Even as globalization poses greater risks to multinationals, most companies acknowledge that they don't have the resources in place to manage geopolitical, strategic and operational risks effectively, according to two recent surveys.
A massive IBM Corp. survey of 1,200 corporations in 79 countries revealed that nearly two-thirds of companies with more than $5 billion in revenue experienced major risks during the past three years, and only half the responding CFOs and senior finance executives said they were prepared to handle such events. Separately, more than half those responding to an Aon Global Risk Management Survey said they don't have any programs to handle the risk that they rate most worrisome–damage to reputation–and 30% said they are unprepared to deal with their second-biggest concern: business interruption.
"The lack of preparedness is both surprising and somewhat worrying," says Ruth Joplin, Aon Global Risk consulting managing director.
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But these grim statistics are, by necessity, changing, says Stephen B. Rogers, the financial management lead for the IBM Institute for Business Value and author of IBM's Global CFO Study 2008. More companies, led in large part by CFOs, are integrating what had been autonomous worldwide entities into enterprise-wide finance models united by global standards, common data definitions and standard processes. IBM calls these integrated finance organizations (IFO). Aon's Joplin echoed Roger's observation, noting that the CFOs, treasurers and risk managers said they plan to take a more enterprise-wide approach to risk management in the next two years.
Most consultants agree that CFOs are taking the lead in orchestrating risk management, and sharing ownership with the chief executive officer. The IBM survey, conducted with the Wharton School and the Economist Intelligence Unit, found that 61% of those polled expect CFOs to lead risk management within their organization, followed by CEOs, 50%; chief technology officers, 27%; and chief risk officers, 19%. Respondents could check more than one category.
"The CFO is uniquely positioned to start the dialogue and get other C-suite executives to buy in," says Rogers. "Also, they are well situated when it comes to the risk/reward equation."
Interestingly, though, financial risks ranked relatively low on the list of risks encountered by IBM respondents in the past three years. The risks broke down this way: strategic (32%), geopolitical (17%), environmental/health (17%), financial (13%), operational (13%) and compliance (8%). But it is still appropriate for CFOs to lead ERM endeavors. "The truth is that all risks come home to roost in the share price and in the bottom line," says Rogers.
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