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The CFO as a chief risk manager

By Paul L. Walker, CPA, Ph.D., and Mark L. Frigo, CPA, CGMA, Ph.D.

Disruption is driving risks for every organisation. CFOs can play a critical role in helping organisations proactively manage them and create value.

The role of the CFO in managing enterprise risk and creating future value continues to evolve in this dynamic and rapidly changing environment of disruption. Our research, which we released in a report by the Financial Executives Research Foundation (FERF), The Strategic Financial Executive: Managing Enterprise Risk in a Disruptive World, describes strategies CFOs can use to manage risk and create value in today’s dynamic landscape and discusses how CFOs can incorporate strategic risk themes emphasised in the new enterprise risk management (ERM) framework by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The research is based on extensive interviews with financial executives and other corporate stakeholders from leading companies. The takeaways in the report encompass four strategic themes: recognising disruption, developing risk management maturity, communication, and strategic thinking.

Theme 1: recognising disruption, the speed of change, and underlying sources of disruption

The roles and skillsets of the financial executive must swiftly adapt. CFOs bring value to the table by, among other things, informing the board and CEO regarding matters they may not be familiar with and providing insight to nuances they may not have seen.

Fifty years ago, people managed physical assets to deliver cash flows, explained Corey West, CPA (inactive), chief accounting officer and corporate controller for Oracle. “Today, you manage intangible assets to deliver cash flow. Those intangible assets can be valuable one day, and it can go “˜bye-bye’ the next, depending on who enters a marketplace where you’re competing. … The importance about understanding the business you’re in, the competitive landscape, and where your competition might be coming from, [from] a strategic standpoint, is a lot more important now. I think CFOs need to be part of that thought process.”

Theme 2: increasing the enterprises’s risk IQ and capabilities

ERM is evolving and becoming more strategic in its efforts and results. Given the efforts of COSO to highlight strategic risk dimensions, executives should expect board members to ask more strategic risk questions and be prepared to address them when asked. The ERM framework developed by COSO points out that strategic risks can be sourced as follows:

  • Strategy and business objectives not aligning with mission, vision, and values.
  • The implications from the strategy chosen.
  • The risk involved with executing the strategy.

Executives and board members should seek or reconfirm their knowledge related to those strategic risk dimensions. To get this right, financial executives should look to leverage their current ERM processes to determine what strategic risk help and analysis is being developed. Some advanced companies already use strategic risk analysis tools, such as workshops on strategic disruption, black swan events, and emerging trends practices.

Theme 3: thinking and communicating strategically

With the proper strategic thinking, noise and signals can help your organisation to know where the market is heading and where to compete. Consider all the factors, such as customers, the global economy, foreign currency hedging, and contracts with escalations.

Financial executives are in a unique position to take advantage of an integrated approach that sees changes, identifies the risks, and links them to the business model.

Theme 4: developing skills to enable a forward-thinking finance organisation

Successful financial executives look toward future value creation. Decisions made with this risk information are aimed toward better business models and future strategy. “Enterprise risk management consists of a set of forward-looking tools for senior management,” said Jeff Pratt, general manager of enterprise risk management at Microsoft.

Knowledge of accounting, finance, reporting requirements, and related skills may have helped financial executives move to the top. But that knowledge is not enough to keep them successful and able to add the most value to their organisations. We recommend based on work with CFOs that they develop a professional development plan for their CFO team that incorporates strategy, strategic risk management, and business model skills. Consider the profile of skills needed, and access the current skillset as a starting point.

“The more senior role that you play in the organisation, the more time you should spend looking forward versus looking in the rear-view mirror,” said Bob Verbeck, senior vice president of finance and corporate controller at Boeing. “… It’s really about proactively determining where you are going with your responsibility [and] your business.”

Paul L. Walker is the executive director of the Center for Excellence in ERM at St. John’s University. Mark L. Frigo is the director of the Center for Strategy, Execution and Valuation and Strategic Risk Management Lab at DePaul University.

This article was originally published in the December 2017 issue of Finance Management magazine.