Risk Management

How CFOs Can Blend Strategy With Risk Management

In today’s volatile environment, having a risk management process in place is crucial. As the custodian of a company’s financial health, CFOs play an important role in combining strategy with risk management. Here we take a look at how the finance leadership of a company can address the business’s strategic risk management process.

In today’s uncertain environment, having a risk management process to identify, assess and respond accurately to risk is imperative. However, the nature of risk has evolved over the years with advances in technology and a volatile geopolitical climate. Ownership of risk management within an organisation is and people seem unclear who is responsible. Understanding critical, enterprise-wide risks that could possibly threaten the company goals is just the tip of the iceberg. The department a risk is likely to impact the most is responsible to tackle it. However, putting a good risk management process in place requires a collective effort by all the decision makers of an organisation.

As the custodian of the company’s financial health, a CFO plays a rather important role in orchestrating these tasks. The role of the CFO has evolved in the recent years and has increasingly become more involved in the strategic decision making of the company a partner to the CEO. This makes the financial leadership ideally placed to set appropriate risk preferences and instill a risk-oriented approach to decision making processes within the organisation. In a 2016 survey of 769 finance leaders by EY, The DNA of the CFO, 57% emphasised upon risk management being a critical capability of their roles in the future.

Not only can a CFO oversee the management of financial risks, but can also affect change in the company as a whole with these strategic risk management processes mentioned below.

Make risk management an integral part of the business-planning process

This link is where most companies fail because risk analysts often focus on the current challenges rather than the foreseeable ones. To make the best of this process, a CFO must put a pin on exactly where and how a particular risk affects the business plan and incorporate them into forecasting models as shown in this paper from McKinsey.

Similarly, it is important to include stress-testing as a part of the financial planning process. This helps ensure that the company is capable of dealing with any risks, both operationally and financially, and further cement the robustness of the company’s business plan. It is also crucial to use at-risk modeling to gain insights on the probability of success for major investment decisions. By doing this, companies that face volatile risks can amount the aggregate impact of these risks on their potential investment returns.

Gauge the company’s risk appetite and preference with the executive board

The main risk capital of a company is its equity and as the gatekeeper of the company equity, the CFO is the natural choice to lead a discussion of the company’s risk preference with the management. They C-suite should collectively decide which risk is worth taking; in terms of money, returns and at what cost. While doing so, the business leaders must be able to narrow down on the risk preference, the gravity of it and its implications.

Use risk analytics to make informed investment decisions

CFOs are the primary decision-makers when it comes to investment and strategic decisions. They lead these discussions and their decisions hold great value and are powerful within an organisation. As an integral part of the C-suite, a CFO must employ risk assessments before taking any proposals up to the board and the rest of the management. Most often, potential project risks are compared to the total risk the company as a whole face. In such a case, there is a high probability that some risk factors may be overlooked. A set of mandatory financial and risk analytics need to be run for every parameter of the project to ensure that all the risks are brought to the table and discussed. The role of a CFO also focuses on improving capital-expenditure decisions and to do that deploying an analytical risk-adjusted valuation process in conjunction with other factors to reflect an explicit adjustment for riskiness in capital-expenditure prioritisation.

Risk management is clearly a holistic approach in the company. The finance leadership needs to coordinate efforts and work alongside the management to foresee risks and form an understanding of how to mitigate them. Together with these points, CFOs can help balance risk and return strategically and thereby, create significant value for the company and its shareholders.l