targets into account.
- ERM is integrated with major business processes
ERM processes are improved and implemented as integrated with the business processes. ERM should not be thought as a stand-alone process like any other business processes. To establish ERM as a normal part of strategic planning, business planning and operational management are the most important objectives.
- ERM will continue to evolve
ERM is a continuously evolving and repeating process. Sabanci Holding aims to create added value and reflect best practices through ERM. Therefore, it is possible to reveal ongoing change and improvement in the organisation through the ERM practices.

To implement ERM transformation effectively, the Sabanci ERM risk model, which is comprised of four basic risk categories, will be used. The risk model considers more than 50 risk factors under the categories of financial risks, operational risks, strategic risks, and external risks.

The resulting risk management process is summarised in Figure 3.

Benefits of ERM

With the implementation of its ERM system, Sabanci Holding has achieved the following.

- Improved corporate governance
SA-ERM assists senior management, the audit committee and board of directors in discharging their governance responsibilities through concise, relevant and timely communications from decentralised operations.
- Focus on shareholder value and realising strategic objectives
SA-ERM creates focus on the risks which have the largest potential impact on shareholder value and strategic objectives. Sabanci Holding anticipates risks before they occur, thereby reducing earnings volatility.
- Reduced costs
The senior management efficiently deploys capital and risk management resources to high risk activities and adopts best practices consistently across business units.
- Better business decisions
SA-ERM enables better business decisions and risk optimisation, based on more sophisticated risk analysis, quantification and modelling, supporting a better understanding of the organisations' risk tolerances.
- Consistency in managing similar risks
SA-ERM puts in place consistent and documented processes for the management, measurement and reporting of key risks across all business units.
- Establish a link between risks
SA-ERM identifies linkages between separate risks so that more meaningful enterprise-wide exposure can be identified and scenario analyses can be performed.

The ERM approach at Sabanci Holding has been well received by international markets. With the help of this positive approach, we have been able to achieve significant improvements in the Sabanci Holding global insurance programme in terms of cost and structure. And we were delighted that the Sabanci Holding ERM approach was rewarded with the first place in the Enterprise Risk Management Programme of the Year category in the 2005 StrategicRISK European Risk Management Awards.

Looking ahead

Sabanci Holding sees and uses risk management as an important factor for achieving its long-term growth objectives. The effective and efficient working of the Holding's risk management division will continue to be a major priority in the future. With the full implementation of the SA-ERM system, Sabanci Holding will be assured that the risk profiles of its subsidiaries are in compliance with the business strategies and risk appetite of the parent company, Sabanci Holding.

As productivity and effectiveness of our risk management activities increase, it will become possible to provide our shareholders with the highest added value that we strive for.

- Dr Tamer Saka is chief risk officer of Sabanci Holding, backed by a team that includes Alper Ugural, manager, and associates Arda Denizhan and Yasemin Altunbas,Tel: (0212) 281 66 00, E-mail: tsaka@sabanci.com

Sabanci Holding in brief

Sabanci Holding is the parent company of the Sabanci Group, one of Turkey's leading industrial and financial conglomerates. The Sabanci Group is composed of 64 companies, many of which are recognised market leaders in their respective sectors. Sabanci Holding's main business ventures range far and wide, encompassing financial services, which include banking and insurance, as well as tyre and tyre reinforcement materials, automotive, food, retailing, chemicals, cement, textile, energy, paper and packaging materials, information technology, tourism and international trading. The companies of the Sabanci Group currently operate in 11 foreign countries.

Capitalising on its strong reputation and instant name recognition, in addition to its positive local relationships and knowledge of and experience in the Turkish market, the Sabanci Group has grown through the expansion of existing core businesses and the formation of joint ventures.

Sabanci Holding's multinational business partners include such prominent companies as Bridgestone, Toyota, Kraft Foods International, Bekaert, Heidelberg Cement, Carrefour, Dia, Hilton International and Mitsubishi.

Sabanci Holding, in addition to coordination of finance, planning and human resources functions, determines the group's vision and strategies, thus creating shareholder value through synergies across the group companies.