Turning the Organizational Pyramid Upside Down: Ten Years of Evolution in Enterprise Risk Management at United Grain Growers
Managing Principal, ermlNSIGHTS
Strategy without tactics is the path to uncertain success; tactics without strategy is the noise before defeat.
– Sun Tzu (c. 544-496 B.C.)
Few companies stand out as successful pioneers in enterprise risk management (ERM), especially one that undertook the initiative almost 15 years ago. One such ERM pioneer was United Grain Growers (UGG), a conservative 100-year-old Winnipeg, Canada-based grain handler and distributor of farm supplies. When UGG announced that it had implemented a new integrated riskfinancing program in 1999, it received a great deal of attention in the financial press. CFO magazine hailed the UGG program as "the deal of the decade." The Economist characterized it as a "revolutionary advance in corporate finance." Harvard created a UGG case study. While most outside attention focused on the direct financial benefits of implementing the program (protection of cash flow, the reduced risk capital required, and a 20 percent increase in stock price), scant attention was given to the less tangible and therefore less measurable issues of governance, leadership, and corporate culture – the conditions that enabled such innovation. It was a combination of a collaborative leadership open to new ideas, a culture of controlled risk taking, and active risk oversight by the board that produced a strategic approach to UGG's risk management process. A combination of the same cultural factors had already contributed to the 1993 transformation of UGG from a cooperative structure to a publicly traded company with access to the capital markets. UGG's chief executive officer (CEO) had two key strategic objectives: (1) from day one of his tenure, a razor-sharp focus on improving the financial performance of the company to better serve customers and shareholders, and (2) as financial performance improved, to change the risk profile of the company to attract long-term shareholders versus short-term stock speculators.
Implementing the integrated risk program that reduced earnings volatility helped to change the risk profile of the company. However, the strategic goals of UGG went deeper than an integrated risk program. Over the next several years, financial performance continued to improve. New value was created by implementing a unique credit financing business (UGG Financial), in partnership with the Bank of Nova Scotia (ScotiaBank). This was followed by merging/ acquiring the business of rival Agricore Cooperative in 2001, creating Agricore United (AU). The final act of value creation was extracting a high premium for AU's stock in 2007 from several bidders that wanted to acquire the company.