BEIJING, June 21 — The State-owned Assets Supervision And Administration Commission (SASAC) at one stage planned to ask all state-owned enterprises (SOEs) to designate a chief risk officer (CRO), but gave up the idea due to the big differences in SOEs’ levels of internal management, according to a source in the China Daily today.
The source’s comments came as SASAC minister Li Rongrong released new risk management guidelines for SOEs yesterday. The guidelines aimed to “shed light on the overall principles, basic process and evaluation of risk management,” and urged SOEs to set up risk management commissions to prevent losses and enhance their competitiveness.
A position of CRO has become almost mandatory in US energy firms since the collapse of Enron in 2001 – the CRO aims to provide an independent risk assesment and management strategy for dealing with physical and financial risk.
But it will come as no surprise to foreign firms China has abandoned the CRO concept – Chinese state-owned organisations are structured too differently for such a position to have any real power. Best practice in the US has shown the CRO role to be most effective when he or she has a direct reporting line to the chief executive or chief financial officer, and real power within the company. But even western corporations have shown resistance to this idea – European CROs complain of the difficulties in getting management’s ear for example.
For China’s SOEs, a different approach will be required – yet wherever risk management sits within the organisation it must be powerful right down to the company’s core. Financial failures such as China Aviation Oil’s (CAO’s) ruinious oil hedging programme – CAO admitted losses of US$550 million (RMB4.3 billion) in November 2004 – can only be avoided by ingraining a risk management culture throughout the entire organisation.
It is precisely the CAO incident which prompted SASAC’s new guidelines, according to Li.
The CAO case is the largest scandal involving a Chinese state-owned company listed overseas – Minister Li said the incident at CAO could have been avoided if there was a sound internal auditing and risk management system in place.
CAO did have advanced risk management capabilities in place, including Kiodex software (now owned by Sungard) used by US energy firms and investment banks alike. However, the company’s application of the technology and its risk organisation were clearly flawed structurally.
SASAC has since sent seven SOE board members to Hong Kong to receive training on risk management. And the ministry has organized eight seminars on the subject over the past two years.
However, an official with SASAC admitted that most SOEs were still in the early stages of establishing a risk management system, with the few that have floated their shares overseas the exception.
Meanwhile, CAO is recruiting a new vice general manager, responsible for assisting the general manager in the company’s operation and management, including international trade on oil products and related products, coordinating with domestic oil products business and related work, perfecting and conducting company’s risk management system. Candidates are required to have experience in domestic and international marketing and risk management.
Given the early stages of risk in China, this position looks like a superb opportunity for the right person to carve out a career in Chinese energy risk management.