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When John Pearce joined Fonterra Co-operative Group Ltd. in 2006, the company did not have a developed enterprise risk management program.
In fact, “risk management was seen as a separate activity, not integrated into the way that the business operates,” he said.
“There were a few things that had to be done,” said Mr. Pearce, general manager, policy and risk for the Auckland, New Zealand-based milk processing company. One of the first things was selling the benefits of risk management to management, he said.
That required running test programs to show there was potential for value to the business by engaging in risk management, he said. In turn, doing so meant “we had to run a range of different risk management programs in the property area, business risk and so on.”
Once Mr. Pearce and his team were able to show there was value to be had, the next target was to develop the framework to establish the processes that would be used and taking that up to top management and the board's Audit, Risk and Finance Committee.
Mr. Pearce said the framework included the risk management policy, which stated the intent; the risk management standard, which defined accountabilities and responsibilities; and the risk management guidelines, which outlined how to achieve the requirements of the policy and standard, pointing out that, at Fonterra, policies and standards are requirements of any program.
“We also have regular meetings with the commercial directors of the strategic business units. Business units report to strategic business units, which report to group” level, he said.
“I think the really key accomplishment for me is the fact that we've now got a common enterprise risk management program operating across the whole company that adds value from the business unit to the board room,” said Mr. Pearce.
“Now we have a common language for risk management that goes across the whole enterprise. We've got a common risk universe, so when we describe risks, we're putting them into categories that the businesses understand and that have been signed off by our board,” he said.
Fonterra has common risks matrices, so what is used to define and quantify risk is common across the business, said Mr. Pearce. Fonterra does annual assessments of the risks in the business, he said, “and we've got much stronger links in terms of where risk fits in the overall business planning and strategic activities.”
For most new projects, acquisitions and the like, there is a requirement that a risk assessment occurs as a part of the review process before approval goes to the board.
Mr. Pearce said Fonterra's risks are directly related to its objectives. “The associated controls to manage these risks are identified, and the effectiveness of the controls is assessed,” he said. Where required, control improvements are developed and implemented, and Fonterra has a process that tracks and reports on the effectiveness of controls relied upon to manage risks.
“The outcome of this activity is that the business is better able to achieve its objectives because its risks are known and controls improved where required,” said Mr. Pearce. “We are focusing on what is important, and therefore risk management has relevance.”
Mr. Pearce said there are challenges still. The biggest one is “sustaining the momentum that we've developed over the years by building risk management into the DNA of the business.”
Fonterra Co-operative Group Ltd.'s philosophy of managing insurance is straightforward: None of the individual businesses within the Auckland, New Zealand-based milk processing company is allowed to buy its own insurance without approval from either the chief financial officer or John Pearce, general manager, policy and risk.