There was a full menu of meaty issues for delegates at the ACT Annual Conference to chew on, but risk management was the dish of the day at Edinburgh.
It’s a topic that has been steadily rising up boardroom agendas over many years. Risk management will mean different things to different people, as one of the conference’s keynote speakers, Johnny Cameron, Chairman, Global Markets, RBS, said. But there is a general recognition that its core function is to minimise the impact of financial risk.
The latter has certainly been evident in recent months, with the once mighty dollar regularly crashing to new lows, commodity prices going through the roof, and credit spreads widening from their previously low levels. This has publicly tested the risk management skills of the world’s central banks. Faced with hard choices, treasurers have struggled to balance their vigilance against resurgent inflation with pressure to administer an adrenalin shot of interest rate cuts to flagging economies.
Risk management rarely consists of a single right answer, but a range of options that must be assessed. In today’s environment, it means striking the right balance between risk and reward rather than simply guarding against the shocks that can hit the business.
Harder times also spell opportunity for treasurers. Effective risk management lies at the heart of treasury. So they should grasp the chance to move centre-stage in devising an effective risk management policy, enhancing both their personal and professional standing.
With many companies responding to the chillier economic winds – and protecting shareholder value – by stepping up their hedging activities, treasurers must evaluate their hedging policies. They must be robust enough to respond to the turbulence. Hedging simply because it has always been company policy is not a sufficient reason.
Does the hedge meet the key risk areas of pension liability, interest rates, foreign exchange and inflation? Is the balance of risk versus reward appropriate? Does it create shareholder value? And does it offer strong potential for reducing volatility and thereby keeping shareholders on your side?
Treasurers also need an effective capital structure to support their risk management policy. With lenders driving tighter terms and covenants, companies must keenly monitor the market to benefit from the best opportunities while accessing multiple means of liquidity.
As conference delegates were reminded, many of the messages they heard on effective risk management aren’t exactly new. But as the door firmly closes on the era of cheap and accessible finance, every corporate treasurer should have them at the top of their own to-do lists.
Graham Buck
Reporter
See page 18 for more on The ACT Annual Conference