Bank of Montreal 2012 Annual Report Download - page 81

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Board of Directors is responsible for the stewardship of BMO and
protecting the interest of BMO’s shareholders. The board, either
directly or through its committees, is responsible for oversight in the
following areas: strategic planning, defining risk appetite, identi-
fication and management of risk, capital management, promoting a
culture of integrity, governance, internal controls, succession planning
and evaluation of senior management, communication, public dis-
closure and corporate governance.
Risk Review Committee of the Board of Directors (RRC) assists the
board in fulfilling its oversight responsibilities in relation to BMO’s
identification and management of risk, adherence to risk manage-
ment corporate policies and procedures, compliance with risk-related
regulatory requirements and evaluation of the Chief Risk Officer.
Audit and Conduct Review Committee of the Board of Directors
assists the board in fulfilling its oversight responsibilities for the
integrity of BMO’s financial reporting, effectiveness of BMO’s internal
controls and performance of its internal and external audit functions.
Chief Executive Officer (CEO) is directly accountable to the board for
all of BMO’s risk-taking activities. The CEO is supported by the Risk
Management Committee and its sub-committees, as well as Enter-
prise Risk and Portfolio Management.
Chief Risk Officer (CRO) reports directly to the CEO and is head of
Enterprise Risk and Portfolio Management (ER&PM). The CRO is
responsible for providing independent review and oversight of
enterprise-wide risks and leadership on risk issues, developing and
maintaining a risk management framework and fostering a strong risk
culture across the enterprise.
Risk Management Committee (RMC) is BMO’s senior risk committee.
RMC reviews and discusses significant risk issues and action plans that
arise in executing the enterprise-wide strategy. RMC provides risk
oversight and governance at the highest levels of management. This
committee is chaired by the CRO.
RMC Sub-committees have oversight responsibility for the risk and
balance sheet impacts of management strategies, governance, risk
measurement and contingency planning. RMC and its sub-committees
provide oversight over the processes whereby the risks assumed
across the enterprise are identified, measured, monitored and
reported in accordance with policy guidelines and are held within
delegated limits.
Enterprise Risk and Portfolio Management (ER&PM) provides
independent oversight of the credit and counterparty, operational and
market risk functions. It promotes consistency of risk management
practices and standards across the enterprise. ER&PM facilitates a
disciplined approach to risk-taking through the execution of
independent transactional approval and portfolio management, policy
formulation, risk reporting, stress testing, modelling, vetting and risk
education responsibilities. This approach seeks to meet enterprise
objectives and to ensure that risks assumed are consistent with BMO’s
risk appetite.
Operating Groups are responsible for managing risk within their
respective areas. They exercise business judgment and seek to ensure
that policies, processes and internal controls are in place and that
significant risk issues are appropriately escalated to ER&PM.
The Board of Directors, based on recommendations from the RRC and
the RMC, delegates the setting of risk limits to the CEO. The CEO then
delegates more specific authorities to the CRO, who in turn delegates
them to the Operating Group CROs. These delegated authorities allow
the officers to set risk tolerances, approve geographic and industry
sector exposure limits within defined parameters, and establish under-
writing and inventory limits for trading and investment banking activ-
ities. They are reviewed and approved annually by the Board of
Directors based on the recommendation of the RRC. The criteria whereby
these authorities may be further delegated throughout the organization,
as well as the requirements relating to documentation, communication
and monitoring of delegated authorities, are set out in corporate policies
and standards.
Risk Culture
At BMO, we believe that risk management is the responsibility of every
employee within the organization. Our strong risk culture shapes the
way we view and manage risk and is evident in the actions and behav-
iours of our employees and groups as they identify, interpret, discuss
and make choices in the face of both opportunity and risk. Our risk cul-
ture is deeply rooted across the enterprise, including our acquired busi-
ness, where we have aligned our risk culture, risk appetite and risk
management frameworks, policies and practices this past year.
Our risk culture encourages engagement between ER&PM and the
operating groups, contributing to enhanced risk transparency and open
and effective communication. This promotes an understanding of the
prevalent risks that our businesses are facing and facilitates alignment
of business strategies within the limits of our risk appetite, leading to
sound business decision-making. We encourage the escalation of con-
cerns regarding potential or emerging risks to senior management so
that they can be evaluated and appropriately addressed. Additionally,
we support a two-way rotation system that allows employees to
transfer between ER&PM and the operating groups in order to effec-
tively embed our strong risk culture across the enterprise.
To enhance our risk management capabilities and support the
ongoing strengthening of our risk culture, we continue to add learning
opportunities and expand our delivery of risk training across the enter-
prise. Our educational programs are designed to foster a deep under-
standing of BMO’s capital and risk management frameworks across the
enterprise, providing employees and management with the tools and
awareness required to fulfill their responsibilities for independent over-
sight regardless of their position in the organization. The principles that
support our approach to risk management provide a consistent frame-
work for our risk curriculum. This education strategy has been developed
in partnership with BMO’s Institute for Learning, our risk management
professionals, external risk experts and teaching professionals. Our
credit training programs provide role-specific training and practice in
sound risk management as a prerequisite to the granting of appropriate
discretionary limits to qualified professionals.
Risk Principles
Risk-taking and risk management activities across the enterprise are
guided by the following principles:
‰ER&PM provides independent oversight of risk-taking activities across
the organization;
‰management of risk is a responsibility at all levels of the organization,
employing the three-lines-of-defence approach;
‰ER&PM monitors our risk management framework to ensure that our
risk profile is maintained within our established risk appetite and
supported with adequate capital;
‰all material risks to which the enterprise is exposed are identified,
measured, managed, monitored and reported;
‰decision-making is based on a clear understanding of risk, accom-
panied by robust metrics and analysis;
78 BMO Financial Group 195th Annual Report 2012