Strategic risks pose the biggest threats to companies' existence — but bosses are struggling to find effective ways of managing those risks.

That was the message from William Montanez, director of risk management at Ace Hardware, an international company with a captive insurance company domiciled in Bermuda.

Speaking at the Bermuda Captive Conference yesterday in a session on risk and corporate governance, Mr. Montanez said that according to the Audit Director Roundtable, more than two-thirds of market capitalisation declines of more than 50 percent were due to strategic issues.

While companies like Ace Hardware tended to be effective at managing operational and financial risks, strategic risk was where they tended to come undone, Mr. Montanez said.

"These risks include things like decline in core product demand, poor mergers and acquisitions integration, competitor infringement on core markets," Mr. Montanez said. "These risks are very important, because they are the ones that could bring down your companies."

He said the key for companies attempting to manage risks effectively was to embed it in the regular decision-making process.

Many companies treat ERM (enterprise risk management) as a checklist of things to tick off, but that's not necessarily good enough," Mr. Montanez said. "We live in a dynamic world where things change every single day, every single hour in fact. So you need active management of risk rather than a process."

Fellow panellist Keith Ryan, vice-president, director of finance shared services at Lincoln Financial Group, described some of the risk management lessons his company had learned during the financial turmoil of the past two years.

"We learned that we had to do better asset and liability management, have various distribution channels to sell products, to tailor our products to reduce the risk in them for us and to evaluate our investments better," Mr. Ryan said. "And we are not now dependent on anybody to meet our cash flow needs for the next 24 months."

Evaluating the risk of each individual client was also now being done more rigorously, while more emphasis was also being placed on effective communication.

He referred to Lincoln's life insurance and annuities products and how the crisis had highlighted numerous risks. The 50 percent plunge in many asset values during the crisis had led to a significant reduction in revenues for Lincoln. There had also been investment downgrades, difficulties with rolling over debt agreements, the need for more capital to back new sales, the need to "right-size" the organisation and an impact on employee morale.

Laura Taylor, who will head the just-launched Bermuda arm of Aon Global Risk Consulting, also spoke on risk factors impacting her clients. Two of the external risk drivers involved regulators and rating agencies.

The US Securities and Exchange Commission had introduced new rules on disclosure of compensation practices and whether they encouraged inappropriate risk taking, as well as the board's role in oversight of risk.

Rating agency Standard & Poor's was also enhancing its examination of risk management for companies including non-financial entities during the credit rating process, Ms Taylor said.

"What they are trying to find out is, what are the key risks of an organisation and how much risk do you want to take. It's also telling to them where risk management sits in an organisation.

"Whether or not you have a chief risk officer does not mean anything — it could be a middle management position. You could have a company without a CRO, where the General Counsel or the COO manages the discussions around risk. And how involved is the board?"