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Corporate Risk Management, 2nd Edition


Risk management is one of the most important issues facing organisations today. With an increasing pace of change, customer demands and market globalisation, having a process in place to identify, assess and manage major business risks is essential to survive in today’s market. Getting the balance right is key; the opportunities are as important as the threats.

Fully updated from the first edition, this book compares and contrasts tools and techniques used in risk management, showing readers how to implement a generic risk management mechanism. Including up-to-date guidance on new regulations in corporate governance, including updates on the Turnbull and Sarbanes Oxley acts, the Higgs report and European legislation, the book presents a fully updated and expanded model framework for analysing risk at corporate, strategic business and project levels.

Typical risks affecting organisations – including pension-related issues associated with equity risk – are discussed, along with sections on the evolution of risk management and its processes, corporate and project finance, portfolio risk management and cash flow analysis. There are also fully updated and expanded sections on financial modeling – especially the use of Excel as a powerful financial tool – and derivatives, including interest rate, RPI swaps and foreign exchange.

Combining theory with practical examples and case studies – including interviews with over 90 corporate organizations in the UK and overseas – this book is an essential guide to the commercial aspects of risk management and its implementation, at all levels of an organisation.

“An excellent well structured book which leads the reader through the broad spectrum of risk management essential in today’s business environment. The authors concisely address the key areas of identification, assessment and management/planning relevant for the corporate risk manager, as well as those issues specifically relevant to those involved in project driven endeavours.”

Gareth Owens, Investment professional, London based commodities principal investment team

This important new edition of Corporate Risk Management updates the highly successful first offering by Merna and Al Thani. The latest research and opinions on corporate governance codes and analytical techniques are described with superb clarity. The wide range of case studies from food and tobacco to pharmaceutical and oil industries help to identify the generic issues that are fundamental to corporate risk management.” --Professor Tim McCarthy, University of Wollongong, NSW Australia

Dr Tony Merna, BSc, MPhil, PhD, graduated with a Doctor of Philosophy degree from UMIST for his work on risk management in corporate organisations. Tony then gained a Doctor of Philosophy degree from UMIST for his research into the assessment of risks in portfolios of projects. Tony is currently working for a London based Investment Boutique focusing in Structured Finance; more specifically infrastructure.

Dr Faisal F. Al-Thani, BSc, MSc, PhD, is Senior Director and Head of Business Development – Middle East for Maersk Oil Qatar. A petroleum engineer by profession, he has over 21 years’ experience in the planning, design, operation, maintenance and finance strategies of oil and gas projects. Faisal is also a board member of the Marsh International Risk Council.

