Risk Management

Best of 2009: Risk Management

The credit freeze, spawning perils to both markets and corporate finance, was arguably the biggest risk of the year.
CFO Staff and David KatzDecember 28, 2009

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The 2004 Basel II capital accords break down “risk management” into three basic categories: market, credit, and operational. As they routinely do, operational risks — the potential for man-made or machine-made losses — have plagued finance chiefs in 2009. But there can be little doubt that credit risks and market risks have been uppermost in their minds in the year now drawing to its end.

Indeed, the seizing up of capital markets over the course of the year provided a double dollop of market risk and credit risk. In print and online stories, the perils that stem from changes in market conditions — including changes in interest rates, exchange rates, and prices — were often spotlighted by CFO in 2009.

Executives worried, for instance, about too much concentration of risk in the market for credit-default swaps and other derivatives. Particularly troubling were the results of a Fitch Ratings survey we reported on in July: about 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies were held by a mere five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley.

But with the tightness of credit pervading the economy, stories spotlighting companies’ potential to become deadbeats also ran frequently. As Pam Krank, president of Credit Department, an accounts-receivable consulting and outsourcing firm, put it last fall: CFOs are “finally putting credit risk at the top of their lists” for the first time in her 18-plus years in business. What’s more, the availability of credit insurance has seemed vulnerable. The five biggest risk-bearing banks unearthed by Fitch accounted for more than 96% of companies’ exposure to credit derivatives.

This year, the financial world was roiled by “toxic assets,” the bad loans and securities that devastated bank balance sheets. Yet meanwhile, an operational risk, toxic environmental liabilities, threatened the financial health of some U.S. businesses. Accounting rules have enabled companies to conceal the full extent of these costs, encouraging minimal disclosure, even when management knows the total bill will be far higher, according to a story in the September CFO. That situation seemed likely to spawn a world of legal risk in the form of shareholder suits.

A slew of other perils, ranging from information technology to the economy to swine flu, also plagued executives this year. Here are 10 of CFO’s top stories about the witch’s brew of risk that was 2009.

Credit Check

One in seven midcap companies may be a credit risk. Are any of them tied to you?

Five Firms Hold 80% of Derivatives Risk, Fitch Report Finds

First-quarter financials mark the first time comprehensive derivatives disclosure was mandated for all U.S. companies.

Giving Credit Risk Its Due

The current economy is prodding finance executives to try to detect potential deadbeats by using such things as automated alert systems.

Dirty Secrets

Companies may be burying billions more in environmental liabilities than their financial statements show.

The Carbon Effect on Earnings, M&A

Proposed energy legislation will have direct and indirect consequences on the revenues, profits, and M&A transactions of heavy CO2 emitters.

Staples CFO: Going Green Means Saving Green

Switching from using three-amp to two-amp light bulbs, for instance, adds $4.2 million to the company’s bottom line.

CFOs to CIOs: Get Real

On their wish lists addressed to IT leaders, finance chiefs want more risk-management awareness and better communication on project delivery.

Swine Flu Hits Financials, Safe Harbor Statements

Burger King says the outbreak, coupled with existing economic woes, caused more conservative fourth quarter guidance. Others cite swine flu as a risk or as an opportunity, while Ernst & Young has an office scare.

Liquidity, Crime Woes Shake Up Chief Risk Officers

Top risk cops are taking a fresh look at corporate exposures in the wake of the financial crisis.

No Worries

Are you managing your company’s risks as well as you want to? If so, you’re among the very few.