Fundamentals of Risk Management

stakeholder expectations
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Board-level employee representation involves employee representatives who sit on the 
supervisory board, board of directors or similar structures in companies. These employee 
representatives are directly elected by the workforce, or appointed in some other way, and 
may be employees of the company, officials of organizations representing those employees, 
or individuals considered to represent the employees’ interests in some way.
Board-level representation also differs from other types of indirect participation such as 
works councils in that it attempts to provide employee input into overall company strategic 
decision making rather than focusing on information and consultation on day-to-day 
operational matters at the workplace.
In most cases in western Europe, employee representatives are in the minority, and 
board-level participation is associated with the obtaining of information and understanding 
followed by the expression and exchange of opinions, views and arguments about an 
enterprise’s strategy and direction. In a few cases, however, when employee representatives 
are equal in number to those of shareholders or other parties, issues of control, veto and
real influence over company strategy – sometimes known as ‘co-determination’ – come
into play.
employee representation on the board

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operational risk 
management
operational risk
The importance of managing operational risk has been well established for some 
time. Operational risk may be considered to be the type of risk that will disrupt
normal everyday activities. In many ways, operational risk is closely related to
infrastructure risks described in the FIRM risk scorecard classification system.
Operational risks are usually hazard risks, and historically this has been an area 
of strong application of risk transfer by way of insurance. However, operational risk 
now has a more extensive application and a more specific definition, especially in 
financial institutions. Whilst addressing the same types of risks, operational risk in 
financial institutions is differentiated by the fact that there is a need to quantify these 
risks in terms of potential financial loss.
Financial institutions are required to have sufficient capital reserves available to 
meet the actual and potential financial losses and obligations faced by the organiza-
tion. This is a key requirement of the regulatory framework set out for banks in the 
Basel II Accord and under emerging regulation for European insurance companies 
through the Solvency II European Directive. Therefore, financial institutions need to 
measure the level of operational risk that they face. A major contributing factor to 
the global financial crisis was that banks adopted high-risk strategies that resulted in 
the banks having insufficient capital when the risks materialized.
The capital adequacy regulations that are based on Basel II require that banks 
take their operational risk exposure into account in determining their capital
requirements. This operational risk management framework should include identifi-
cation, measurement and monitoring, reporting, control and mitigation frameworks 
for operational risk. This assessment of capital requirements is often called economic 
capital.
In addition, the regulations require that banks must follow one of three specific 
quantitative methods to provide another measure of capital requirement. This is the 
so-called regulatory capital. Two of the methods are based on the incomes of the
financial institution. The third method requires assessment of all material operational 
risk exposures to a high degree of statistical quality. Under the Solvency II European 
Directive, insurance companies in the EU will have to adopt a similar approach.