Are You Losing Money By Not Managing Your Risks?

Many treasuries recognise they need to manage their competitive and commercial risks in a more disciplined way. The introduction of new codes of practice in recent years, such as Basel II and, to a certain extent, post-Enron paranoia have influenced this trend. Unfortunately, many treasurers are still not sure that they are managing their risks in an effective way. How can they do so and keep in step with changing dynamics of the underlying business? Part of the problem is that “risk management” in isolation is a relatively abstract concept that many treasurers need convincing about what real purpose it can serve. Is it genuinely a “skill” or discipline that can benefit the organisation? The jury is still out on this one for many treasurers.

Dedicated Risk Management

Any competent treasurer knows how to manage risk; otherwise, arguably he isn’t doing his job properly. But how does he prove this, when a client or an internal auditor asks the question “how do you manage your business risks?” One way may be to dust off procedure manuals (assuming they are not out of date). Another is to direct the question over to the person responsible, directly or notionally, for “Control” within the organisation.

These are a few of the tactics used to “answer” this question so that a treasurer can get on with his “real- job”. They often work but times are changing as clients and other interested parties are now starting to press for more detail about a treasurer’s attitude to managing risk, as they in turn need to answer their own clients’ or auditors’ questions, as part of their due-diligence or inspection. A properly structured and/or well-disciplined risk management function can help address this question properly.

Managing Risk

These are some of the ways treasuries have addressed the issue of managing risk:

• Write a risk policy: What should such a document say? Who is qualified to write it? What value does it have?
• Appoint a Treasury Risk Manager: What should this person do? Who should be responsible for what they do? How do you measure whether they are effective?
• Establish a separate process to manage risk: What shape should this take – a risk map, a risk framework? What are these? How do they work? What benefit are they? Is this just added bureaucracy?
• Establish a Treasury Risk Committee: How do you differentiate this forum from other committees and justify crowding an already-congested diary even more? What should the agenda be and most importantly, what should the end-product be?
• Implement risk technology: What is a sensible budget? Will the system be useful? What is the input/output?

One of the problems is how to get started so that you don’t end up in a worse state than you were in at the outset. Some have found that they have woven an intricate web of processes and dependencies that lead to even further confusion; not only within the treasury but also in the way they are perceived from other departments or clients.

Key Questions

First, ask yourself whether a risk management process will make you work more efficiently and improve performance. It is essential that risk management is led, and continues to be driven, from the top. These days, Heads of Treasury, Finance Directors and key stakeholders are acutely aware that in the shareholders’ view, the buck usually stops at their desk when something goes wrong – especially if it costs the company a great deal of money. Is this money that could have been saved in hindsight? Showing that preventive measures were in place could help save your job.

Secondly, decide whether a structured risk management process is absolutely necessary – it can be quite a substantial investment certainly in terms of time. In many cases, it might not be necessary. Are you satisfied that all members of management run their operating units in a way that gives you peace of mind that all the bases have been covered? Or do you need risk management to help reinforce this?

Thirdly, ask whether you ever have time to take a step back and look at your risks in a dynamic way. Do you know where the next loss event is hidden? If you are interested in enhancing performance, ingenuity, efficiency and excellent service are all ways of achieving this, but how do you ensure that standards are maintained and improved? Risk management must complement these and other ways of improving performance. The approach must be dynamic and work in co-operation with the commercial business. It should not just be a reactive support function that operates independently from the key stakeholders in the business.

Today, all major companies are aware of their responsibility to have effective corporate governance procedures in place. There are established ways of assuring shareholders and other interested parties that the company is going someway to achieving this. Risk management has an important role to play in this context but effective risk management must be part of the business. This leads to interesting questions about where the role of a risk manager should actually fit within an organisation. Should the risk manager be part of the corporate governance framework or within the operating units?

Evolution

Many treasurers are reaching a crossroad in their thinking as to how to manage risk more effectively. It is not simply a question of installing a layer of procedure and bureaucracy to show others that they have a “system” in place. Treasurers want more out of a risk management process so that they not only save money but find ways of improving performance by using risk management as a catalyst for creative thinking.

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