Embracing risk

As the journal of the global derivatives industry, Risk has an important role to play in commending those institutions that have made risk management an integral part of their day-to-day business.

Until recently, the vast majority of our coverage of firms that fit this particular description would have been confined to the largest banking institutions. But that is changing, as risk management – whether it is market, credit or operational risk – becomes part of the fabric of most major corporations, whatever field they operate in.

In this month’s Risk, we profile three such corporations in detail. Each has its own particular challenges to meet and each has come up with a different solution, but what links all three is the top-level focus on managing the risks inherent in their businesses. Most major companies have embraced risk management, with some appointing chief risk officers, setting out defined risk management strategies and putting in risk management systems.

Few, however, have taken this as far as Kansas-based Koch Industries. There are few more complex corporations, and its business is exposed to some of the most volatile markets – such as energy, commodities, and pulp and paper.

But as our profile of Koch’s team on page 52 demonstrates, Koch has placed risk management at the heart of its business strategy. It uses risk analysis to inform many of its major strategic

decisions, with a positive benefit for its results. It is now extending the use of its firm-wide risk management system to areas such as merger and acquisition decisions, proprietary trading, asset and liability management, and liquidity analysis.

Owning a number of the world’s best-known brands is a huge bonus for a company, but selling these products across the globe places a particular challenge in terms of managing risk. That is the situation facing UK-based premium drinks firm Diageo.

Its risk managers have taken the controversial decision to trade the cost of hedging its dollar exposures in favour of an increase in earnings volatility. This could, of course, be as much in anticipation of a strengthening in the dollar as it is a strategic decision.

Where Diageo excels, however, is in the management of the numerous business risks in its portfolio of brands – from sitting on stocks of premium whisky for a decade or more before it can be sold to ensuring rigorous reporting lines for operational issues. We profile Diageo on page 55.

Meanwhile, in an increasingly competitive industry, American Express Financial Advisors has sought to stay ahead of the competition by reinvigorating the risk management process in its family of mutual funds, as we report on page 48.

And while we’re handing out accolades, it is appropriate to mention the profoundly beneficial effect the introduction of a market standard credit default swap index has had on the global high-yield market. We look at the changes in detail in our cover story on page 44.