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Corporate Risk Management resources

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Introduction The theory of corporate risk management has changed a lot in years. And so has corporate practice, mainly in ways predicted25the past by the theory. In the 1980s and well into the 1990s, most large companies had a “risk manager” whose main job was to oversee the fi rm’s insurance purchases. At the same time, fi nancially savvy corporate trea sur ers, with little or no input from risk managers, began using newfangled securities called “derivatives” to hedge the fi rm’s interest rate and currency exposures. In many of these compa- nies, especially those where the trea sury was encouraged to view itself as a profi t center, the trea sur ers followed a practice known as “selective hedging.” In practice, selective hedging meant leaving exposures unhedged (or, in some cases, maybe even enlarging them) when so directed by the trea sur er’s “view” of future prices. The main purpose of such hedging was to pad or smooth the corporate profi t and loss statement, with the idea that shareholders place a pre- mium on earnings stability, no matter how achieved. But in the last 10 years, the scope and mission of corporate risk manage- ment have expanded well beyond insurance and opportunistic hedging to in- clude all kinds of corporate operating and strategic risks. And, as oversight and control of these once compartmentalized activities has become more central- ized, the corporate risk manager has given way to the “chief risk offi cer,” a se- nior management function increasingly overseen by the board of directors. In many companies the mission of corporate risk management, once concerned mainly with smoothing out bumps in the earnings trajectory, has become pro- tection of the fi rm’s major rm’s “franchise value”—that is, protection of all the fi sources of future earnings power. As Bob Anderson, executive director of the Committee of Chief Risk Offi cers, notes in the roundtable discussion that ends this book, corporate risk management is no longer “just a series of isolated transactions; it’s a strategic activity . . . [that] encompasses everything from

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