Bank of Montreal 2004 Annual Report Download - page 70

BMO Financial Group Annual Report 200466
MD&A
Management’s Discussion and Analysis
Reputation is one of BMO’s most valuable assets. Key compo-
nents of the effective management of reputation risk include:
•fostering a business culture that incorporates integrity and
ethical conduct as core values; and
•promoting a conviction that every business decision must
reflect the enterprise’s core ethical values.
Reputation risk falls under the Operational Risk Framework
as a component of business risk due to operational failure.
Reputation risk is a risk that BMO has always faced. We
believe that active, ongoing and effective management of
reputation risk is best achieved through integration of explicit
assessments of reputation risk into strategy development,
strategic and operational implementation, transactional decision-
making and risk management and control processes.
It is the responsibility of all employees to conduct themselves
in such a way as to maintain and build BMO’s reputation.
Reputation Risk Management Committee – a new management
committee – has been formed to consider potential reputation
risks to the enterprise that are identified in the review and
approval of complex and structured financings. The committee
is also responsible for monitoring overall governance of
reputation risk.
Reputation risk is the risk of negative impacts resulting from the deteri-
oration of BMO’s reputation with key stakeholders. These impacts include
revenue loss, reductions in our customer/client base, costly litigation,
regulatory sanctions and declines in BMO’s share price.
Reputation Risk
BMO is committed to the principles of sustainable development
and, in particular, to the belief that the quality of our lives
improves when economic growth is integrated with respect for
the environment. We implement practices across the enterprise
that reduce waste, conserve energy and recycle materials.
In providing credit to customers, we take reasonable
precautions to ensure that we deal with environmentally
responsible borrowers.
BMO will continue to demonstrate a willingness to work with
government, industry and all relevant constituencies to support
environmental issues. We are committed to open dialogue with
all relevant constituencies including governments, customers,
employees, shareholders and the public at large.
Environmental Risk
BMO faces many risks that are similar to those faced by non-
financial firms, principally that its profitability (and hence
value) may be eroded by changes in the business environment
or by failures of strategy or execution. Sources of these risks
include volatile economic market activity, changing client
expectations, adverse business developments and relatively
ineffective responses to industry changes. Risks to BMO’s
margins and volumes are categorized as business risk due to
earnings volatility.
Business risk due to earnings volatility captures the possibility that
volumes will decrease or margins will shrink with no opportunity being
available to offset the revenue declines with a reduction in costs.
Business Risk due to Earnings Volatility
Operational risk is measured using an actuarial methodology
that combines the likelihood of an operational risk event occur-
ring with the probable loss if it does occur, to arrive at the loss
distribution. The loss distribution is then used to determine the
capital at risk for each line of business.
A tailored measurement process and model are used to
determine the operational risk for each line of business.
Corporate Audit regularly reports on the effectiveness of
internal controls for operational risk and management
processes to the CEO and to the Board’s Audit Committee.
BMO’s goal is to make operational risk, like all other risks,
transparent throughout the enterprise. Therefore, this frame-
work includes regular reporting of relevant operational risk
management activities and processes to senior line and corpo-
rate management, the ORC and the Board of Directors.
Every process included in the operational risk framework is
at a different stage of development. Our approach is to continu-
ously improve each in a way that is useful to business and risk
management while also meeting external needs such as the
Basel II regulatory requirements, anti-money laundering
requirements, Canada Deposit Insurance Corporation standards
and Federal Deposit Insurance Corporation requirements.