An effective risk-management strategy depends on knowing your shareholder’s idea of value.
David Shimko is founder and president of Risk Capital.
How do shareholder relations link to risk-management policy? The answer: Utilities have to communicate to shareholders a particular set of operating strategies that will attain certain financial results. Risky activities both enhance and threaten those financial results. Therefore, policies must define how risky strategies are formulated, approved, controlled, and measured.
Consider an example. Prior to declaring bankruptcy in 2003, Mirant was seen by many as an energy trading company that held assets in order to improve its trading prospects. The theory was that the connection between physical and financial trading of energy commodities provided unique profit opportunities. This particular strategy also is common to J.Aron and Morgan Stanley, both financial trading shops that acquired physical commodity capabilities in order to capitalize on this sweet spot in commodity trading.
Yet Mirant also could have been seen as a company that managed generation assets and traded to the extent it found opportunity around those assets. In other words, the assets and the activity of a company do not define its strategy. The company defines its strategy. Several different strategies might by coincidence lead to similar portfolios.
We would expect that a trading firm with assets would have a different risk-management policy than an asset firm that trades. These are suggested in Table 1.