News Risk Management14 Nov 2018

Chief financial officers' risk challenges

| 14 Nov 2018

The chief financial officer of an organisation works around many challenges. These begin with managing shareholder's money - to provide an adequate return on the capital employed, increase the share price with the least volatility and much more. However, uncertainty of the future is a risk that very often thwarts the best of his plans to do so.

Institute of Risk Management’s (IRM) India ambassador Sonjai Kumar writes in an article in ETCFO (www.etcfo.com) , “Such risk challenges may come from different buckets such as strategy, emerging new risks, changing economic and regulatory environment, changes in the global ecosystem such as crude oil, currency volatility and so on. Therefore, managing uncertainties depend on how robust is the risk management within the organization.”

 

Mr Sonjai Kumar’s original article can be accessed at the link ETCFO Insight: Managing uncertainties; CFO’s risk challenges.

Strategy

Detailing the salient aspects of the many challenges Mr Kumar writes, “The growth of the business is a function of strategic planning for the medium to long-term -- on what to sell, how to sell and where to sell. This would require product ideas, its manufacturing, human resources planning, operational enhancement, developing a marketing strategy, and ideas about current and emerging target market.



Emerging risks

World is changing fast -- from paper to paperless (the digital) world. Kumar writes, “The businesses are to invest in the next big development of the digital world, but they should also to be aware of the emerging risks from it.

“The digital world is providing many pathways to cybercriminals to track the computer system as compared to the previous time where everything was documented on paper and scope for cybercrime used to be limited.”
 

Specialists are short in numbers

The CFOs should be aware that there are technological risks which come from lack of understanding about the system and there will be a dependence on specialist people. This brings not only the technological risk but also people risk, who are the basis of a CFO’s decisions. There is a need to have specialists in the risk team who can advise on the digital risks.

Kumar says, “CFO is required to work closely with the chief risk officer (CRO). This has to be more as a critical friend rather than a policing approach. This relationship will go a long way in helping the company in managing the risks better.”
 

It is important to understand that the digital risk is not the same as cyber security risk, but a bigger risk. So in the current scenario, “the CFO is not only to manage the return on new capital employed for digitalisation but also identifying these risks and their management,” writes Kumar.

Thus, the success in the future will not only depend on investments but also on risk management on the digital front -- as the businesses are entering into the digital world of unknown and untested areas.
 

Economic and regulatory environment

The key risks arising from economic changes for the company are from macro-economic factors such as changes in the interest rate, price movement, equity market volatility, industrial development and so on.

The risk from a regulatory environment are changes in the regulation brought in by different financial regulators of the country.

 

Changes in global ecosystem

Kumar writes, “With all business becoming global in nature, the Indian companies are not insulated from the changes in the global market. The currency volatility, movement in the crude oil price and any adverse global developments need to be considered while taking current and future decisions.

“The CFOs should be aware that there are technological risks which come from lack of understanding about the system and there will be a dependence on specialist people.”

 

Maturity of risk management in Indian context

It is evident that the risks are present everywhere and any decision on investment must go through the risk management process.

“In India, the risk management is in its early stages of development. It is found that there is a lower take-up rate for the adoption of risk management. The 2008 and earlier crises have taught the world the importance of risk management and the western world is evolving it ever since those days,” writes Kumar.

Therefore, in order to address the risks, the CFO is to work closely with the chief risk officer (CRO). This has to be more as a critical friend rather than a policing approach. This relationship will go a long way in helping the company in managing the risks better.

In such a case reporting of CRO becomes an important factor; in mature countries, CRO is to report to Board and not directly to any other C-level executive to avoid conflict of interest and getting the best results in favour of the company.

In conclusion Kumar says, “Modern day CFO needs to manage the risks better with close working relationship with the CRO to address the strategic, emerging, economic, regulatory and global risks better. Those who will manage the digital risk better in future will survive longer as compared to those who lag behind.”

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