Ask Ed Bell about energy trading and risk management (ETRM) technology and he’ll likely bring up his days with Enron back in the early 1990s. Bell—now a principal at Houston-based technology...
Strong CROs: More Important Than Ever
How important is the risk function at your company?
the CRO has to have the knowledge and wisdom to oversee them all. Background and training are major issues here. Some CROs possess outstanding commercial and analytical acumen and easily can discuss highly theoretical aspects of risk. However, unless these skills are married with real-world experience and lessons learned through a “baptism by fire,” such as liquidity crises and trading-book blowups, their effectiveness can be limited. Additionally, many lack the requisite interpersonal, diplomatic, and political skills to make them effective in the role. Without question, a candidate’s personal style and interpersonal skills are the most critical and unique aspects of a utility CRO search. The cultural complexity and institutional history associated with most utilities require the CRO to be skilled at assessing personalities, determining motivations, and educating skeptical internal “clients.”
The importance of the independence of the CRO hardly can be overestimated. In a well-run company, the CRO needs to be able to “deep dive” anywhere and perform in-depth analysis of transactions and operations. He should have easy, unencumbered access to all commercial and operational areas and to almost any other corporate records, without having to negotiate burdensome and time-consuming bureaucratic obstacles.
Where Do You Stand?
Where the CRO stands in the actual and perceived command structure is as important as the independence of the CRO and the quality of experience and leadership. Does the CRO report directly to the board of directors, CEO, or CFO, or to a lower-level manager? The position of the CRO in the hierarchy often directly reflects the degree of importance the company places on risk management, and this can send an informal, yet powerful message to the individuals and groups being scrutinized by the CRO.
Analysts like Arlene Spangler are making it clear that a rudimentary risk function simply will not do. The qualitative assessment of utilities’ risk function is sure to create angst for some and opportunities for others. Some organizations will have a slight reprieve, given that most of the focus appears to be on utilities that still have meaningful trading and marketing activities. However, rating agencies such as Standard & Poor’s ultimately will be turning their finely tuned microscopes on all utilities and judging them against essentially the same guidelines.
Shelley Hurley, a partner with Accenture’s Risk Management Practice and long-time proponent of risk management in the energy industry, says the decision to embrace a comprehensive risk-management culture and infrastructure usually has been the result of one or several of the following: a risk-savvy board of directors demanding that the company implement a world-class risk management infrastructure, a “blow up” in the company’s energy trading and marketing business, or pressure from rating agencies.
It is safe to assume that the last of those options is likely to become the predominant factor causing traditional utilities to examine the benefit of implementing a robust risk-control program.