Risk-Management Principles for the Utility CEO

Many utility CEOs do not give specific strategic directives to those responsible for risk management. As a result, often they are disappointed when trading results do not reflect the goals of the organization. The CEO must set clear directives for trading off profit and risk that are interpreted and...

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Bibliographic Details
Published in:Public Utilities Fortnightly 2004-06, Vol.142 (6), p.78
Main Authors: Shimko, David, Friedman, Brett, Essaye, Tim
Format: Article
Language:English
Subjects:
Bankruptcy
Benchmarks
Chief executive officers
Collateral
Corporate profits
Hedging
Objectives
Portfolio performance
Principles
Public utilities
Risk management
Treasuries
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Summary:Many utility CEOs do not give specific strategic directives to those responsible for risk management. As a result, often they are disappointed when trading results do not reflect the goals of the organization. The CEO must set clear directives for trading off profit and risk that are interpreted and executed by the trading groups. Several principles in accomplishing this: 1. All risk management policy follows from the board's agreement with key principles. 2. Management sets clear definitions, benchmarks, and objectives. 3. Benchmarks are both specific and achievable. 4. Each trading book is allowed only one benchmark and one objective. 5. Risk management objectives are linked to corporate financial objectives. 6. Scarce resources, like risk capital, credit capacity, collateral, and working capital, must come at a cost. 7. The chief risk officer must be empowered and independent. 8. Most things are possible in risk management, except the recovery of past losses.
ISSN:1078-5892
1945-2578