Widening the risk management net

Managing and analysing risk is a fundamental part of a corporate treasurer’s job – and the most time consuming

Treasurers are now managing a far wider range of risks, including liquidity, regulation and shareholder risk, which might include activist shareholders demanding excess cash is used for dividend payments or share buy-backs.

“Historically, risk management commonly referred to financial risks – in other words, mitigating gains and losses to financial assets that the company holds on the balance sheet due to fluctuations in market rates,” says Greg Person, vice president, global presales and strategic value, at proactive treasury management advisers Kyriba.

In some cases, treasurers are currently being asked to manage additional risks as they gain greater involvement in strategic business decisions. Karlien Porre, co-head of Deloitte’s treasury advisory practice, says treasurers are increasingly becoming involved in the planning of mergers and acquisitions earlier in the life cycle of a deal.

“They are getting involved in the due-diligence stage, planning funding arrangements and possibly putting in place deal-contingent foreign exchange and interest rate hedges,” she says.

Managing all these risks is no insignificant task, but while treasurers may be looking at a wider range of risks than in the past, they are well equipped to do so.

The more risks a treasurer has to manage, the more important it is to have a clear view of what those risks are and many are adopting an holistic approach

“Traditionally, treasury may have deployed its capabilities for the chief financial officer to control revenue uncertainty caused by foreign exchange volatility, in the implementation of a forward rate hedging programme,” says Jennifer Boussuge, head of global transaction services, Europe, Middle East and Africa, at Bank of America Merrill Lynch.

“Now these same risk tools can be used to help the company assess areas such as the desire for inorganic growth versus the balance sheet capacity and brand impact.”

The more risks a treasurer has to manage, the more important it is to have a clear view of what those risks are. In order to achieve this, many treasurers are adopting an holistic approach to risk management.

Risk Appetite

Holistic risk management in treasury is distinct from enterprise risk management, whereby a clear framework is put in place to manage all risks across the organisation. Companies which practise holistic risk management in treasury do so by focusing on treasury-related risks, but with a clear understanding of how those risks interact with each other.

“In my mind, this is about looking at all your risks together,” says Dino Nicolaides, co-head of Deloitte’s treasury advisory practice. “For example, you may have an obligation to pay $10 million in the UK in six months’ time. At the same time, another part of the business in the United States may be due to receive $6 million in six months’ time. If you look at these risks holistically, you may be able to net off some of these exposures such that you only need to hedge $4 million.”

Ms Porre adds that the accounting and tax treatment of this approach may be more complicated, but netting off exposures in this way may still be beneficial.

An holistic approach to risk management also takes into account the interaction between different categories of risk and the actions taken to hedge those risks. A fuel hedge, which is denominated in a different currency to the functional currency of the company, for example, may mitigate fuel costs while generating a new foreign exchange risk which then needs to be understood and managed.

Vita Group, a producer of cellular foams and industrial polymers, manages risk in an holistic way. Chris King, the company’s group treasurer, says Vita Group’s risk management strategy “attempts to take an holistic and balanced approach to risk management, trying to recognise the interaction between the various categories of risk”. The risks managed by the group include liquidity, refinancing, interest rate, foreign currency and counterparty risks, as well as wider financial risks, such as its defined benefit pension scheme, supply chain credit and insurance.

Mr King says an holistic risk management approach allows greater comfort for the board. “If executed correctly, it should also enhance shareholder value by applying cost-effective processes and solutions to reduce volatility, while allowing for a level of commercial and balance sheet risk appropriate for each organisation,” he says.

However, holistic risk management has its challenges, such as ensuring that all the relevant risks are captured and all the interdependencies are adequately understood. “This is a dynamic process, and the balance of those risks changes as the organisation grows or shrinks and as the external markets change,” Mr King explains.

Risk Statistics

In some cases, the role played by the treasurer is expanding to encompass other types of business risk. Around 18 months ago, smoothie maker Innocent Drinks began to strive for a more joined-up way of thinking about risk across the business. “We’re a reasonably small company, so we don’t have an enterprise risk management department or any kind of extra resource to look at group-wide risks,” says treasurer Alison Wilson. “Having shown some interest in this, I said it would be great if I could extend my remit and think about risk across the group.”

The focus of the project has been on introducing a standard risk management language across the business, as well as creating standardised processes and supporting the business units in the use of the relevant tools. These include risk registers, whereby business leaders identify the top risks faced by their business units, by likelihood and impact. As well as financial risks, these might include operational risks, talent risks and trading risks.

“The goal is to think about the consequences for the business unit you’re managing,” says Ms Wilson. “So an event might be unlikely, but it could have very significant consequences, such as drawing senior management time away from running the business.”

By obtaining impact and likelihood scores across different risks, the treasury is able to compare and consolidate those risks to gain a better understanding of the overall risk profile. Ms Wilson points out that risk management is not about avoiding risk. “Our focus is on improving risk management capabilities across the business – identifying, assessing and responding to risk – in order to improve our opportunity to succeed, and limit our potential to fail,” she says.

Ms Wilson says she wouldn’t describe this approach as enterprise risk management. “There are more sophisticated ways of managing risk than what we are doing,” she concedes. But the company has taken a first step towards recognising there are different types of risk across the group which need to be understood in aggregate. “If you don’t do this, you’re going to miss something,” she concludes.