Uncertainty: Risk or Opportunity?
The first meeting of the Blue Chip Finance Leaders Programme in 2013, supported by HP,
took place at Chartered Accountants’ Hall on 26 February.
Twelve FDs and CFOs from a range of major FTSE, private and public sector organisations
met to discuss the challenges facing them and their global organisations in the current
business climate. The discussion under Chatham House rule was facilitated by Simon Alsop,
our Head of Business, and allowed for significant sharing of personal experiences and views
on many different aspects of the role of CFO/FD, but also brought home to the group that
many of the challenges they are facing are not unique.
In advance the delegates were asked to consider the following aspects:

ICAEW research suggests that the CEO and CFO would both like the CFO role to be more
strategic. How does the CFO make that happen?

Can the CFO act as a catalyst for change?

How does the CFO find the time and resources to guide the board in setting the strategy?

The ONS estimate that businesses have £720bn of cash reserves has been widely reported.
Does this encourage CFOs to be more risk averse? Are CFOs missing opportunity? Is the
strategy “do nothing”?

How do you balance risk management with the need for growth?
The following tries to capture some of the key threads of the discussion and the issues that
arose.
Introductions and initial reaction to risk management in today’s climate
During the introductions round the table it became apparent that most participants saw the
current climate as both a risk and an opportunity – the uncertainty is here to stay and has to
be managed. It was also apparent that government continues to have a major impact on
many businesses – either as a regulator/intervener, or as a customer in the form of public
sector contracts. Other risks included commodity pricing, market pricing, security of raw
material supply and risk to reputation. And for business services the risk of volatility in the
need for advisory services like legal, accountancy etc. The danger is that the current climate
encourages short termism and discourages long term planning. However this environment
also poses opportunities for expansion into more expanding geographical markets (eg
Australia and lesser developed markets) and acquisition of struggling competitors.
Approach to risk management and the role of Finance?
Finance underpin the risk management process and are custodians of the risk register in
many businesses, but compliance and control is only a part of the overall risk management
approach (albeit a very important element especially in regulated businesses). There is a
danger that the process of risk management documentation and compliance becomes so
time consuming that other (more strategic) tasks are not tackled.
Uncertainty: Risk or Opportunity?
Much depends on the organisation’s appetite and attitude towards risk. In organisations
where the leadership team is upbeat and optimistic the CFO may have to temper this
attitude by evaluating the risks and “minimising the regrets.” Every decision carries an
element of risk and Finance can help analyse the upsides and downsides (via scenario
planning) but there is a severe risk that Finance get boxed into a compliance and risk
assessment role rather than a more strategic role. To make the “right” calls requires the CFO
to be close to the business (business partnering) to understand the consequences of each
decision. The leadership team will set the attitude to, and aptitude for, risk so the CFO needs
to be in tune with the underlying culture; but they also have a duty to review decisions and
assess risks.
What was acceptable as a business decision some years ago is now an unacceptable risk.
Some organisations benchmark how they are perceived externally and internally, but a
hierarchy of risks may be an appropriate way to review risks:



Operational risks eg health and safety
Commercial risks like contractual risk and transactional terms of business
Strategic risks such as deciding which markets to exploit.
Risk v Reward
Another major determinant of the attitude to risk is the cost of capital and the business’
expectations for ROI. Different projects will carry different risk profiles with different expected
ROIs. Hurdle rates need to be robust to weed out high risk-low return projects - some
businesses take a 20 year view whilst others take a 3-5 year perspective, so a lot depends
on the investors’ timeframes. Longer term perspectives can be truncated if the short term
performance is below par. Many businesses consequently separate the annual budgetary
process from long range planning as the latter can take a more aspirational path. Critical to
success is also the plan of implementation. The danger is that risks are built on risks
because the underlying assumptions were risky, especially in multi-geographical businesses
where the attitude to risk can vary considerably by country. Another temptation to reduce
risks is to look at franchising or JVs, but as well as cutting returns these often introduce
different risks and can consume a lot of management time
(At this point the fire alarm sounded and so the discussion ended 10 minutes earlier though
there was some further debate on the pavement outside!)
Uncertainty: Risk or Opportunity?