Is Passive Hedging in Shareholders' Interest?

Hedging policies are central to the treasury policies but are sometimes peculiar from the shareholder’s perspective.

When I was a young corporate treasurer I lost a fortune on a hedge but obviously the commercial flow balanced it. However the board noticed the losses I made so they asked me to explain why I could loose so much money. I was puzzled since I only followed the policy I had proposed and they had approved. I prepared a presentation explaining the policy with an example. A board member commented: “We understand the principles of hedging but we are anyway surprised that you did hedge since you lost so much money. Was that really necessary?”

I was chocked! What a question, we must be consistent in our hedging otherwise we would be speculating. But with time I started to appreciate his comment. It makes sense to me. Is it shareholder value to implement a hedging policy that may create huge losses? Does the policy make the risk disappear? After all a hedge only postpones the financial impact.

And why is hedging not speculating? Because you take a position passively based on a policy instead of your market opinion? What does zero risk actually mean? Is passive hedging strategies in the shareholders’ interest? Is financial risk not a business risk?