RSS FeedBy M. Isi Eromosele
As they conduct global business, corporations are open to many risks. These are risks that they cannot pass onto the capital markets of risk transfer markets. A corporation that decides to expand its global market cannot hedge its risks cheaply because of the risks inherent in its expansion plans. The firm would be expected to have excellent knowledge of the risks involved in its plans. However, if it looks for a way to hedge those risks, the costs would be elevated as possible counterparties seek to be compensated for creating models to assess the risks they are expected to hedge.
Typically, insurance companies do not provide contracts that offer total coverage for shortfalls in earnings. It is assumed that the insured firm, who knows all about the distribution of its earnings, could influence the spreading of the earnings to raise the value of the insurance policy. In the process of taking business risks, a corporation faces the possibility of cash flow shortfalls that could affect the implementation of their future plans.
Every corporation faces risks that are unique to them and specific to the industry they are in. As such, it would be difficult for them to decrease their contact with these risks. This makes it very important for the corporation to avoid risks that are not relatively exclusive to their business or industry. This would enable them to more focus on the complicated risks and tough to hedge business risks they may face.
As the risks to be hedged become more relative to the corporation, the costs of hedging them are elevated higher. On a global project, a corporation can hedge the exchange rate risk in their exposure to foreign exchange currency receivables. It is considered a commoditized transaction to hedge against Euro receivables.
In costing total risk management, a corporation has to create a risk-return tradeoff. To implement a large scale project, for example, it would have to be highly profitable in order to pay for the elevation in total risk hedging. All the decisions made during the project must be assessed on the basis of the established risk-return algorithms.
Establishing the process of risk-return assessment corporate-wide can be achieved by three methods:
- In measuring total risk, the corporation must ensure that all substantial risks are thorough evaluated. If a sub project is to be implemented, its impact on the main project in terms of material risk would have to be thoroughly assessed. A project’s return relative to minor risk to the corporation will engender the best possible results. The assessment of risk and return must be carried out in totality in regards to the entire project, not merely at the specific project level.
- If a centralized assessment organization is set up within the corporation to scrutinize the risk-return on every project, the process will literally grind to a halt. Flexibility has to be the rule of the day here. Every business unit within the corporation should be given the autonomy to factor in risk-return tradeoff in its project implementations. This facilitates smooth, fast and efficient implementation process that would ultimately benefit the corporation and its shareholders.
- The performance input of every business unit to the overall corporate business goals has to be taken into consideration in assessing total risk to the corporation. This provides the factual financial accomplishments of each business unit. Additionally, it provides incentives to business unit managers to succinctly focus on managing the risk-return tradeoffs and avoid taking other overly unnecessary risks.
The implementation of the above actions is imperative to the success of a corporate wide risk management programs. Collectively, they facilitate collective responsibility for assessing project risks to avoid starting projects that could turn out to be a disaster for the firm. When all corporate staff is made to feel that they own part of the risk, they are more liable to make the program a success for the corporation.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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