Standards & Benchmarks
Standards satisfy the increasing expectations of shareholders, the demands of your auditors and ever escalating regulatory requirements.
- Standards are not optional. They are being progressively imposed by auditors, bankers, and regulators not to mention shareholders but where is the manual for price risk management? There is no ISO or IFRS to look to. The truth is that where no industry norms exist, standards are self-developed and outside expertise can go a long way to facilitate the right ones.
- Standards set in many departments impact price risk management. Whether the commercial group is setting data entry deadlines, the credit group setting counterparty limits, IT changing software standards or legal and compliance dictating guidelines for documentation, many upstream standards impact your price risk management program. The risk department should not be forgotten when standard setting is done.
- Standards will often be inexact. Many derive from “fact of life” norms imposed by industry practice. Legitimized by the principle of 99% effort for 1% return, the widespread use of preliminary assays, acceptable imprecision in shipping volumes and estimates employed in the calculation of plant efficiencies are examples of “expedient inexactitudes” that exist throughout any business. Risk managers need to be aware of them, and indeed should dig around for them, as they can impact tracking of efforts at risk mitigation and can have long term consequences.
The commodities industry has a long history of spectacular risk management failures that fascinate media and public alike. Successful managers know what they don’t know and often look outside for assistance.
- Benchmarking means setting standards for all risk participants, monitoring how close you get, and evaluating and incentivizing performance. Risk benchmarking in commercial activities is complex and issues are not easily visible, but the exercise can show up yawning gaps between policy and performance. Getting the benchmark measures right requires skilled outside help.
- Benchmarking helps protect reputations. It’s always easiest to learn from other’s mistakes and practices. Reinventing the wheel is hard. What have you done to make sure you aren’t repeating unwanted history? A risk audit is a great way to provide the insight you need.