EuroFinance 2012: Risk Management: Touching the Void

27 Sep 2012

Joe Simpson, mountaineer and author of ‘Touching the Void’, gave the participants at EuroFinance 2012 in Monaco a taste of what it means to be a diehard risk taker. What risks to look out for and how to manage them were two issues discussed during the second day of the conference operating under the theme of stability.

The highlight of day two of EuroFinance 2012 was ‘Touching the Void’ author and mountaineer Joe Simpson, the ultimate risk taker. He recounted his and Simon Yates's disastrous and nearly fatal climb of Siula Grande in the Peruvian Andes in 1985.

Despite meticulously planning the climb for more than two years, the unpredictable weather conditions and unstable mountain terrain during their descent led to a bad fall by Simpson, shattering his leg. Yates and Simpson continued down the North Ridge face as night fell, dehydrated and frostbit, but unable to stop because they “had not brought an extra canister of gas for the stove”. Simpson indicated this was the one piece of kit that could have been a game changer during their descent.

Tragically as Yates lowered Simpson down the mountain, the latter fell off a cliff. Because of the bad weather conditions, neither could hear nor see the other. Yates had little choice but to cut the rope in order to save his own life and Simpson fell down a crevice. However, he survived the fall and managed to crawl back to base camp alive.

Simpson’s harrowing account highlighted the fact that in these volatile times, you cannot plan for the unpredictable event. Yet risk management, which has become increasingly part of the treasurer’s remit, must encompass more than just the immediate risks faced by a company today. The strategic treasurer is now identifying key risk indicators (KRIs) and how they are interconnected in order to get a true picture of the risks.

In the plenary session entitled “It’s the Chequered Flag: The End of the World as We Know It?”, Alyson Warhurst, chief executive officer (CEO) and founder of Maplecroft, outlined the changes in the global economy, specifically the growth of emerging economies.

Although businesses need to be in these geographies, there are a number of risks outside operational and business that corporates need to consider:

• Legal and regulatory.
• Conflict and terrorism.
• Corruption and lack of corporate governance.
• Human rights.

These risks can conflate with exacerbaters, such as natural disasters, climate change and risk of hydro-meterological disasters, emergence of infectious diseases and food security.

“Many corporates do not look at the interrelation between these risks, which is a very important dimension,” said Warhurst. “For example, Egypt was a fast growing economy, but suddenly [during the political protests] corporate supply chains fell apart.”

James Lam, president, James Lam and Associates and author of ‘Enterprise Risk Management’ (ERM), outlined how corporate could minimise unforeseen risk factors by integrating ERM and business strategy. He said that corporate needed to:

1. Define their business strategy.
2. Establish key performance indicators (KPIs).
3. Identify risks.
4. Establish KRIs.
5. Provide integrated monitoring with regards to points one to four.

Lam said that it was important for corporates to identify the few scenarios that would ‘break the bank’ and set up an early warning system. He also warned against not just black swan events, but the “grey swans”, or events that are now just part of a faster-changing and more uncertain world.

Developing Risk Policies for New Markets

Iain Wetherall, head of corporate finance at Wizz Air, presented a workshop outlining the characteristics that define risk in new markets. The Hungarian low-cost airline, which will celebrate 10 years in operation in October, has 16 operating bases in nine central and eastern European countries. It has experienced a 10%-15% growth year-on-year and has just opened up another route to Geneva with 50 new routes planned for next year.

The main characteristics of new markets include:

1. Growth rates: high top line growth, but inflation may be an issue.
2. Culture: different market policies and mentality.
3. Workforce: young versus old generation.
4. Technology: various levels of penetration.
5. Distribution channels: medium to weak; fragmented regional markets.
6. Infrastructure: medium to weak.
7. Social networks: varying degrees of emigration/immigration.
8. Regulations: stability of governments; regulatory and fiscal changes.
9. Exchange controls: varying degrees of money flow in and out, and this can change quickly.
10. Pace of change: rapid.

Wetherall was quick to point out that with risk policies, “one size does not fit all”. He listed a number of traditional risk concerns that is normally associated with emerging markets, such as foreign exchange (FX), convertibility and liquidity, devaluation, payments and collections, and corporate governance, including bribes and taxation.

“Operating in new markets is really a mixture of the good, the bad and the ugly,” said Wetherall. “The good includes exciting growth, operating a profitable business model and strong corporate governance. My advice is that slow and careful planning is key to success.

“The extreme bureaucratism is the bad. But it is important to remember that in many cases there is a reason behind the madness. The ugly is the cultural differences. These can result in sudden and unexpected changes which may turn a business model on its head.”

This blog was first published on www.gtnews.com.