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Finance professionals are in the vanguard of corporate risk management - especially after the debacle of the global banking crisis - says CIMA president and risk management expert, Aubrey Joachim.
CIMA members are at the cutting edge of the emerging discipline of corporate risk management. Strategic risk is the most potentially damaging category of risk for overall corporate progress and prosperity, said CIMA president Aubrey Joachim at a bitesize briefing in London.Joachim took the example of a Marsh & McLennan Companies survey in which 10% of Fortune 1000 companies surveyed recorded a loss of over 25% of shareholder value in one month. He argued that strategic risk easily outstrips hazard, financial or operational risk in terms of value erosion. For most companies, critical strategic issues, like customer demand, competitive pressure, M&A integration and misaligned products are far more likely to cause major business headaches than lawsuits, commodity prices, interest rates or other macro economic factors.Understanding, managing, and mitigating risk is one of the biggest emerging challenges facing finance professionals. But Joachim added that having technical skills is not enough. Finance professionals must embed the concept of risk assessment into their core business functions. They also need strong communication and influencing skills to ensure that their organisations engage with the risks in their strategic business plans and day-to day operations. ‘This is a new and emerging space for finance professionals,’ said Joachim. ‘We must influence management thinking.’
Becoming a core competencyHow do finance professionals establish risk reporting frameworks and embed the financial tools necessary to ensure effective, accurate, timely and business focussed risk assessment? Joachim emphasised that a company’s financial statements are only a consequence of the organisation’s strategic and operational activities. For these to be effective, management and staff at all levels must appreciate how their own business operations cause and impact upon the company’s business risks. Some primary issues for consideration are:
Increasingly risk management is becoming a core competency of finance professionals with the CFO expected to plot and show the relationship between the risks and the company’s financial reporting and to provide an effective framework for good governance and risk management, said Joachim. Today’s CFO must provide a complete risk management strategy encompassing financial, strategic, compliance related, operational and environmental risks. Using internal, strategic and feedback controls the CFO must insist that risk management is everyone’s responsibility and not simply that of specialists.But he conceded that an effective ERM system should also report opportunities or ‘positive risks’. Joachim said that strategic planning was a continuing process, with risks likely in either taking strategic action, or failing to take it.
Parts of the frameworkCapital spend, operating expenditure and the budgetary process were all essential parts of the management reporting framework, he said. However he said that there were also significant shortcomings to longer term budgeting as a management control tool. Long term budgeting is relatively ineffective in a frequently changing environment as it suppresses innovation, and can fail to empower managers and staff.Many businesses are now adopting rolling forecasts, providing a continuous process of forecasting and risk management said Joachim. He cautioned strongly against short-term incentives in which bonuses could be earned only at the expense of adding unacceptable levels of risk to long-term business sustainability. In some cases a more viable option may be to offer shares in the company. Whatever the case, Joachim urged that, ‘it is for the finance professional to understand the risk’. In the context of the recent financial services crisis and the huge banking risk exposures on complex financial instruments, Joachim said: ‘If people don’t understand the instrument, they don’t understand the risk.'Ultimately, the finance professional should provide a total financial picture, including non-financial measures, complete with a performance management framework and risk matrix. This should enable stress testing of critical business functions. Joachim said that the finance professional should always assess and place a cost on the risk identified, which should result in a key performance indicator for the business. ‘If you can’t come up with a KPI then it’s not worth doing,' he said. ‘We must know the cost of failure and the cost of success.'
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