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CFO Risk management

Shaun Drummond (Australian Financial Review) | April 5, 2011
Companies are now trying to reintroduce years of risk management theory - left in bottom drawers when times were good - and make it work in practice, which brings challenges.

 "We want people in the organisation "to take a risk - that's how we make money", Craig Dunn, chief executive of Australia's AMP, told a conference late last year.

"But we want them to make informed decisions that explicitly recognise risk and we want them to make choices about the risks that they take."

Along with low gearing, some have seen the focus on how a company manages risk as a fashion that will wane with time. That may be so, but either due to the global financial crisis, individual crises or the pace of change, the theory of risk management is now being embedded into day-to-day decision- making process across all sectors.

Almost three-quarters of respondents to a survey of Australian company directors released by law firm Mallesons Stephen Jaques in February said they'd seen a significant upgrade to internal risk management in 2010.

Richard Gossage, head of PwC's risk and control unit, says that even at mid-size-company level "risk management and business management is fusing to be the same thing, which is exactly what you want".

In the fabric of decisions

 Dunn, for one, says taking into account the risks of any investment decision cannot just be added to the already long list of things to consider for those making important decisions. Rather, "it is something that goes to the fabric of every decision they make". But the concepts and language used need to be readily grasped by the majority.

Ideally, as a financial institution, AMP would use risk-based capital as a measure, Dunn says. But instead it has gone for something that is better understood - profit, or "profit at risk". At board level the company determines the variation in profit it is prepared to accept in any year and that sets its "risk appetite" or, to get it into well understood parlance, he calls it "risk budget".

"Most people understand that there is a finite level of capital in an organisation, certainly in the short term, and therefore that has to be deployed or invested wisely," he told the Institute of Actuaries. "That's what we have tried to do at AMP with risk - it is a limited resource that when invested wisely can improve returns for all stakeholders."

It is applied to all major investment decisions, but adjusted according to the return expected in the long term, Dunn says. "When we look at an M&A opportunity now, we will look at the risk budget that acquisition might consume and think about how that compares to our overall level of risk and our appetite for risk. That's meant that in certain instances we put opportunities in M&A to one side because we haven't been comfortable with the level of risk that they will absorb."


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