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Blue Wood Chocolates


Partner, RSD Solutions Inc.


Partner, RSD Solutions Inc., and Associate Professor of Finance, Dalhousie University

This case highlights many issues around enterprise risk management (ERM). It concerns a company that has turned in a satisfactory performance in the past, although this has been a result, at least in part, of luck rather than design. There is a variety of risk and governance issues that can be discussed. They include prioritization of actions and implementation of an ERM framework when considering how to deal with a diversity of personalities and opinions.


Sally Holton, the newly appointed chief financial officer (CFO) of Blue Wood Chocolates, gazed from her office window at the sunny scene outside. Her mood was far from sunny, however, as she pondered what seemed like a mountain of urgent issues facing her. It seemed that there were no easy solutions to any of them.

Blue Wood Chocolates makes chocolate products at its plants in the Midwestern United States for sale domestically and internationally. The company has delivered a mixed financial performance over the past couple of years with volatility that management has not been able to explain, and that the board of directors and owners consider unsatisfactory. There has been an ongoing debate among board members as to whether the lackluster results are due to operations or the vagaries of the commodities markets.

When the long-serving CFO recently retired, Sally Holton was brought in as an outsider to replace him. Her appointment was controversial among some finance and treasury people in the company who expected an internal appointment. Several senior, long-serving, and experienced employees were thought to be well qualified for the role. However, the CEO, John Ferguson Junior, determined that it was an appropriate time to bring in an outsider with new ideas to shake up the finance and treasury functions. Quarterly results had been variable and unpredictable. Ferguson felt that the company needed a better planning process and had to improve its ability to explain its performance to shareholders, the board, and the banks.

He considered the main problems the company faced to be due to poor reporting and presentation. Sally wondered whether the problems were more significant and fundamental. In any case, she knew that she needed to make an impression and make an impression fast.

Originally trained as an accountant and auditor working for one of the major accounting firms, Sally left accounting to work for a small mining company. That led to a job with an international mining conglomerate where she was promoted through various treasury and finance roles. Most recently, she had been responsible for managing commodity price and foreign currency risks. This was thought to position her well for dealing with Blue Wood's exposures to cocoa and sugar prices and foreign currencies. However, her new role was much broader than anything she had experienced before, and she soon realized that she had walked into a job that was going to be far more challenging than she had anticipated.

One of the first major projects Sally was tasked with was to present the latest quarterly results to the board at the end of her first month in the job. From brief conversations with some board members, she knew that they were concerned about the company's situation, and she had learned enough to know that she would have difficulty explaining the underlying reasons for the company's unsatisfactory financial position and recent performance shortfalls.

In the middle of her first week at the office, Sally received a call from Robert Klein, who was relationship manager at Blue Wood's lead bank. He introduced himself and they exchanged a few pleasantries, discovering that their kids attended the same high school, although in different grades. The conversation quickly turned to business. Robert said he was looking forward to working with Sally and seemed sympathetic about the wide-ranging tasks that he knew Sally faced. Unexpectedly, though, he jolted her by expressing his concern about Blue Wood's risk management practices and how this might be contributing to the company's unpredictable financial results. It wasn't just the weak financial results that were troubling; it was the volatility. He mentioned Blue Wood's inability to explain fluctuations adequately to the banks, and noted that the company had been very close to breaching its interest coverage covenant twice in the prior two years and looked like it would actually breach it in the current quarter. Robert was under pressure at his bank to take some form of action, including limiting or reducing exposure to Blue Wood and increasing margins and fees. He told Sally that he needed a report and plan addressing how Blue Wood was going to control and improve the volatility and unpredictability of its financial performance to present internally at his own bank, as well as to the other banks in the lending syndicate. He needed this very soon to determine what mitigating factors could be taken into account in this process.

Sally realized that her brief honeymoon in the new job was over and she needed to get to grips with the company's problems that appeared much more complex than she had been led to believe at the interview stage. She needed to formulate a comprehensive and detailed plan of action before being forced by the banks into taking certain measures that might not be in Blue Wood's best interests. She could certainly blame her predecessor for increased margins and fees on the bank financing, but she was determined to limit the extent of this by demonstrating how the company planned to improve controls, reporting, and, she hoped, financial performance.

Over the next few days, Sally spoke to as many executives in different areas of the company as possible. It became clear that there was little ongoing communication between major functions within the company. Areas like purchasing, operations, and sales did not coordinate or discuss current difficulties, future trends, and plans. They each made quarterly contributions to the business plan and got on with their business as they saw it. These contributions appeared manipulated to allow for adjustment when they were told to improve their targets. When plans were not met, which was most of the time, each area blamed the others and reporting was not adequate to identify reasons for shortcomings.

Worse still, the two cocoa purchasers did not get along and bad-mouthed each other to Sally. They were each pursuing their own purchasing strategies in isolation. The cocoa and sugar purchasing managers had discretion to use futures and options contracts as well as supply agreements to hedge quantities and prices of commodities, and they were doing this according to their views of the market and information about requirements from the production managers. The only restriction was that all contracts had to have a maximum maturity of one year.

Sally also spoke to two of the board members. Irene Dawson had been nominated to the board by one of the private equity funds that had a significant ownership stake in Blue Wood. She was not one for small talk, and appeared comfortable only when she had an Excel spreadsheet in front of her and a ruler in hand. She laid out a long list of detailed analysis and information she wanted Sally to provide to the board. Her fund wanted out of Blue Wood, but not at current values. Irene's mandate was to push Blue Wood to maximize value in the short term.

David Rennie represented a pension fund that had invested in Blue Wood. The fund saw its position as a long-term investment in a sector that promised steady growth, with Blue Wood well positioned to participate in this growth over time. The fund did see some current issues, but David considered these to be little more than a blip. In his view, management had a good grasp of the business and would soon be on top of things again. Each time Sally tried to discuss the business and the company's strategy, David was quick to steer the conversation in a different direction. He liked to be photographed with the board and attend publicity functions. He also appeared to have a weakness for chocolate, constantly feeding his not inconsiderable frame with the stuff. He bemoaned the fact that being a board member did not entitle him to a constant free supply of the company's product, although he offered the opinion that it was not nearly as good as some of the competitors' products.

Sally learned that discussions about the business plan and results at recent board meetings had degenerated into long and often heated discussions and disagreements about Blue Wood's business strategy and objectives. It seemed the arguments always circled back to the latest financial results.

In her two weeks between jobs, Sally had been reading a book about ERM frameworks and implementation guidance. The sections about the ISO 31000 framework seemed particularly interesting, but there was a variety of other risk management and financial approaches with differing levels of detail. As Sally pondered the results of her inquiries, it seemed to her that Blue Wood was sorely and urgently in need of such a framework. But which type of framework would be best for Blue Wood? And how should she go about applying this in practice? She even wondered if this would be a good time to try to implement such a system, with her being so new in her role. It would be a lot to explain to many people in a very short period of time in which she had to demonstrate competence.

She worried that if not done properly, implementing ERM would be seen as a bureaucratic exercise and resisted, or at least not applied usefully. How could it be more than a compilation of a list of risks, most of which were already known? Such a list would certainly be useful, as major risks were currently dealt with in different ways by different people and nobody had a big picture view of the company's risk profile. However, such a list would also be a static snapshot that would soon be out of date.

Upon further reflection, Sally wondered if she should set her sights lower and start by considering implementing a narrower form of financial risk management for the areas directly within her purview. She was certainly more confident of her abilities to understand what would be needed and how to do it. Perhaps a comprehensive ERM framework encompassing financial risk management would be too much to achieve and could even conflict with the financial risk management part.

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