Why Risk Management Is Supposed To Be Boring
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
Let me start by saying that I am by no means an expert on risk management. I actually I find it quite boring, yet from time to time some major events happen and it makes you think twice about what risk management is and what it is not. Obviously the perception of risk management has been very much refined following the financial crisis however there are some companies that still don’t get it.
O.W. Bunker is or I should say was the world’s largest bunker oil trader and was listed on the Danish Stock Exchange a mere 7 month ago however something went terribly wrong! Due to poor risk management and wrong market bets on the development of the oil price they faced losses of USD 150M in a matter of a couple of months. At the same time they had also grossly neglected their credit policy granting individual customers credit far exceeding what was prudent. One of those customers was granted credit of USD 125M and due to the company being in severe troubles this resulted in an additional loss for the company. The combined losses became too much and in less than a week the company was declared bankrupt. For a bit more insight into some of the speculation you can read this article from Shippingwatch.
So going back to the part about risk management being boring. In very simple terms risk management is supposed to protect you from scenarios you cannot afford to be in (oil price dropping 25% in a quarter) or leave you to focus on what you consider is your core business (selling bunker oil to ships). The price of risk management (again in simple terms) is that you limit your upside as well. If you decide to go without any risk management strategy you will therefore do great and most likely better than competitors as long as the market develops in your favour. However as soon as the market starts spinning the other way you are in big trouble.
This is exactly what happened for O.W. Bunker as they in a continuous hunt for upsides and larger bonus’ made more and more crazy bets. They had unprotected positions in bunker oil and when the market started to drop they doubled down (or worse) hoping to recoup their losses fast once the market would turn again. Only problem is that the market never turned (and still hasn’t turned). The worst part about it that it was the head of risk management that was leading the charge in these bets!
To sum it all up, risk management might be boring especially because it limits your upside however if you go without it you might find yourself without a job faster than you could ever imagine. Please share your stories on poor risk management or where your risk management strategy failed you.
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Director at UBS
6yMe too, not a risk management expert and O.W. Bunker example, I believe, is more related to the market risk, an area which is beyond me. Switching to Finance, I believe, that risk management and mitigation needs to be embedded in the processes. In my view, its difficult to have a finance process working seamlessly without having a proper controls and risk mitigation plans in place.
Anglo-American Attorney and Solicitor
10yMaritime transport is a cutthroat business, and there's a massive open space for frauds and various other liabilities in the course of everyday business thanks to the international nature of the industry. Clearly, somebody messed up. But I don't agree at all that risk management is boring in the slightest. And on a sidenote, I actually applied for a job with their Houston office about 6 months ago and never heard back from them. They must have hired the wrong person.
Head of Research at the UK's largest student platform, StuRents.com
10yThe container shipping industry has witnessed extreme rate volatility and declining freight rates for many years and yet very few carriers decide to protect themselves from this exposure, as reflected by the industries continued losses. If we were to witness a major container line to go belly up, who would ultimately bear responsibility, considering the tools are now available to protect oneself from these risks?