CFOs increasingly “own” responsibility for risk across global enterprises, according to the results of a recent study by the IBM Institute for Business Value in tandem with the WhartonSchool of the University of Pennsylvania and the Economist Intelligence Unit. Over 1,200 CFOs and senior financial executives were interviewed across 79 countries around the world, and what we found is that a surprising number of enterprises are unable to handle the impact of a major risk event to their organization.
Our findings support the notion that globalization opens up significant opportunities for companies but also exposes them to more risk. In the past three years, 62% of enterprises with over $5 billion in revenue encountered a major risk event. When a major risk event did occur—such as natural disasters, economic recessions or industry consolidation—nearly half of CFOs and other senior finance executives were not well prepared.
Recent market turmoil has underscored the range of strategic, geopolitical, financial, environmental and operational risks today’s global enterprises face. We found that in the past three years, enterprises encountered a medley of risks including strategic (32%), geopolitical (17%), environmental/health (17%), financial (13%), operational (13%), and legal and compliance (8%).
Driving good information and insight is at the heart of performance and risk management. Indeed, we found a strong correlation between effective information integration and financial performance. Further analysis found the drivers of information integration to be a corporate philosophy of globally mandated standards, enterprise-wide common data definitions, an enterprise-wide standard chart of accounts and enterprise-wide common standard processes. These are the components of good governance and the core of what we are calling the integrated finance organization (IFO).
One big advantage that the IFOs have over the non-IFOs is that the length of time the latter spends compiling their data and checking whether it is right. IFOs can cull data more quickly and trust its veracity. Therefore, they spend more time extracting meaning and insight from it. The IFOs therefore exhibit greater resiliency, better decision support and therefore end up outperforming their non-IFO peers.
Every part of the organization experiences risk, but increasingly the CFO, together with the CEO, is helping to orchestrate the enterprise risk profile. The study found that 61% of CFOs are expected to lead risk management in their organizations, followed by CEOs (50%), chief technology officers (27%) and chief risk officers (19%).
While risks are prevalent, formal risk management is fairly immature. By their own admission, only 52% of the companies surveyed have any sort of formalized risk management program. Moreover, only 42% of respondents to historical comparisons to avoid risk, just 32% set specific risk thresholds, and a meager 29% create risk adjusted forecasts and plans.
The thanks to their greater discipline, IFOs are ultimately more flexible, more dynamic and more effective at executing the finance organization’s agenda and are ultimately better able to handle risk.
Overall, IFOs achieve higher growth rates—a five-year 18% compound annual growth rate (CAGR) versus 10% for non-IFOs.Because they are so capable of it, 50% of IFOs thrive in challenging high-growth markets, as the results clearly show: IFOs had a 24% CAGR for revenue versus 14% for non-IFOs.
