CFOs batten down the hatches

Oct 06 2008 by Nic Paton Print This Article

With the financial outlook getting grimmer day by day, the buzzword within the boardroom at the moment is risk Ė how to manage it, how exposed the organisation is to it and, critically, how to avoid it.

According to research by consultancy Towers Perrin, improved risk management is now the number one priority for chief finance officers and, more widely, board-level senior managers alike.

A poll of the 125 U.S finance executives, sounded out before Congress agreed last week to the Treasury's $700bn rescue plan for the economy, found that, while just four per cent felt the market crash would have a severe effect on their own financial prospects, now was clearly no time for complacency.

The majority acknowledged that the crisis would almost inevitably dampen profit expectations and potentially leave a lasting dent in the world economy.

Yet, despite outward confidence about their own prospects, nearly three quarters also admitted they were worried about their own organisation's risk management practices and ability to meet strategic plans.

This suggested that finance executives, regardless of industry, perceived a need to invest in more effective risk identification, measurement, and management procedures, argued Towers Perrin.

More than four out of 10 predicted a more active and "energised" involvement by boards of directors in risk management policies, processes and systems, with a similar percentage even forecasting increased employee-level engagement in this area.

More than six out of 10 also conceded they had concerns about raising short-term capital.

More than half of the CFOs polled said they planned to put their risk management practices under a microscope, in many instances at all levels of the organisation, from the boardroom down to the shop floor.

More than six out of 10 blamed poor or lax risk management at financial institutions as a major contributor to the current financial mess.

Nearly as many also cited the complexity of financial instruments, while 57 per cent blamed financial market speculation.

The research adds to a growing weight of evidence, if more were needed, that CFOs, unsurprisingly, are pulling in their horns in the face of the financial meltdown.

A study by recruitment firm Financial Executives International and Baruch College's Zicklin School of Business in April, for example, found that more than four out of 10 CFOs believed the U.S was already in a recession, with another third believing it was likely to be so in the next six months.

According to the Towers Perrin research, what CFOs believe is needed to sort out the mess is, first and foremost, better regulation of lending practices and derivatives.

The CFOs also recommended that there needed to be heightened vigilance by boards, management, investors and even regulators to risk management practices and risk-related incentives, they suggested.

At a practical level CFOs, argued Towers Perrin, therefore needed to take three important steps:

  • get a better grip on the conditions that could expose their company (or the economy) to the risks associated with the current financial crisis
  • measure the potential combined impact on short- and long-term financing needs
  • then stock the balance sheet with the right mix and amount of provisions to weather the storm better than competitors.

"With these and other steps, CFOs can look at future risk events as competitive opportunities that can minimise exposure to balance sheet risk," the survey concluded.