The Role of the CFO in Risk Management
With the volatile environment the world has and will continue to face for the foreseeable future, risk management has become a key item on companies’ agendas. Up until a couple of years ago, firms would concentrate on a small number of risks with financial risk being one of the key ones. But the world has changed, and businesses are now broadening the scope of their risk management strategy. What do businesses have to contend with and how can CFO’s play a key role in supporting the business?
CFO’s have always been the guardians of financial risk by protecting the financial position of the company and ensuring regulatory compliance. The increasing range of threats has led finance leaders to invest more time in risk management. Balancing short-term and long-term priorities for the business, keeping an eye on debt, liquidity levels and compliance are all important missions of the CFO. Their unique access to data now gives them an unrivalled oversight of the situation of the business and the risks that could impact it.
From supply chain disruption, evolving customer habits and cyber threats linked to a swift move to home working and online shopping during the pandemic, most businesses have had to be reactive and act quickly to ensure the least disruption possible. This has also left them exposed to new risks.
Now that more employees work from home, protecting systems and making sure that possible data breaches are anticipated and avoided mean an investment in technology that many companies had not factored in. The rise of online shopping has meant investing in secure online payment systems to protect consumers against fraud. Finance has a key role to play in identifying opportune investments and presenting business cases to the senior leadership team.
As we have seen, geopolitical and public health issues have an effect on supply chains and on the price of goods. Building resilience in the supply chain has been an ongoing matter for most companies and this cannot be solved by adopting a silo approach. Procurement and Logistics Directors need support from the CFO to identify suitable solutions for the business.
In the context of climate change, catastrophic risk is going to become more and more important. Sustainability is a strategic risk for most companies and CFO’s will have to advise the Board in managing this emerging risk. Our impact on climate change has already caused extreme weather events that have disrupted supply chains and damaged companies’ assets. Leadership teams will have to plan for these disruptions and find ways to protect their employees to avoid affecting business continuity. The need to decarbonise business activities will require a new approach to procurement and production. Finance will be pivotal in advising on new procurement contracts, commercial agreements with greener suppliers as well as on the cost of turning to renewable energy.
CFO’s will need to remain vigilant to ensure firms are compliant with the rising number of legal requirements and regulations related to sustainability and avoid paying substantial fines. Other financial risks linked to the topic such as taxation and suitable insurance cover will also be part of the finance team’s remit.
Consumers and investors increasingly tend to favour companies that act against climate change. Reputational risk linked to sustainability or more precisely the lack of sustainability policies will have an impact on the business and its financial health. Changes are coming at a fast pace and CFO’s are well placed to help companies navigate this shift.
No company can plan for every single risk. However, being prepared, using scenarios to stress test the business and ultimately building agility in teams will help firms react more quickly in case of another unprecedented event. At Partner Executive we think that risk culture must be balanced carefully as excessive compliance might prevent innovation whilst a lack of controls can expose firms to damaging issues. Most risks seem to be increasingly linked so developing common risk processes across the organisation might help anticipating potential problems and being more agile in the future. An efficient risk management strategy will drive value for the business. Leadership teams need to move from being reactive to forward planning and embed risk management into strategic planning to build resilience through the company. Sometimes, taking on more risks is a way to grow a business.
