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| There's no denying the prevalence of new opportunities and risks in today's global environment. Yet, most enterprises are failing to put risk into the context of overall performance. By treating risk and performance management (sometimes referred to as corporate, enterprise or business performance management) as separate disciplines, they miss opportunities to limit surprises and/or capitalize on the upside of risk. CFOs are well-positioned to encourage a more holistic and cross-silo view of risk. Integrating risk into planning, budgeting, reporting and forecasting can lead to better decisions through risk-adjusted plans and budgets. |
In the IBM CFO Study 2008 of over 1,200 CFOs and senior Finance professionals, two out of three (62 percent) enterprises with revenues over US$5 billion encountered material risk events in the last three years. Of those, nearly half (42 percent) admitted to not being well prepared for it. The situation at smaller enterprises was better, but not by much. Of enterprises with revenues under US$5 billion, 46 percent experienced a major risk event and 39 percent were not well prepared.
Risk comes in many flavors besides financial. The IBM CFO Study 2008 found that 87 percent of risk types were non-financial in nature, that is, strategic, operational, geopolitical, environmental / health and legal / compliance risks. Of the risk event types, the most frequently mentioned were strategic risks involving decisions about markets, customers, products, M&A activity and other top-line business decisions. Geopolitical and environmental / health risks were the next most prevalent.
However, for publicly traded companies, it seems all risks come home to roost in the stock price. Therefore, virtually all risks ultimately have a financial impact. Another study found roughly the same magnitude of nonfinancial risks (85 percent) led to companies' market capitalization decline of 30 percent or greater relative to their peer group.
Astoundingly, most organizations don't plan for risk. Despite the preponderance of risks, only about half (52 percent) of all surveyed acknowledge having any sort of formalized program to manage risk. Fewer categorize their organization as being effective at risk management (45 percent). Moreover, only 29 percent of enterprises conduct risk-adjusted forecasting and planning.
While most enterprises are not in the business to manage risks but instead to drive performance, does effective risk management correlate with better enterprise performance? In a word, yes. The IBM CFO Study 2008 found that increased effectiveness at supporting / managing / mitigating enterprise risk characterizes financial outperformers.
CFOs are uniquely positioned to determine and guide the overall enterprise risk profile – largely due to the CFO's influential role both at the strategic and tactical levels, expertise in the organization's operations, support of data and measurement programs, and ultimate accountability to shareholders (and regulators).
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