The CRO: a species at risk: the position of chief risk officer is struggling to find a niche within many organizations. Beyond a few sectors, notably the energy and financial services industries, the need for a CRO is still hotly debated

Risk & Insurance, Sept 1, 2004 by Lawrence Richter Quinn

"Certainly some industries are paying more attention to ERM and appointing CROs, particularly energy and financial services," says Bob McDonald, CRO and vice president of corporate planning at Chicago-based energy company Exelon.

So why the reluctance in manufacturing? Says the University of Georgia's Hoyt: "CROs are rare in manufacturing industries because their risk focus is so narrow. Risk is a challenge for them because tool-driven solutions don't work for so many of the risks they face."

"Manufacturing companies think they better understand their risks at different levels than other industries," says Richard Inserra, assistant treasurer and director of risk management at Connecticut-based Praxair Inc. "It's a huge problem for them because they still do their risks in silos. In effect, they have 'mini-CROs' for their silos."

Regardless of industry, with so few positions to fill, whoever wants to become a CRO will have to come out swinging. And it promises to be ugly.

PROPONENTS HANG TOUGH

Despite the challenges that CROs face, it's clear that creating the position has its proponents. "The major advantage of having a CRO is that somebody can pull the plug and say, 'This is asinine,'" says Kloman.

"The CRO's ultimate objective is to help the board and executive management determine the risk/ reward tradeoffs in a business, and given the right support they can be extremely effective at that," he says. Some companies seem genuinely happy with their CROs. That's particularly true in Canada.

Take Ontario-based Hydro One, Inc., the second-largest transmission company in North America, for example. There, CRO John R.S. Fraser, appointed in January 2000, built an ERM program from scratch with a staff of four. The program has been so successful that he's now running a one-man shop. "I'm working my way out of a job," says Fraser.

Hydro One's program covers all risks, including "soft" risks such as reputational risk, and it has endured traumatic events such as the acquisition of 88 companies in 2000 and the opening of the electricity markets.

"Having a CRO has been enormously important to the overall success of the company," says Tom Parkinson, president of Hydro One. "We couldn't have done it without Fraser as CRO. Our ERM program is enormously successful."

PSEG's ERM program, initiated by Brooks, is a success as well. But she says the company was already headed in that direction when she came on board in November 2002. "The CRO position comes out of an evolution here where we initially considered risk management just in terms of our trading operation. Now we're looking at our whole enterprise," she says.

"We're looking at this in two pieces," Brooks says. "One is a credit piece. Maybe we're trading with the same counterparty at both the regulated and unregulated sides of our business, so we want to know what our total exposure is to this counterparty as a corporation."

"With the second piece, we're looking at new aspects of market risk," she adds. "Our people are understanding that there can be more risk in owning either the assets or our load obligations than in stand-alone trading. Both come out of the fact that, in some markets, we are generating into an oversupplied market. The question then is: How do we manage risk for assets in these markets so we can recover our investment?"