COVER INTERVIEW

that drive the business performance, but it is mighty essential to know most, if not all of them. It could be oil, metal, currencies, regulations, or anything else, but an ability to model them all and come out with total business at risk at any point in time is a critical differentiator.

2. Business is boring

Unless you are really into rocket science or casinos, the best run businesses have a unique characteristic they are boring. They just identify their key variables and go about controlling them day in and out. They identify their core competence and go about executing it day in and out. They stick to their core strengths, build their product and delivery innovations around that core and make the whole machinery strong and muscular. They don’t take risks that they can neither control nor model because it is just not in their DNA.

3. Balance Sheet is King

This can never be overemphasised. Time after time, crisis after crisis, the companies that emerged stronger invariably also had a strong balance sheet to boot. A sensible capital structure, a strong liquidity position, and access to funding are hallmarks of conservative balance sheet management. A well-thought-through hedging and investment policy that puts risk management ahead of profits will help ensure that any temporary shocks caused by movements in various markets - currencies, equities, rates, or commodities, are swiftly absorbed.

4. Board is Boss

The independence of boards has come under question several times with otherwise well-run companies. But the best-run companies have strong boards. A board that formulates and approves a risk management framework for the company alongside monitoring it on an ongoing basis shows skin in the game. The board should review all the business, regulatory and financial risks at least once a quarter and convince itself that nothing is out of the ordinary - either currently or expected in the future.

5. Culture is everything

Having a strong board and an effective management is good, but it only addresses the top of the pyramid. However, real work happens below, and it is important that every employee and stakeholder buy into the firm's risk culture. This can only happen through regular and direct communication, right from the top, emphasising the company's acceptable risk management culture and how every employee is expected to internalise that as part of their DNA. Frequent training and surprise audits have a great effect in ensuring people follow the risk framework to a large extent.

6. Timing is for tennis stars

A lot of times, I have seen managements delay taking action, especially on financial risk hedging - be it currencies or rates, as they wait for the opportune moment to enter into a hedge. What they usually don’t get is that this time is better spent elsewhere. Because, if you are attempting to time the market, you have to get it right a whopping 85% of the time to derive the exact result you would have achieved by just blindly following your well-thought-out risk management policy. The key, therefore, is to stay true to your committed policy than to try and outsmart the markets. Timing is for others to enjoy watching on the cricket field or tennis courts, of a Tendulkar straight drive or a Federer cross-court. Businesses, as we noted before, are supposed to be boring by sticking to their game plan all the time, every single time.

7. Think long term

Managements come and go; boards come and go, but companies are meant to stay and what makes some of them more alluring than others is that they stay true to their identity over a very long term. The best-run companies always think long term. Once they have laid out a risk management framework, they don’t keep messing with it, except for tweaks that are re-