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CFOs Challenged by Growth-Risk Balance

Finance executives constantly weigh risks and opportunities.

Risk is a powerful, complicated four-letter word. No doubt, it’s the topic of much debate in the C-suite and board room.

“The biggest business challenge of the 21st century is how to exploit opportunity while managing downside risk. It’s easily said, but very difficult to do,” says Sridhar Ramamoorti, chair of Financial Executives International’s (FEI) Committee on Governance, Risk, and Compliance. In the middle of this task are CFOs, who, depending on the extent of their role at their organization, oversee risk management.

Balancing risks and rewards has become tougher as the pain of financial loss and ruin from the Great Recession remains fresh. “When people get burned, they shut down,” says Parveen Gupta, chair of the accounting department at Lehigh University. “They’re fearful of taking chances. If they make even a small mistake, there will be criticism from regulators, the media.”
 

To be sure, leaders are being more thoughtful about risk. But others are going to the extreme, battening down the hatches like they don’t plan to emerge any time soon. “Some financial executives don’t see the light at the end of the tunnel. There is still much uncertainty – it’s hurting business. After World War II, people were gun shy. We’re at that point again,” says Paul Walker, full professor with the Department of Accounting and Taxation and The School of Risk Management at St. John’s University.

Financial executives face quite a dilemma – growth requires some risk taking. Move forward on an opportunity, and you also take on the risk. “Risk and opportunity are two sides of the same coin,” says Ramamoorti.

Hiding from Risk Gets You Nowhere
Risk, by definition is the combination of opportunity, plus peril, says James Kallman, assistant professor of finance at St. Edward’s University in Austin. “Almost every activity involves the chance for both opportunity and peril.”

Standing still and avoiding the risk may feel “safe,” but there can be a downside to sitting on the sidelines. “Say your company is looking at expanding to a new market abroad,” says William Montanez, director or risk management at Ace Hardware and former board member of The Risk Management Society (RIMS). “If you decide to avoid the risk altogether, the risk of not going global may be a lack of growth, and if your competitor pursues that territory, then you become the market laggard, not the market leader. It will be more expensive to play catch up later.”

Truth is, though, constraint doesn’t rule forever. “There are signs that some companies are coming out of hibernation. They want to know what opportunities are out there, and are being mindful about using lessons they’ve learned to take intelligent risk,” says Gupta.

As they continue to emerge from the ashes of the Great Recession, how can companies best view risk from a new lens and determine good risk from bad?

Evaluating Risk: What Tops Your List?
In Ernst & Young’s 2013 “Turn Risks and Opportunities into Results” survey, CFOs said their top 10 risks are risk and compliance; cost cutting; managing talent; pricing pressure; emerging technologies; market risks; expansion of government’s role; slow recovery/double-dip recession; corporate social responsibility; and access to credit.

Contrast that with what ranked in the top 10 for opportunities: improving execution of strategy across business functions; investing in process, tools and training to achieve greater productivity; investing in IT; innovating in products, services, and operations; emerging market demand growth; investing in clean tech; excellence in investor relations; new marketing channels; mergers and acquisitions, and public-private partnerships.

The key to balancing all of these issues is evaluating the risks facing the business. “Is the reward there? Does your company have the skills and talent, resources to make the opportunity happen? Is it consistent with your company’s mission? Often corporations don’t think this through,” explains Walker.

Smart companies, though, particularly since the Great Recession, “are wising up,” says Jim DeLoach, managing director, specializing in business risk and opportunity for consulting firm Protiviti. “Integration with risk with what matters is a big deal. If the C-suite doesn’t see how the risk relates to how they run and manage their business, then it’s not given serious consideration. An integrated solution is the only solution.”

Another question is how much risk is too much risk? The answer to that is different for every company and every industry. “It also depends on where you are,” says Montanez. “Are you the market leader? A manufacturer may have different risk a than retailer or financial services firm.”

Furthermore, how measurable is the risk? “Is it compensated, meaning there is potential of upside, or uncompensated, meaning there is potential for downside with little prospect of anything positive?” asks DeLoach.

Managing Risk: What to Keep in Mind
“Risk cannot be eliminated. At best, you can eliminate a slice of risk, you can manage risk,” says Ramamoorti.

Risk can be transferred to a third party, like an insurance company. You pay the premium and the insurance company carries the burden if things go badly. You can share the risk, for example, through a joint venture where the parties decide who owns what percentage of the risk. When you mitigate risk, you assume that a certain amount of risk is good for the business or at least the business can withstand potential problems.

What’s vital, says DeLoach, “is to not treat all risk alike. Recognize you have to look at the unique characteristics of the risk to know how best to mitigate it.”

If any good came of the recession, it’s that those who manage risk have gotten a better grip over it. They also should know they can’t stay in hiding forever. Free markets and capitalism need risk takers in the economy to keep it humming. “In the long run, the economy won’t be sustainable without them,” says Ramamoorti. “You may be worse off if you hunker down and do nothing.”

Sheryl Nance-Nash is a freelance writer specializing in personal finance, small business, general business, and career-related topics. 

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