Fear Factor

Sarbanes-Oxley offers one more reason to tackle enterprise risk management.

To create it, Geeraerts and Timothy Rogers, manager of tax risk and property accounting, put together a fully fledged ERM strategy with assistance from London-based global insurance broker Willis Group Holdings. Like Peabody, they assembled a multi-departmental committee that included risk overseers from internal audit, tax, finance, and power-plant operations — roughly 8 people altogether. The committee wrote up a detailed questionnaire that was E-mailed to 110 other people in the organization asking them to identify and list risks in their individual areas of oversight, what Rogers calls “brainstorming across all corporate lines.”

The process generated more than 60 defined risks, which the committee then boiled down to the top 25. Two workshops were held without executives, who were questioned separately. The goal was to drill down into each of the risks to determine what actions, if any, were being taken to mitigate them, and who was accountable for ensuring and monitoring these actions. “We wanted to know the probability of each risk causing financial harm, from both a frequency and a severity standpoint. [We also wanted to know] who was watching the store,” explains Geeraerts.

Ultimately, the company was able to force-rank the five top risks challenging Seminole. Number one was electrical-generation capacity — the loss of a generating plant due to an unplanned or forced outage. The company evaluated factors such as tornadoes and terrorist incidents that would disrupt power supply or cause a unit to go down. The second-highest risk was loss of market, a concern given Seminole’s status as a cooperative. Filling out the top five risks were the need to have an optimum mix of power resources to serve customers, fuel price volatility, and regulatory risks, such as the impact of potentially stricter environmental standards.

A dollar number was ascribed to most risks, representing probability, frequency, and severity. All the risks were then assembled on a matrix. The final part of the process — a determination of risk-mitigation options and a process for monitoring risk-management compliance — is still under way. “For fuel price volatility, the option is a fuel hedging program; for the loss of power lines, the option is insurance; for the risk of terrorism, the option is elevating our security officer to senior staff level,” notes Geeraerts.

Agricor’s Granular Approach

Agricore United could tell both Peabody and Seminole a thing or two about ERM. The Winnipeg, Canada-based company initially went through the risk-identification phase in 1997, only to learn its risk-management focus was misplaced on more-transferable risks like a fire to a facility, rather than on the one major operational risk that could doom it, a reduction in grain volume.

Agricore’s first step was to form a steering committee to identify and evaluate the major threats to earnings. More than 30 employees from all levels gathered in 1997 in one room at headquarters to identify the risks facing the company. This meeting was repeated earlier this year. “The world is a dynamic place and risks are constantly changing,” says Peter Cox, CFO of Agricore, with $422 million (Canadian) in 2002 revenues. “It’s much of the same thing with markets to transfer or mitigate risks. Nothing is static.”

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