by Fred Cohen, Managing Director, Perception Advisors, Retired PricewaterhouseCoopers Partner, and Reval Board Member
The economic turmoil over the past two years stemming from the global financial crisis and the European sovereign debt crisis should cause companies to reassess their exposures and risk comprehensively over the long and short term. The assessment should include not only their interest rate, foreign exchange and commodity exposures, but also new exposures caused by changes to their global value chain. But for many multinationals, development of a sound risk management programme continues to be an elusive goal.
According to PricewaterhouseCoopers’ 2010 Global CEO Survey, 80% of senior executives say they expect to change the way they manage risk; however, only 37% say that their companies link key risk indicators with key performance indicators, and of those, only half say they employ risk-adjusted performance metrics. Where companies have closely linked material exposures with risk mitigation on a risk-adjusted basis, a disconnect in performance is less likely to occur. During periods of abnormal market fluctuations the natural tendency is to focus unduly on the market prices rather than on changes in underlying exposures, resulting in unrealistic performance measures. The challenge is, then, to maintain the risk and control elements of a comprehensive risk mitigation strategy while markets are highly volatile and discourage poorly designed rapid responses that might not result in an acceptable long-term result.
The CEO and CFO must provide the leadership and the resources to ensure that a comprehensive exposure assessment is performed across the entire company.
Let’s examine the core elements of a structured risk mitigation programme that would protect multinational companies during periods of significant market volatility. The successful development of such a programme rests on strong commitment and involvement of the corporate leadership team, broad management involvement across the value chain — from product design through sales — disciplined hedging practices and transparent reporting of performance results.