Risk Management for Organisational Value Optimisation
At PowerSeraya, we view risk management as a necessary and important function that serves to protect the enterprise value of the company. Taking a precautionary approach through the various risk management practices within the company helps to mitigate the multiple risks that the company encounters in its daily operations. Due to the interdependent nature of the business operations of PowerSeraya and its subsidiaries, prudent risk management aims to minimise the risk impacts that affects the business ecosystem of the PowerSeraya Group. This way, it seeks to also optimise the value chain across the various business entities.
We have a corporate risk management framework that covers the different types of enterprise risk. Under this framework, enterprise risks are identified by the respective business units and significant risks are documented in the Corporate Risk Register and monitored. The business risks are expected to identify mitigation measures to address the enterprise risks and implement them accordingly in efforts to reduce the risk exposure. We employ risk monitoring and reporting systems to enable early detection and escalation of risks to the various levels for review to take appropriate actions. Diagram 5.1 shows the risk-management cycle practiced in the company.
PowerSeraya has put in place a structure to manage the risks of the entire company. The committees and their respective roles in risk management are shown in Diagram 5.2. We have the Risk Management Committee (RMC) which is responsible for the development and implementation of processes that identify, measure, monitor and control risks within the company. The RMC is headed by a Chief Risk Officer (CRO) appointed by the Board.
Positive Outcomes to Risk Management Committee with New Ownership Changes
There were no changes to the existing risk management structure of the company even when new owners YTL Power International Berhad came on board in 6 March 2009. However, there were several changes to the key appointment holders which led to two changes in the composition of the risk management committee in 2009. The new members of RMC come from diverse backgrounds and their experiences has injected valuable perspectives to how risk can be better managed to enhance the value of the organisation. For example, the appointment of our new CFO cum CRO, has contributed his experience in dealing with financial issues related to banking like credit granting which would have an impact on enterprise risk if mismanaged.
Reporting to the RMC are the various risk owners who are responsible for managing and monitoring risks of their business units. The Enterprise Risk Management (ERM) Department collates all reports from the risk owners on a quarterly basis. The ERM Department primarily manages the overall market risk of the company and works with the different risk owners to manage other types of enterprise risks that include (but are not limited to) the following:
• Market Risk
• Credit Risk
• Liquidity Risk
• Regulatory and Legal Risk
• Project Risk
• Health and Safety Risk
• Operational Risk
• Integrity Risk
• Human Capital Risk
• Business Continuity Risk
Due to the interdependency between oil prices and our business operations, strong oil fluctuations can have an adverse impact on the profitability of the company. During the global financial crisis which started in the last quarter of 2008, the world experienced a huge dip in oil prices. The company managed to mitigate its loss due to the sharp drop in oil prices from the robust risk management systems in place. The exposure to the company from the oil price fluctuations were limited by capping the open positions of our oil traders. The Enterprise Risk Management (ERM) team provides daily reports on the day's open positions to the management who will then make informed decisions to manage the company's risk exposure. A system of alerts enables the management to be notified of any trading positions that has exceeded a certain allowable threshold and this triggers precautionary measures to be taken to limit losses.
Besides strong oil fluctuations, another challenge encountered during the financial crisis is the credibility of counterparties. One month before the collapse of Lehman Brothers, the ERM proposed to the management to freeze its credit limits with Lehman when bad news about the company continued to emerge in the market. No additional trade was done after the management's approval. During the financial crisis, more counterparties' credit limits were freezed after ERM's review. Besides a few reputable counterparties which ERM deemed as still being financially strong and sound to trade with, PowerSeraya turned to the Exchange (SGX and NYMX) to complete its hedging requirement which has virtually no credit risk.