ACCORDING to the latest survey on companies and how they treat derivatives, shareholders have reason to worry. A Price Waterhouse survey of 386 of the world's top companies shows that many still do not realise that they need to keep a far closer eye on their treasury activities. Two key areas of concern are in separation of front-office and back-office function, and in whether or not the company is investing in good risk-management software that can accurately plot the daily position. The world has only really woken up to the size of the derivatives market, where trillions of dollars worth of business goes through every week. Since early 1994, some big names have been admitting that their treasury operations got the numbers wrong. Forget about Nick Leeson whose judgement sank Baring Brothers. The corporate landscape is littered with other casualties of the derivatives market. Florida State Treasury and Florida League of Cities lost US$99.6 million on mortgage derivatives, Kashima Oil lost $1.45 billion on currency derivatives, Dell Computer lost $34.6 million on leveraged swaps and notes. Metallgesellschaft lost $1.34 billion on energy derivatives, Procter & Gamble lost $157 million and Showda Shell Sekiyu lost $1.58 billion on foreign exchange forwards. These are big sums - and the companies are big entities. Perhaps the most frightening thing about the Price Waterhouse report is that it was compiled from the replies supplied by 386 companies listed on Fortune's chart of the world's top 5,000 companies. While the numbers they supplied may not seem dire, Price Waterhouse said that companies which thought they were on course with risk management were more likely to reply to such a survey. Of those which did reply, fewer than half had invested money in the sophisticated risk management software packages that offered greater security and could show the company the true extent of its derivatives exposure if markets or currencies moved against it. Saving money by skimping on something as vital as a good risk management package is ludicrous considering the potential losses that can follow an ill-judged or badly-monitored position. Such a package would not have automatically prevented a meltdown of the sort that destroyed Baring Brothers, but it should have alerted the company's bosses. Also frightening is the fact that many of the respondents proudly pointed to policy statements to show their commitment to cutting risk. Policy statements carry about as much weight as companies' mission statements when it comes to day-to-day tactics in global markets. The Price Waterhouse report echoes a similar warning from Arthur Andersen in June. Arthur Andersen did a global survey of derivatives activity last year for the Group of 30, an influential international group of financial experts. One of the group's recommendations was that boards of directors should take a keen interest in setting derivatives policies for their companies. In a 1995 survey, the Hong Kong Monetary Authority found that only about half of the territory companies with formal derivatives policies had sought approval from their boards. Arthur Andersen's Kenneth Blomster puts it bluntly: 'Companies need to understand the risks they are taking and, if they do not understand the risk, they should stay away from the product.' But many do not. Company directors who do not haul up their finance directors on a regular basis and ask the following questions are doing shareholders in their companies a serious disservice. What derivative instruments is the company treasurer using? Is the treasurer using those derivatives to cut risk or to increase profits? Does the treasurer mark the company's position to market daily so that he or she can see exactly the size of the company's position if it decided to close out all of its derivative contracts? Is there a separation between front-office and back-office - in other words, is the person who takes the derivative positions the same person who updates the sophisticated risk-management package that the company, hopefully, uses? If their treasurers cannot answer those questions, they should worry. If the board of directors cannot look at their derivatives exposure at least once a month, their shareholders should worry.