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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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May 16, 2008 3:06 PM ET
The drumbeat for the use of enterprise risk management processes at major companies is getting louder thanks to the credit crisis. Federal Reserve Chairman Ben Bernanke said yesterdayThursday that the credit crisis has exposed weaknesses in many financial firms’ risk-management practices. “For risks to be successfully managed, they must first be identified and measured,” Mr. Bernanke noted in a speech. “Recent events have revealed significant deficiencies in these areas.” Apparently, those deficiencies exist at businesses which specialize in identifying and measuring risks. A new survey conducted by consulting firm Towers Perrin found CFOs at insurers are still woefully behind in weighing enterprise risk when making business decisions. “Although many life companies have made progress in such areas as risk identification, prioritization and measurement, few are achieving the desired full potential of enterprise risk management (ERM) as a management tool,” concluded Towers Perrin, which surveyed CFOs at 38 large and midsize North American life insurance companies. For example, 83% of those CFOs said their company lacked the tools necessary to measure value creation from ERM. More than 70% said they had not yet aligned ERM with performance incentives. Among the areas where insurance companies were lagging the most, according to the survey, is quantifying economic capital risk, with 68% reporting they do not have that capability. Mr. Bernanke cited such quantification as crucial to financial companies’ well being, and said the credit crunch has illustrated that. “[Companies] must understand their liquidity needs at an enterprisewide level and be prepared for the possibility that market liquidity may erode quickly and unexpectedly. “Weak liquidity risk controls were a common source of the problems many firms have faced,” he said, in discussing ERM at financial firms such as banks. “For example, some firms’ treasury functions were not given information from all business lines about either expected liquidity needs or contingency funding plans, in part because managers of individual business lines had little incentive to compile and provide this information.” Prakash Shimpi, a managing principal of Towers Perrin’s ERM practice, said more insurers are coming to embrace the importance of ERM. But insurance company finance chiefs, who typically oversee the treasury function, still give the area short shrift. “It is abundantly clear that ERM will need to be higher on the CFO’s to-do-list if in fact companies wish to maintain healthy levels of financial performance.” He said in an interview that although the complexity of managing risk across a company has spiraled, technological tools have helped make it possible. “You can manage risk at the individual product level and then realize some products are connected” and that problems in one area can infect several other areas and then the whole organization, he said. “ERM helps to recognize that and that it can be managed.” One factor that’s getting more companies on track to improving their enterprise risk management is regular credit rating agency oversight of their processes. The survey found that 96% of the insurers reported having discussions with Standard & Poor’s or other major rating agencies about their ERM framework and their efforts.
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