Don’t panic over risk
Risk management is seen by corporates as a key way to deal with the uncertain world in which they operate. The sophisticated views on risk management demonstrated at the recent ACT/AIRMIC breakfast briefing have come a long way from risk management’s humble origins in the insurance industry in the 1970s and 1980s.
The early focus was on protecting against catastrophe and unaffordable potential losses. But in the last few years risk management has been evolving from little more than business intuition through analytical thinking into a formal way of describing and communicating the controls in place to influence outcomes. At the breakfast briefing John Hawkins looked back to the 1990s, when it became popular to produce a register of risk and try to identify products that were capable of mitigating two or more risks simultaneously, or a single risk for a longer period than was usually the case. Examples include insurance policies covering a wide variety of crime and fidelity risk – indeed, the breakfast briefing was sponsored by insurance company Zurich – average rate currency options and multiple trigger insurance policies.
When the first seeds of corporate governance were sown, risk management became strongly associated with financial controls. Now risk management is being asked to embrace wider business issues. Physical, operational, brand, reputation as well as financial, are all risks which have increased as a result of changes to the way that all sizes of enterprise do business.
In a globalised world, corporates need to look to build a broader framework for defining and attempting to manage a universe of possible threats. In particular there is interest in identifying and managing critical risk interdependencies. Companies that suffer the greatest loss do so because they are exposed to more than one type of risk. Unanticipated interdependence of risk can turn a small event into a company-wide threat. For treasurers this has led to a renewed interest in the technique of Value at Risk (VaR). While not a panacea, VaR has wide applications and is becoming a valuable weapon that is increasingly being deployed beyond conventional treasury.
This interest in a process-oriented re-examination of integrated risk management is bringing benefits, but those responsible for risk need to keep their perspective. While it may be possible to imagine a series of events which could destroy shareholder value, it is still unlikely that they will occur. Some rare events simply cannot be prevented. Instead, companies should assess how to work around them as far as possible by adjusting operational and capital structures.
Risk management can be improved in corporates, but an active risk culture is not the same as one marked by fear and paranoia. The analysis and management of risk should not be confused with the refusal or the lack of desire to actually take a risk if the risk is balanced by the appropriate returns. Treasurers know more than others that in business as in life risk can only be managed not eradicated.
PETER WILLIAMS
Editor
Treasurers urged to concentrate on right risks
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