Companies Employing an Entity-Wide Risk Management Program Better Prepared for Credit Crisis

The report, published by CFO Europe Research Services, shows the two greatest threats identified by CFOs in the survey were the economic downturn and credit crunch, and rising commodity prices. Over half of the organizations surveyed were “unprepared” for these two events. The data shows how prepared companies were for each, why CFOs felt the company was at this preparedness level, and a brief case study of companies that successfully managed each crisis, followed by a summary of best practices for risk management.

Operational and Market Threats

The market downturn prompted concerns from EU CFOs ranging from increasing cotton prices to lower advertising revenue. Two-thirds of the respondents cited operational and market impacts as the largest threat to financial performance, and 54% of those listed commodity prices as the next concern. Even with such an overwhelming effect on the business, only 12% of firms were “very prepared” for the economic downturn, and 49% were unprepared for increasing commodity prices.

Several concepts were identified in the corporations that were caught by surprise. One was a disconnect between the CFO and the operating and market managers. The CFOs expressed an interest in being more involved in risk assessment outside of just the balance sheet and utilizing skills such as modeling. Another problem was lack of oversight or buy-in from the CEO or board for enterprise-wide risk management.

A case study of a company that handled the downturn with relative success was presented. Axel Springer, a German newspaper group identified, assessed, and prepared for risks at the top most level. This identified the company’s top three risks as: a drop in advertising revenue, drop in consumer subscriptions, and rising energy prices. Axel Springer included all identified risks, including lower credit or specific financial risks, in an analysis of impact and likelihood. Once they identified the high-impact risk, they sought entity-wide solutions. Axel Springer created a long-term efficiency program which included a monthly meeting of the heads of all silos. When the top two risks hit the company at once, they had already begun a mitigation strategy, and were able to quickly ramp up the process to meet business objectives.

Financial Threats

The economic downturn created a flurry of threats facing Europe’s CFOs. Respondents cited currency fluctuations, increasing interest rates, bad debt, and the increasing cost of credit as top concerns. Currency fluctuations and increasing cost of credit came out as the highest ranked. Although these risks were ranked highest, more than 40% of companies said they were “unprepared” to face them.

The breakdown, according to the survey, seems to be in communication. The majority of firms responded as having “good” or “excellent” management commitment, credit risk process, and IT monitoring systems. However, only a minority said that their company was good at ensuring individuals knew their responsibility to risk management.

The case study of Clifton Asset Management is presented as a best practice. They do have some examples of assessing and mitigating risk on an entity-wide level, however, they acknowledge the nature of their business predisposes them to succeed in an economic downturn. One applicable best practice they employed is monitoring of governmental action and possible regulation. They have identified regulatory pressures as a high-impact, high-likelihood event that would affect their clients. Clifton Asset uses across the entity strategy, driven by the CEO, to watch and prepare for these events.

Best Practices

The subtitle to this section is appropriately “communicate and integrate”. CFO Research Services followed up the online questionnaire with in-depth interviews, and compiled a short list of best practices from the companies who have been most successful in dealing with the economic downturn.

• Risk questionnaires of operations divisions heads
• Gemalto Corp. utilized this approach to ensure a transparent, open discussion of risk. They hired a third party to create and implement the system, and found the one hour division heads spent on the survey saved the company money during audits.
• Assign clear risk responsibility to top levels
• Amstar Europe assigned their three top risks to three executives. It creates clear accountability and action towards mitigation.
• Create risk team
• AzkoNoble has a small team that goes to each business sector and conducts a formal risk assessment program. They map this silo’s risks and link them to business strategy and objectives.
• Strong information flows

Overall, the survey found companies were better prepared for the economic downturn when they had strong information flows across and down from senior management. This resulted in more tangible steps taken to mitigate the risk, more manpower applied, deeper management commitment, and a more likely integration of the risk into an entity-wide risk management strategy.