I attended the NSW CFO Symposium in Sydney last month. There were a number of great presentations and its good to see the level of innovation rising. Alan Bardwell, the ASX Chief Risk Officer (CRO) spoke on “New Directions of Risk Management”.
As I was a Risk Officer for an investment bank in a previous role, I got a lot out of his presentation.
With the change in the business environment from relatively stable with a manageable degree of growth and certainty to a changing, volatile uncertain and complex environment, risk management needs to have greater visibility and profile, needs to be more qualitative and forward looking with a more sophisticated assessment of risk appetite and the need for Finance and Risk to be linked and integrated more closely, as follows;
Risk Management is essentially about opportunities and needs to be managed in two areas
- Value Optimisation Risks (strategic forward looking) and;
- Value Preservation Risk (operational and current)
The impact and method of management of these risks need to be identified and are then much more easily managed.
When assessing risk and Worst Case Scenarios, the useful definition is an occurrence that is ‘extreme but plausible’ .
Responsibility for Risk management generally rests with the CEO and the CFO, but needs be a team effort that is typically driven by a Risk Officer, or in the absence of a risk officer, the CFO.
The presentation posed some interesting questions for the CFO, well worth consideration:
- Is the risk appetite reviewed and approved by the Board appropriately reflected in the actual activities across the organisation?
- Are you producing for the CEO and Board financial scenarios that capture extreme but plausible upside and downside possibilities to your base case budget/forecast?
- What processes exist to ensure that assumptions underlying financial budgets/scenarios are shared/harmonised across the organisation?
- Is there a risk based approach to determining the adequacy of capital and liquidity? What does this look like in normal and stressed market conditions?
- Is there a process where the organisations senior executives regularly consider the changing internal and external risk profile of the organisation and the actions necessary to manage, influence or control that risk profile (value optimisation and value preservation risks) within the organisations risk appetite. Are the outcomes of this assessment shared with the Board/ARC?
- Are the key value preservation risks of the organisation all identified and controls appropriately in place to manage them. Is there a process and reporting mechanism to highlight any risk that is not being managed within desired risk appetite. Is this reporting visible to the CFO?
- Do employees at all levels of the organisation understand the risk appetite and incorporate into their everyday activities (whether via risk tolerances or judgements taken)?
- What risk appetite has the CFO ascribed to:
- Tax management
- Financial engineering
- Corporate structures
- Earnings and cash flow volatility
- Investment management
- Supplier management
- Does this reflect the Board/ARC’s view of risk appetite?
- Is there a process to assess the financial statement impact of issues arising from the organisations risk assessments?
- Is there sufficient interaction with your risk function and the CRO?
The above is an extract from Alan Bardwell’s excellent presentation and is not the work of the author.
A Copy of the presentation is available from http://www.nswcfo.com.au/symposium/speakers