RISK MANAGEMENT
James Irvine - BAT Malaysia
By Tom Leander

Cigarettes come with a warning on the label. Smokers smoke anyway. James Irvine, CFO of BAT Malaysia, lights up once in a while, too, but that's just about the only risk he accepts willingly. His industry is plagued by high import duties, crop failure, currency volatility, the ephemeral nature of brands, anti-smoking groups and health regulators. No wonder he has made risk management central to his job.

These same risks afflict tobacco companies anywhere. But BAT Malaysia's exposure exceeds the risk of other companies because it owns a lion's share of the local business and it is undiversified. BAT was formed in 1999 when Rothmans of Pall Mall (Malaysia) merged with Malaysian Tobacco, creating a giant with 70 percent of local sales. It yields a rich cashflow that is continually chipped away by risk. Irvine wins this year's Best Practice Award for Risk Management for incorporating the management of risk into his company's day-to-day fabric.

BAT's profits, despite a 30 percent rise in import duties last year, crop failure and regional economic woes, showcase Irvine's success. Pre-tax profits rose 39 percent to US$184 million last year on sales of US$605 million. More importantly, BAT averaged 57 percent cashflow return on investment - cashflow minus a charge for the cost of capital - for the past three years.

Irvine's career prepared him well for the task of risk manager. He first worked for British Petroleum as an auditor in China, switching to BAT in 1986. His history with BAT reads like the stamps on a P&O trunk: auditor in Guatemala, Pakistan and New Caledonia. As general manager of operations in New Guinea he ordered his employees off an island with an active volcano. He became general manager for Asia Pacific in 1997.

The Big Smoke

Irvine was posted to London when he was offered the job as CFO of BAT Malaysia in 1999. The merger had consolidated BAT's holdings in Asia into a giant based in Malaysia. Straightening out its finances and protecting it from risk were key goals of the global company. Foreign equity in BAT Malaysia amounts to 72 percent, and the parent needed a CFO of multinational stature to communicate with this constituency.

Irvine focused on risk from the first. He sent a team of auditors to ferret out risks that threatened the business. He added a node to BAT's enterprise resource planning system, dubbed the risk register. Unit managers became responsible for identifying risks and flagging them. The flags were then centralized and set on a grid of priorities.

When a particular risk continued to emerge as a top priority, the money to address the problem became immediately available. "The risk could be as minor as the breakdown of machinery," says Irvine. "But we already have a plan to ensure there will be no interruption of supply," he says. Irvine assigned controlling risk to the unit's line managers. He included two new committees, a crisis management team and a treasury committee to oversee risks that may threaten to reduce BAT's substantial cashflow.

So far, the system has seen BAT through the imposition of government import duties and a tighter regulatory environment. It also helped as Irvine consolidated the company through post-merger staff cuts. But the real test of the system lies in the future. "Let's hope that test doesn't happen," says Irvine. He adds: "But it will take a lot more than a volcano to surprise us."