Risk Management Red Flags Revealed
The Find: Red flags for boards to watch out for if the current economic meltdown has you worried about your company's risk management.- The Source: An interview with Wendy Lane, a former investment banker with Donaldson Lufkin & Jenrette and Goldman Sachs in Business Week's Managing.
What's your first step if you're concerned about your exposure to risk? Lane suggests you "start by looking at the balance sheet and cash flow statements to see how much risk the company can absorb. It's often useful to do some analysis to determine, for example, by what percentage your assets or cash flow would have to drop before you were in trouble, and what could cause such a drop -- alone or correlatively."
Also, look at your current leverage ratio and asset and liability mixes and whether these have shifted dramatically over time. If there have been big changes, how comfortable are you with them? Board members, Lane feels, need to be alert to exposure to new risks outside the company's primary business (such as issues related real estate at Lehman Brothers, which wasn't primarily a real estate company).
Practically, how should these risk reviews be organized? Lane recommends "that the board include a valuation of the company, including its breakup value and any hidden or undervalued assets" during its annual strategic planning session. "Over time, this will provide perspective on where value is being created -- or lost -- within the company."
The interview, which is also available as a video, contains many further insights for those looking to delve into the subject in depth.
The Question: What grade would you give your company's board for risk management?