As more and more companies come to terms with the unknown factor that is the length of this downturn they fundamentally reposition themselves. Many do this to merely survive the storm. Some, however, see this as an opportunity to thrive by pushing their boat out.
Whatever their driver strategic understanding, management and exploitation of risks is critical. But, companies need to keep in mind that these risks are no longer predictable and line. Like a virus they have mutated, in the form of two-paced markets, business model complexities, multiple stakeholder interdependencies and disruptive technologies to name a few.
As a result there is urgent need for a different, strategic and top down approach to risk management - one that is focussed on value, is core to managerial decision making, and is embedded within an organisation's DNA. There is an equally urgent need for this to be owned and communicated by the C-suite. The modern-day CFO can become the voice of risk management 'for value' and the role model for strategic risk management across an organisation.
CFOs need to lead from the front, own the risk conscience of an organisation, champion it and lead the way in making high-impact, risk informed decisions that improve corporate value. CFOs should enable their colleagues, galvanise their organisations to operate fully aware of the potential risks and opportunities in their business environment, and act decisively.
The changing DNA of the CFO
Today's CFOs are engaged, focused and strategic. They are thoughtful and entrepreneurial, but they remain focussed on maintaining the integrity of the Finance function. Traditional skills of analysis, reporting and control are now in demand outside the Finance function and the job of the CFO is broadening beyond its technical heartland into a role that is much more strategic.
Leading CFOs today overturn outmoded perceptions of Finance as a 'business prevention and counting unit' and reposition it as an enabling partner to business, by providing insight and analysis to the CEO and ensuring business decisions are grounded in sound financial criteria. Many are even playing a more active role in developing and defining their organisation's strategy.
Their unique risk insights allow them to drive more effective strategic decisions by lining up the organisation's capital structure with its strategy and ensuring that risks are being exploited and managed within the overall risk bearing capacity of their balance sheets and in line with their risk appetite. Within this capital structure, they then plan and manage risks within as part of their business' strategy and judge whether the organisation can be sustained with the present and future business model.
The role of CFOs in today's leading companies is rapidly evolving, requiring them to be versatile individuals with the talent to meet a continuously changing set of circumstances. Our research has highlighted six activities that represent the evolving contribution of today's top CFOs:
- Ensuring business decisions are grounded in solid financial criteria
- Providing insights and analysis to support the CEO and other senior managers
- Leading key initiatives in finance that support overall strategic goals
- Funding, enabling and executing the strategy set by the CEO
- Developing and defining the overall strategy for the organisation
- Representing the organisation's progress on strategic goals to external stakeholders
CFOs set the tone
According to our Turning Risk into Results report companies in the top 20 percent of risk management maturity delivered three times the level of EBITDA than the bottom 20 percent. While the report found specific risk practices that were consistently present in the top performers, what also stood-out was the very visible and real championing of risk management from the C-suite led by the CFO.
CFOs should play a vital role in building a strong risk culture through setting a clear tone and role modelling through engagement and communication, both internally and externally, of the importance of risk management with employees at all levels.
Internally, risks and their management need to be strongly seen as a strategic organisational capability, a desired 'must have' rather than an enforced 'have to do'. This will help companies become more risk resilient in predicting and preparing for risk events, and minimising their impact. Businesses that fail to look forward will almost certainly be left behind in an increasingly competitive, globalised world.
As several risk support and enablement functions report into Finance, the CFO also has an important role in ensuring that the risk management processes are optimised to balance value, cost and risk, through eliminating silos in an organisation, aligning mandates and scopes.
Of course, becoming a risk agile and risk resilient organisation will not happen overnight. It requires a fundamental mindset shift that starts at the top and permeates through the organisation: Risk management cannot be separated from strategy setting and executing, it has to apply overtly to all managerial decisions, and ultimately risk management creates value and provides a competitive advantage.
Finally, CFOs have an important role in using their existing communication channels with a range of stakeholders to set the tone externally. Their interaction with shareholders, analysts, NEDs, regulators, rating agencies and banks should be used to showcase the strengths of their risk management capabilities and inspire performance confidence.
Their Insight is their Power
In this risk context, CFOs are best placed to be on the constant watch, monitor the health of the organisation and report signs of ill-health. Their involvement in company-wide activities like budgeting, financial reporting and performance management not only gives them a broad, strategic view of their organisations, but also a ringside view into the universe of risks across various business units and the impact that they can have on their future cash flows.
CFOs should facilitate connections, co-ordination and integration across the organisation so that external trends and internal indicators can be analysed for undue concentrations of risks, risk interdependencies and cascades, and offsetting risk positions. Armed with these insights CFOs can help organisations better understand the material risks to their value drivers and stress test their strategy and expected performance outcomes for a range of different risk scenarios.
That way they play a crucial role in making the attributes of their organisations satisfy design for value requirements, be financially focussed, and deliver a step change in evidence based and rigorous decision making. Risk considerations can then act as the common thread running through all manner of corporate decision making such as strategic planning, capital allocation, financing decisions, IT and business change programmes, compliance, insurance and supply chain business continuity.
Ashish Singh is a director of advisory services at Ernst & Young.
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