Enterprise Risk Management: Its 835 Dr. Ronald Menold

Enterprise Risk Management its 835 Dr. Ronald Menold

Discuss who should lead the development of a risk management framework at Kilgore Custom Milling, considering the company's current risk strategies and leadership’s knowledge, and determine who should have the final say in hedging decisions. Additionally, describe the role of the board of directors in this process and outline the next steps you, as the CEO, would take.

Paper For Above instruction

Enterprise risk management (ERM) plays a vital role in organizations facing complex financial and operational risks, especially those dealing with currency fluctuations and international contracts like Kilgore Custom Milling. Developing an effective ERM framework requires clear leadership, understanding of risk strategies, and defined decision-making authority. As Kilgore faces currency volatility due to its American and Canadian operations, establishing a robust risk management process is critical for safeguarding profit margins and ensuring strategic growth.

Given the company's current situation, the leadership structure should play a pivotal role in developing the ERM framework. The Chief Financial Officer (CFO) is typically best positioned to lead this process because of their expertise in financial risk management, including hedging strategies against currency fluctuations. The CFO's familiarity with derivatives, forward contracts, options, and swaps allows them to design and implement sophisticated risk mitigation tactics effectively. In contrast, the CEO, while responsible for overall company strategy, lacks the technical knowledge of hedging instruments and may not be best suited to lead such specialized initiatives.

The final say in hedging decisions should ideally rest with the CFO. Since hedging involves technical financial instruments that require detailed understanding—such as options, futures, and swaps—the CFO's expertise ensures that decisions are grounded in sound financial principles and aligned with the firm's risk appetite. Moreover, involving the CFO as the decision-maker promotes accountability and ensures that risk mitigation strategies are consistent with the company's financial objectives.

The Board of Directors also has a crucial role in overseeing risk management initiatives. They should set the overall risk appetite, approve major strategies, and monitor implementation. As part of their governance function, the board should receive regular reports from the CFO on risk exposures and mitigation plans, ensuring that management's strategies align with shareholder interests and regulatory requirements. They can also provide oversight on the adequacy of the company's risk management policies and procedures, ensuring transparency and accountability.

If I were the CEO, my next step would be to facilitate the development of a comprehensive ERM framework led by the CFO, with active engagement from the board. This involves ensuring that risk identification, assessment, and mitigation strategies are thoroughly documented and integrated into the company's strategic planning. Additionally, I would advocate for regular risk reporting to the board, fostering a risk-aware culture across the organization. I would also prioritize employee training on risk management practices and encourage open communication channels for early identification of emerging risks. Ultimately, my role would be to support the CFO's leadership while maintaining oversight and ensuring that risk strategies align with the organization’s overall business objectives and growth plans.

References

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