Deven Chitaliya is Senior Vice President & Global Head Credit at Olam in Singapore, where he is responsible for Credit and Counterparty Risk management across 12 agri-business platforms spread across more than 70 countries. He is also responsible for development and roll-out of company-wide Enterprise Risk Management Framework.
Could you please tell me a little about the Enterprise Risk Management, or ERM, that I believe that you helped introduce at Olam?
All organisations must manage risks effectively to endure and thrive. Traditionally, most organisations assign risk management to business unit leaders within their areas of responsibility. We call this “silo” or “stove-pipe” risk management. For example, the Chief Technology Officer is responsible for managing risks related to information technology operations; the Treasurer is responsible for managing risks related to financing and cash flow, and so on.
However, risk does not respect organisation charts; it can be anywhere and take any form. Some risks “fall between siloes”, unnoticed by individual leaders. Others can affect different units differently – managers may not know that a decision taken for one silo can cause or escalate risk in another. The upshot is that risk can go unnoticed or not be effectively tackled until a catastrophic event is triggered.
Another challenge with traditional risk management is that it is often internally focused and granular – looking within the four walls of the organisation, with minimal focus on risks that may emerge from outside the business.
At Olam we have mapped 51 risks (including 19 quantifiable risks) across 11 risk categories that Risk Office monitor, measure and report at regular interval along with each department.
We have 13 people in the Risk Office team in Singapore and 2 in London.
What are the most important considerations when implementing a Risk Management Framework for a company?
The most important is a strong governance structure and an independence of risk management team. You also need what I call a “holistic risk capture’” that is both outward as well as inward looking, and which covers the entire company, not just individual business platforms within the company. Risk must be consolidated and assessed both at business as well as corporate level.
Obviously, you need to measure risk wherever you can, and keep on stress testing and analysing different scenarios. You need proactive operational risk controls in the areas of credit, counterparty, stock, quality. At a platform level, you also need strict ‘drawdown’ and ‘stop loss’ policies.
But perhaps most importantly you need to assess your company’s risk appetite. That may sound obvious, but many companies go into trading without first assessing their risk-taking capabilities.
Could you tell me which are the biggest risks that Olam currently faces?
The biggest and most important risk that we face is the health and safety of our employees; we spend a lot of time making sure that we minimize those risks. This is especially the case now with COVID-19, where we must make sure that social distancing, sanitary measures and all requisite PPEs are always made available for factories, warehouses and our plantations.
I would say that cyber-security risk is our second biggest risk. The innovative ways in which your systems and people information can be hacked and misused sometimes even surprises experts. With wide-spread operations across product platforms and geographies, standardization of IT controls and effective implementation of latest security controls across the company becomes key to counter and reduce losses in case of actual cyber-attack or cyber fraud.
Supply disruption is currently our third biggest risk. Labour shortages and transport / logistics bottlenecks can also be an issue. We do see some slowdown in select countries. However, most of the Agri products fall under the list of essential commodities and therefore the trade is still immune from complete shutdown.
There have been some relatively short-lived food export bans from certain countries, but they have not really had much impact on the supply of food. Ports have remained open, and the food supply chain has shown itself to be robust and flexible in dealing with the current crisis.
I would put demand destruction as our fourth biggest risk. This risk is less with food products, as demand more or less remains constant. People have to eat. However, things can be more complex with what we consider as industrial products like cotton where purchases by end-users can be deferred for fairly longer periods.
For example, we have to ask ourselves how the collapse in retail clothing demand in Europe and the US might lead to the cancellation of their orders, say, with Bangladeshi clothing manufacturing factories, which in turn might affect cotton sales contracts.
In-depth regular risk reviews with business team with focus on operational checks and controls plus assessment of high-risk areas and bottlenecks helps us take proactive actions as “One Olam” team.
Has Covid19 increased counterparty risks?
Olam is quite unique among the major agricultural trade houses in that we are very involved at origin. Our vertically integrated supply chain for our Upstream businesses means that we have very limited and well-managed counterparty risk on our supply side.
Our counterparty risks tend to be downstream where we are dependent on timely contract performance and payments from our Customers. Market volatility plays an important role. Higher the volatility, higher the ‘mark to market’ exposures, and therefore higher the risks.
Not only do we have to assess the risks to our businesses, we also have to constantly monitor the risks to our clients’ businesses: are they facing supply issues; has a major buyer defaulted on them; how is their cash flow with regard to their stock levels; how is their payment performance with us, what are the inputs from our market network, etc? Any of these things can show us an early warning sign / red flag for timely and corrective action.
It goes a long way to ensure long-term relationship building and trust when we try to offer innovative solutions where possible to support their businesses. e.g. short-term cash-flow issues, bank assisted structures to support payments, credit insurance / collaterals / deposits / parent guarantee backed exposures, etc
What keeps you awake at night?
That there is something out there that we don’t know about. I am not worried about the things we know about: any event that may occur once in a while in normal course of business; we have robust systems in place to monitor and manage these known risks.
I am spending a lot of time now, for example, wondering whether there will be a second wave of COVID-19, and making sure that if there is one, we will be ready for it.
Another unknown, of course, is technological development and innovation: will something be invented that might negatively affect one of our businesses? There is no easy way of knowing that except to remain up-to-date on what are the major initiatives, experiments and actions being undertaken across industry!
Many thanks, Deven for your time and input!