A question often asked by members of senior management when evaluating their company’s foreign exchange risk management activities is: “What do other companies do?” One possible place to find those answers is the recently released 2018 Corporate Risk Management Survey from Wells Fargo Foreign Exchange, which offers insights into the hedge programs of 330 of our corporate clients.
A word of caution, though. The survey results may be a better indicator of leading corporate practices rather than best practices. For example:
- Only 23% of the respondents quantify potential risk to changes in FX rates with only 12% of private companies indicating that they quantify risk.
- Only two-thirds of the respondents indicated that they have a formal FX risk management policy. Again, private companies were the worst offenders compared to their public counterparts with only 48% of private companies indicating that they had a formal policy in place.
- Forty-three percent of respondents indicated that their biggest challenges in managing FX risk were: dealing with market volatility, deciding when to hedge, and which strategy to use. Another 32% of the companies indicated that their biggest obstacle was the accuracy and timeliness of exposure data.
These are not good numbers in the sense that they indicate there are a large number of companies out there that are not fully equipped to manage their FX risks effectively and that many companies lack objectives and a decision process to formulate a coherent strategy. And, if companies do not have good exposure date, it is easy to understand why they do not quantify and report risk to their senior management. In other words, this indicates a lack of basic corporate oversight and poor controls.So what is a company supposed to do? We recommend that companies first identify the basic principles of a best practice approach and then apply those to your company’s situation. These best practices should serve as a guide for building policies and infrastructure to manage risks effectively. A suggestion on where to start this process or to make improvements to an existing program would be to do what is necessary to get the right data. Without it, it is impossible to move forward.
We define those best practices in the eight steps shown below, based on the COSO framework which is itself the basis of SOX controls. Each of these steps look almost boring by themselves, but if taken in context of the survey results, the responses point to the fact that many companies fail some of these basic steps, namely: not defining hedge objectives consistent with corporate objectives, failure in identifying and quantifying exposures, and lacking clearly articulated objectives and strategies designed to achieve those objectives. This is what separates best practice companies from everyone else.
Although the survey results may not serve as a benchmark for what your company should do, they may provide valuable insights when viewed as providing indicators of the types of challenges companies face in managing FX risk and problems that your company should try to avoid. This can help companies prepare to take the steps necessary to get it right.
Second, comparisons to competitors or other companies in the same industry can be strategically important. Equity analysts often paint companies with a broad brush in regards to FX risk. If a competitor gets crushed by an FX move, the assumption is that your company is getting crushed too. Looking at survey results and gathering information from public sources on what and how competitors hedge can help CFOs differentiate their company’s situation from everyone else’s. These comparisons can also help companies develop strategies that might provide a strategic advantage and instead of doing what everyone else is doing, the best answer might be to do what no one else is doing.