Managing risk
| by Peter Atrill 14 Jul 2005 Diploma in Financial Management Relevant to Module B |
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The revised syllabus
The syllabus has been revised in response both to developments in the subject and to our experience to date in examining the existing syllabus. Risk management is a new discipline that is evolving quickly. Revisions to the syllabus are therefore necessary to reflect changes. Since the original syllabus was devised there have been significant developments in the area of risk management and corporate governance, and it is important that these developments are included in the topics to be studied. In addition, our experience in operating the existing syllabus has led us to identify areas where improvements can be made. It has become clear, for example, that the balance between certain elements could be improved in order to provide a more interesting and relevant course of study for non-financial managers. The current syllabus consists of three distinct, but overlapping, elements:
- risk management
- corporate governance
- financial management.
The last two elements are, of course, also concerned with managing risk even though the term is not specifically mentioned in their titles. These three elements still form the basis of the new syllabus, although risk management and corporate governance have now been significantly revised in order to:
- achieve a better balance between risk management and corporate governance
- broaden the scope of the risk management element and strengthen the framework within which risk management is considered
- reduce the level of detailed understanding required for financial risk management
- introduce a more analytical,
- problem-based approach to the corporate governance element.
To understand how these aims will be achieved, each of the three elements will be considered in turn.
Risk management
In the current syllabus, risk management is by far the largest of the three elements - 19 out of 28 sessions in the Study Guide are currently devoted to this area. It is also the area of the syllabus that has undergone the greatest revision. The focus of the current syllabus is on financial risk management. However, this focus is rather narrow and has therefore been broadened.
A growing number of businesses now adopt an integrated approach to risk management, and so it is increasingly difficult to separate financial from other forms of risk management. A business has to manage various forms of risk and other aspects, particularly operations risk management, which now features more prominently in the syllabus. Risks arising from people, systems, and events (and the management of these risks) have become an important element of the syllabus. By taking a broader perspective, candidates should achieve a more complete understanding of risk management as a whole and should be able to place financial risk management in context.
Risk management comprises 50 per cent of the revised syllabus. The main topics to be studied now include:
- managing risk (including the nature of risk, risk concepts and the benefits of risk management)
- risk management processes (including frameworks for risk management, ways to implement risk management systems and the implications for the organisational structure of adopting a risk management approach)
- managing operating risk (including the nature and different forms of operating risk, and developing action plans to deal with each type of risk)
- managing financial risk (including the nature and different forms of financial risk, and the techniques available to manage each form of risk).
As the risk management element has been reduced as well as broadened, significant revisions have had to be made. To achieve a reasonable balance between the topics described above, less emphasis is now placed on the last of these - managing financial risk. In particular, less weight is now attached to the technical aspects of derivatives, and so the sections on hedging (through the use of options, forwards and swaps) have been scaled down. This is not to say, however, that these topics are no longer important.
A non-financial manager should have a broad understanding of the main hedging instruments and the role that they play in financial risk management. To demonstrate this understanding, candidates will be expected to carry out simple calculations (which may often be tested through multiple-choice questions) and to discuss the features of the main hedging instruments.Corporate governance
This is an area that is of growing importance in the corporate world. In recent years, the framework of rules governing the behaviour of directors has been strengthened, which has been in response to well-publicised frauds, business collapses, and excessive payments to directors. The way in which a business is directed and controlled has become the subject of intense concern for the various stakeholder groups involved, as well as for those concerned with regulating business behaviour. However, corporate governance is a fairly small part of the current syllabus (only four sessions in the Study Guide are devoted to this area) and so there has only been limited opportunity to explore the issues that have been raised. In the revised syllabus, corporate governance has been given much greater prominence.
Corporate governance comprises 30 per cent of the revised syllabus. The main topics to be studied now include:
- the nature of corporate governance (including the main theoretical approaches to corporate governance, alternative models of corporate governance, and the links between corporate governance and risk management)
- the framework of regulations (including the main elements of the Combined Code, the role of external and internal audit, and the reporting of corporate governance issues)
- the board of directors (including the role of the board and its members, the role of key board committees, and key issues affecting the functioning of the board)
- appraising and rewarding directors (including the different methods of appraising and incentivising directors)
- corporate social responsibility and ethical issues in governing a business.
By expanding this area of study, a more detailed examination of corporate governance issues can be undertaken. It is now possible to go beyond an examination of the various rules and structures and to explore the key issues and problems relating to governing a business in more depth. This will be reflected in the examination questions and in the case study.
Greater emphasis will be placed on discussing the problems, tensions and conflicts that can arise in governing a business. How should directors be rewarded? What are the problems associated with the various forms of incentives that are used? What conflicts may arise between executive and non- executive directors, and how can they be resolved? What is the role of the chairman of the board, and what makes a good chairman?
Although an understanding of key rules - and of the general framework of rules - is required, the main focus is on an analysis of the issues associated with these rules. Why should the roles of chairman and chief executive be separated, and what problems arise when this occurs? Should the rules of corporate governance be voluntary or should they be compulsory?
Financial Management
This area of study will comprise 20 per cent of the revised syllabus, which is roughly in line with the current syllabus. In the current syllabus, five sessions in the Study Guide, out of 28, are devoted to this topic. The focus will remain basically the same and will cover:
- the cost of capital and capital structure (including calculating the cost of capital, gearing and the capital structure decision, and the capital structure debate)
- dividend policy (including the importance of dividends, factors determining the level of dividends, management attitudes towards dividends and alternatives to cash dividends).
The questions posed will be in line with those that have appeared in previous examinations and case studies.
Summary
The risk management syllabus has been revised to take account of both developments in the subjects covered and of our experience in operating the existing syllabus. The new syllabus aims to achieve a better balance between the areas of study, and should be more relevant and interesting for
non-financial managers.
Peter Atrill is examiner for Financial Strategy and Risk Management