Not Just One Man - Barings
 Analysing Sumitomo
 The Causes of the Asian Financial and Ec...
 Lessons From The Collapse Of Hedge Fund,...
 13 Questions on Risk Management


















 

Case Studies

13 Questions on Risk Management

What is the company's philosophy towards financial risks?

Do supervisory board members understand the financial instruments the company uses or owns, particularly derivatives?

Who formulates the firmís guidelines and policies on the use of financial instruments?

Has the board approved these policies?

How can the board foster a risk management culture within the firm?

How does the board ensure the integrity of the risk management system?

Is there a separation of duties between those who generate financial risks and those who manage and control these risks?

What type of financial instruments may the firm use?

How are these financial instruments valued?

Is there a limit system in place?

What are the major risks resulting from financial instruments?

Are senior managers and the board of directors kept abreast of the financial exposures facing the company at any one time?

As a shareholder, how much information on the financial risks of the company can I reasonably expect?

Lapses in risk control often lead to substantial financial losses by a company. Barings, Morgan Grenfell Asset Management, Daiwa and Sumitomo Corporation are household names because they lost huge amounts of money as a result of failures in their control systems. A break-down in risk control eventually costs the shareholder money, directly or indirectly, either by being forced to inject more capital or by seeing the equity loose value when losses resulting from risk control failures become public knowledge.

It is thus within every shareholder's interest (let alone right) to question the company's board and senior management on how the firm manages and controls risk, since good risk management must start from the very top. But what questions can a shareholder justifiably ask you, a director or senior manager? And what reasonable answers can you give?

There follows a list of questions which shareholders should ask their board and senior management. The answers contain risk management and control guidelines which shareholders could use as a template to evaluate whether their company has a firm grip on risk control. The questions are straightforward. The answers may also seem obvious, but then the best risk control systems are based on common sense. However, as experience has shown, common sense does not always prevail among the higher ranks of management in even the most prestigious institutions.
The bare bones of good risk management are summarised in the flowchart below. How they are fleshed out is what makes the difference between a first-class and second-rate risk management system.

vf

Case Studies