The Age of Risk (and Fewer Returns)

The implosion of much of America's financial services sector has prompted discussion regarding the role of risk management -- or, perhaps more accurately, the lack of risk management -- at the country's largest financial institutions. While most nonfinancial firms haven't been body-slammed to the same degree that their Wall Street counterparts have, many CFOs and treasurers are reviewing their own approaches to risk management. "Risk management is rising on the radar screen," says Mike Gallanis, partner with Chicago-based consulting firm Treasury Strategies, Inc.

One clear sign of corporate America's current aversion to risk was the December sale of 1- and 3-month Treasury bills at yields of zero percent, says John Snyder, director of business development with Chesapeake System Solutions, Owings Mills, Md. He adds that some financial executives now describe their investment strategies as "not losing money." Tellingly, there's no mention of return.

Moreover, while companies' compliance efforts used to focus primarily on ensuring that executives didn't run afoul of any laws, risk management now is seen as critical to keeping firms solvent, Snyder adds. "Before, it was an academic and legal exercise," he says. "Now, the concern is whether the company will take a big hit."

At the same time, the current economic crisis "has highlighted the breadth of the question of risk management," says Michael Gannon, vice president and treasurer with Owens-Illinois, Inc., an $8 billion manufacturer of glass containers. It's brought to the forefront the interplay between all areas of risk management, including cash forecasting, minimizing counterparty risk, and navigating a volatile economy. He adds that "doing these things well is more important than ever for Owens-Illinois." This is true even though the company's sales and earning per share rose 10 and 40 percent, respectively, and total debt dropped by nearly a tenth in the nine months ending in September 2008.

To take one example, counterparty risk, or the likelihood that the other party to a transaction may fail to hold up its end of the deal, was something that few companies properly monitored even just a few years ago, says Gallanis.

Not anymore. "What's really been a focus over the past 6 months has been counterparty risk," says Ather Williams III, managing director and global segment executive with JPMorgan Treasury and Securities Services. In a switch from the historical banker/client relationship, corporate clients have inundated their account managers with phone calls, seeking information on the bank's performance and details about the quality of the holdings in their investment funds. They'll ask, for example, whose commercial paper the bank is holding. "We're seeing requests for a level of due diligence that we haven't seen in the past," he says.