Olam has a rigorous risk management framework designed to identify and assess the likelihood and impact of risks, and to manage the actions necessary to mitigate impact.
The process identifies risks from a top-down strategic perspective and a bottom-up business perspective. Overall responsibility to monitor and assess risk lies with Olam’s independent risk function (Risk Office).
We take a holistic approach to enterprise-wide risk, monitoring across each value-chain step and a wide range of both quantifiable and non-quantifiable risks.
Risk Governance Structure
- Olam has an institutionalised process in the governance of risk management matters: our Chief Risk & Compliance Officer (CRCO) is a member of the Executive Committee and reports to both the CEO and the Chair of the Board Risk Committee (BRC), which comprises the Executive and Non-Executive Directors.
- The BRC is also supported by the Executive Risk Committee (ERC). The ERC comprises key executives from the senior management team who support the risk governance process by promoting risk culture, approving large exposures and mediating large breaches.
- The Risk Office reports to the CRCO and is responsible for identifying, assessing, measuring and monitoring risks, to provide Olam’s senior management and the Board with assurance that all the risks borne are within our risk tolerance. The Risk Office is responsible for risk monitoring and control on an independent basis and undertakes regular stress-testing of the company’s portfolio.
- Risk limits are set as part of the annual budgeting cycle, which are presented to the Board for approval. These limits – outright, basis, structure, arbitrage and Value-at-Risk (VaR) as well as credit and counterparty limits – are set based on various factors such as risk versus return, volatility of past earnings, adherence to limits and maximum loss limits derived from scenario and stress-testing. The number of years in business, strength of the management team, prevailing market conditions and the macro-economic outlook are also considered.
- The CRCO is mandated to allocate the risk capital across businesses considering the competitive position, trading and market conditions and the track record of each business. Performance is continuously monitored, and risk capital allocation is recalibrated where necessary. The assigned limits are set at all levels of hierarchy within the structure, i.e. at businessunit level, value-chain step level and at profit-centre level, as well as any other limits the Risk Office deems appropriate.
Enterprise Risk Management
Olam’s Enterprise Risk Management framework defines 51 individual risks across 11 categories.
Of the 51 risks, 16 are evaluated on a quantitative basis and represented in the company’s Group Risk Dashboard (GRD), the output of which is presented to the BRC each quarter. This report allows segmental analysis of earnings sensitivity for 12 of the 16 quantifiable risks at Cluster level, business unit level and at the value-chain step level and the remaining four at the company level.
The Enterprise Risk Scorecard (ERS) is the result of an assessment of each of the 51 risks for likelihood of occurrence and impact. Each risk is evaluated for each Business Unit both on an inherent and residual basis using a traffic-light system of red-amber-green. Inherent risks are the threats that an activity poses in the absence of any mitigating factors in place; residual risks are those that remain after mitigations are considered.
The ERS is also presented to the BRC on a quarterly basis which, in conjunction with the GRD assists the Board with
(i) examining the effectiveness of the Olam’s risk management plans, systems, processes and procedures and
(ii) reviewing company-wide risk policies, guidelines and limits, as well as risk exposure and risk treatment plans. The Board is responsible for approving the overall risk capital of the company at the start of the financial year. Risk capital, expressed as a percentage of the equity capital of the company, refers to the maximum potential loss if all the trading risks across all product-types and geographic regions materialise at the same time.
The oversight of each of the 51 risks is divided among the 5 Board Committees (Risk Committee, Audit Committee,
Capital & Investment Committee, Corporate Responsibility & Sustainability Committee and Human Resources &
Board – Strategic Risk Assessment
- Olam continually upgrades our risk measurement methodology in line with industry best practices. We focus on the measurement of quantity, dollar value, diversified VaR and stress testing to determine potential impact of adverse market events on the books. Analysis of return drivers provides a clear attribution of returns against risk and allows an independent flagging of outsized or undesired risk.
- The VaR methodology calculates the potential loss arising from the commodity price, credit, counterparty and currency risks to which it is exposed.
- Market risk (i.e. commodity price risk and currency risk) VaR is calculated over a one-day time horizon with a 95% confidence level for each product in the portfolio. Credit and counterparty risk VaR may be computed by applying default rates (based on counterparty ratings) and underlying commodity volatilities as appropriate.
Market Compliance Controls
- One of Olam’s key priorities is to comply with the highest standards of business conduct. The Market Compliance Office (MCO) is responsible for ensuring regulatory compliance for the derivative trading units. The MCO carries out regular trader training courses to ensure familiarity with prevailing exchange rules globally and ensures that all new hires are comprehensively trained in Olam’s Trading Compliance Manual.
Risk Training and Communication
- Olam has laid out risk policies that guide newcomers on the risks they will be required to manage and the risk systems that require timely and accurate reporting. The Risk Office frequently presents to the Olam’s most senior management bodies, the purpose of which is to enable the continual reinforcement of the control environment and alignment of risk culture and awareness across the company. From time to time, the Risk Office publishes advisories on pertinent matters to raise awareness and to promote industry best practices.