macquarie.com.au  2014 Annual Financial Report  Macquarie Group Limited and its subsidiaries  Risk Management Report  continued  Macquarie’s risk culture is well established Risk governance structure Risk management is sponsored by the Macquarie Group  Board (Board), and is a top priority for senior managers,  starting with the Managing Director and CEO (CEO).  The Head of RMG, as Macquarie’s Chief Risk Officer (CRO),  is a member of Macquarie’s Executive Committee and  reports directly to the CEO. The CRO has a secondary  reporting line to the Board Risk Committee that approves the  replacement, appointment, reassignment or dismissal of the  CRO.  Macquarie recognises that an effective risk management  framework involves more than just robust controls.  Macquarie's risk culture, which is less tangible, is equally  as important and at Macquarie the risk culture remains  strong and controls are respected by staff. Risk culture is  established and maintained in the organisation broadly  through three steps:  Setting expectations -  The Board sets expectations  regarding appropriate behaviours and oversees  performance.  Leading and executing -  Management implement these  expectations by their leadership actions and communication,  organisational governance, incentives and consequences as  well as establishing appropriate capability.  The Board oversees the risk appetite and profile of  Macquarie and ensures that business developments are  consistent with the risk appetite and goals of Macquarie.  Monitoring and measuring -  Effectiveness is assessed and  reported to allow adjustment and refinement as necessary.  Key aspects supporting Macquarie's risk culture include: Committee. The Board Risk Committee reviews and  endorses Macquarie's risk management framework which  includes the establishment of policies for the control of risk.  All Board members are members of the Board Risk  The Board Risk Committee receives information on the risk  profile of Macquarie, breaches of the policy framework and  external developments that may have some impact on the  effectiveness of the risk management framework. It also  approves significant changes to risk management policies  and framework and approves Macquarie’s risk appetite. The  Board Risk Committee is assisted by the following  Committees: GLYPH<150> The Board Audit Committee (BAC) monitors the  effectiveness of internal controls with Macquarie’s  management, the Head of Internal Audit and the  external auditor. The BAC also monitors and reviews  the effectiveness of the external auditors and the  Internal Audit and Credit Assurance functions GLYPH<150> The Board Remuneration Committee liaises with the  Board Risk Committee and the CRO to ensure there is  a properly integrated approach to remuneration that  appropriately reflects risk GLYPH<150> The Board Governance and Compliance Committee  (BGCC) reviews Macquarie’s corporate governance  arrangements and compliance matters. The BGCC  also has oversight of Work Health and Safety and  environmental matters on behalf of the Board.  GLYPH<150> Macquarie's businesses are fundamentally client  based . Therefore, across Macquarie, greater emphasis  is placed on fostering long-term relationships with our  clients and building franchise businesses as opposed  to short-term profits from proprietary trading GLYPH<150> Consideration of worst-case scenarios is part of  everyday risk controls rather than supplementary to  them . Even though the worst case scenarios are often  in excess of what has been historically observed, they  play a major role in influencing and limiting positions  particularly for extreme loss events. For example, we  apply limits to contingent losses from an instantaneous  40 per cent gap move in stock prices. This effectively  constrains trading divisions from issuing well out of the  money options and encourages hedging of extreme  loss events. We have over 14,000 contingent loss limits  that consider a variety of worst case scenarios GLYPH<150> The role of risk management staff is one of active  engagement in risk-taking decisions . In accordance  with the principle of risk ownership, the primary risk  analysis and initial decisions to reject or accept a  transaction are taken by Operating Groups. In its review  of a new proposal, RMG provides an independent  confirmation of the risk acceptance decision. RMG  works closely with the deal team and shares the goal  of making the transaction successful by requiring  improvements to the transaction terms where  applicable. Strong emphasis is placed on transferring  knowledge to transaction teams so that the same risk  management principles are applied to future proposals  from an early stage  GLYPH<150> Macquarie’s remuneration policy for senior  management encourages a long-term view in  decision making . It discourages excessive risk taking  as incentives are aligned with the long-term profitability  of the firm through retention of remuneration and equity  participation. The principles behind our current  remuneration structure have been in place for  many years. Committees exist at the executive management level to  ensure that the necessary elements of expertise are focused  on specific risk areas. The Macquarie and Macquarie Bank  Executive Committees and the Macquarie Operations  Review Committee focus on strategic issues, operational  issues, material transactions and the management of risk  and review the performance of Macquarie on a monthly  basis. Beneath this level, there are other committees where  senior specialists focus on specific risks as appropriate. The  Market Risk Committee and Asset and Liability Committee  are examples of these committees.  While committees oversee Macquarie’s risk appetite and  acceptance process, risk acceptance decisions are  ultimately delegated to individuals to ensure that approvers  are individually accountable when signing off on risk  acceptance decisions.  24 