1 Introduction.

1.1 Introduction.

1.2 Why Managing Risk is Important.

1.3 General Definition of Risk Management.

1.4 Background and Structure.

1.5 Aim.

1.6 Scope of the Book.

2 The Concept of Risk and Uncertainty and the Sources and Types of Risk.

2.1 Introduction.

2.2 Background.

2.3 Risk and Uncertainty: Basic Concepts and General Principles.

2.4 The Origin of Risks.

2.5 Uncertainties.

2.6 Sources of Risk.

2.7 Typical Risks.

2.8 Perceptions of Risk.

2.9 Stakeholders in an Investment.

2.10 Summary.

3 The Evolution of Risk Management and the Risk Management Process.

3.1 Introduction.

3.2 The Evolution of Risk Management.

3.3 Risk Management.

3.4 The Risk Management Process – Identification, Analysis and Response.

3.5 Embedding Risk Management into Your Organisation.

3.6 Risk Management Plan.

3.7 Executive Responsibility and Risk.

3.8 Summary.

4 Risk Management Tools and Techniques.

4.1 Introduction.

4.2 Definitions.

4.3 Risk Analysis Techniques.

4.4 Qualitative Techniques in Risk Management.

4.5 Quantitative Techniques in Risk Management.

4.6 Quantitative and Qualitative Risk Assessments.

4.7 Value Management.

4.8 Other Risk Management Techniques.

4.9 Country Risk Analysis.

4.10 Summary.

5 Financing Projects, their Risks and Risk Modelling.

5.1 Introduction.

5.2 Corporate Finance.

5.3 Project Finance.

5.4 Financial Instruments.

5.5 Debt 116

5.6 Mezzanine Finance Instruments.

5.7 Equity.

5.8 Financial Risks.

5.9 Non-Financial Risks Affecting Project Finance.

5.10 Managing Financial Risks.

5.11 Risk Modelling.

5.12 Types of Risk Software.

5.13 Summary.

6 Portfolio Analysis and Cash Flows.

6.1 Introduction.

6.2 Selecting a Portfolio Strategy.

6.3 Constructing the Portfolio.

6.4 Portfolio of Cash Flows.

6.5 The Boston Matrix.

6.6 Scenario Analysis.

6.7 Diversification.

6.8 Portfolio Risk Management.

6.9 Cross-Collateralisation.

6.10 Cash Flows.

6.11 An Example of Portfolio Modelling.

6.12 Summary.

7 Risk Management at Corporate Level.

7.1 Introduction.

7.2 Definitions.

7.3 The History of the Corporation.

7.4 Corporate Structure.

7.5 Corporate Management.

7.6 Corporate Functions.

7.7 Corporate Strategy.

7.8 Recognising Risks.

7.9 Specific Risks at Corporate Level.

7.10 The Chief Risk Officer.

7.11 How Risks are Assessed at Corporate Level.

7.12 Corporate Risk Strategy.

7.13 Corporate Risk: An Overview.

7.14 The Future of Corporate Risk.

7.15 Summary.

8 Risk Management at Strategic Business Level.

8.1 Introduction.

8.2 Definitions.

8.3 Business Formation.

8.4 Strategic Business Units.

8.5 Business Strategy.

8.6 Strategic Planning.

8.7 Recognising Risks.

8.8 Portfolio Theory.

8.9 Programme Management.

8.10 Business Risk Strategy.

8.11 Tools at Strategic Business Unit Level.

8.12 Strategic Business Risk: An Overview.

8.13 Summary.

9 Risk Management at Project Level.

9.1 Introduction.

9.2 The History of Project Management.

9.3 Definitions.

9.4 Project Management Functions.

9.5 Project Strategy Analysis.

9.6 Why Project Risk Management is Used.

9.7 Recognising Risks.

9.8 Project Risk Strategy.

9.9 The Future of Project Risk Management.

9.10 Summary.

10 Risk Management at Corporate, Strategic Business and Project Levels.

10.1 Introduction.

10.2 Risk Management.

10.3 The Risk Management Process

10.4 Common Approaches to Risk Management by Organisations.

10.5 Model for Risk Management at Corporate, Strategic Business and Project Levels.

10.6 Summary.

11 Risk Management and Corporate Governance.

11.1 Introduction.

11.2 Corporate Governance.

11.3 Corporate Governance Approach in France.

11.4 Corporate Governance Approach by the European Commission.

11.5 Corporate Governance and Internal Control.

11.6 Summary.

12 Risk Management and Basel II.

12.1 Introduction.

12.2 Risk Rating System (RRS).

12.3 Borrower Risk Rating System and Probability of Default.

12.4 Risk Rating and Provisioning.

12.5 Risk Rating and Pricing.

12.6 Methodology of RRS and Risk Pricing.

12.7 Grid Analysis or Standardising the Risk Analysis.

12.8 Regulation in Operational Risk Management.

12.9 Summary.

13 Quality Related Risks.

13.1 Introduction.

13.2 Defining Quality Risks.

13.3 Standardisation – ISO 9000 Series.

13.4 Quality Risks in Manufacturing Products.

13.5 Quality Risks in Services.

13.6 Quality Control and Approaches to Minimise Product Quality Risks.

13.7 Summary.

14 CASE STUDY 1: Risks in Projects in the Pharmaceutical Industry.

14.1 Introduction.

14.2 The Pharmaceutical Industry.

14.3 Filing with the Regulatory Authority.

14.4 Identification and Response to Risks Encountered in DDPs.

14.5 Summary.

15 CASESTUDY2: Risk Modelling of Supply and Off-take Contracts in a Petroleum Refinery Procured through Project Finance.

15.1 Introduction.

15.2 Financing a Refinery Project.

15.3 Bundling Crude Oil Contracts.

15.4 Assessing a Case Study.

15.5 Bundle Solutions After Risk Management.

15.6 Summary.

16 CASE STUDY 3: Development of Risk Registers at Corporate, Strategic Business Unit and Project levels and a Risk Statement.

16.1 Introduction.

16.2 Levels of Risk Assessment.

16.3 Amalgamation and Analysis of Risks Identified.

16.4 The Project: Baggage Handling Facility.

16.5 Risk Statement.

16.6 Summary.

17 CASE STUDY 4: Development of a Typical Risk Statement to Shareholders.

17.1 Introduction.

17.2 UUU Overview and Risk Register.

17.3 Corporate Risk Register.

17.4 Strategic Business Units Risk Register.

17.5 Project Level Risk Register.

17.6 Risk Statement to Shareholders.

17.7 Summary.