10 ERM Questions from an Investor – The Answer Key (1)
Riskviews was once asked by an insurance sector equity analyst for 10 questions that they could ask company CEOs and CFOs about ERM. Riskviews gave them 10 but they were trick questions. Each one would take an hour to answer properly. Not really what the analyst wanted.
Here they are:
- What is the ﬁrm’s risk proﬁle?
- How much time does the board spend discussing risk with management each quarter?
- Who is responsible for risk management for the risk that has shown the largest percentage rise over the past year?
- What outside the box risks are of concern to management?
- What is driving the results that you are getting in the area with the highest risk adjusted returns?
- Describe a recent action taken to trim a risk position?
- How does management know that old risk management programs are still being followed?
- What were the largest positions held by company in excess of risk the limits in the last year?
- Where have your risk experts disagreed with your risk models in the past year?
- What are the areas where you see the ﬁrm being able to achieve better risk adjusted returns over the near term and long term?
They never come back and asked for the answer key. Here it is:
1. The first step in real risk management is to be able to think of the firm from a risk point of view. Any CEO can do that from a sales point of view and from a profits point of view. They know that 40% of the revenues come from the pumpkin business in South Florida and 25% of the profits from the Frozen Beet Juice Pops product line. Those statistics are a part of the sales profile and the profits profile. A first step to having a real ERM system is for the CEO to have an equal command of the Risk Profile. Any firm where the CEO does not have an equal command of risk as they do for sales does not have ERM yet. So this question is first and most important. The CEOs who are most likely to be unable to answer this question are the leaders of larger more complex companies. The investor need to make sure that top management of those firms has actual command of all of the key issues regarding the firm and its business. Risk really is a key issue. A vague or slow answer to this question indicates that Risk has not really been an issue that the CEO has attended to. That may work out fine for the company and the investors. If they are lucky.