Tuesday, December 1, 2009

21st Century CFO = Chief Reality Officer?

“Insanity is doing the same thing and expecting a different result.” ~ Albert Einstein

Wake Forest University accounting professor Jonathan Duchac (right) led his talk at the CFO Alliance meeting in Charlotte by quoting the famous physicist, noting that such logic applies to risk management. With the financial crisis and recession, companies are under pressure to revert to the traditional ways of viewing risk, seeing it simply as a negative event that must be controlled.

Rather, Duchac encouraged the more than 60 executives in attendance Tuesday morning to seek opportunity when it comes to risk, albeit with an appropriate measure of caution. Rather than simply revert to the same methods that got us in trouble, companies must do a better job of understanding and identifying risk. “We need to change the paradigm,” he said. “Risk management is not about mitigating loss … it is about generating value.”


How do you manage risk? Duchac gave a terrific illustration of how risk management should work. First, identify, quantify and model risk v. reward. That allows a financial officer to communicate risks, opportunities and actions, which in turn leads to risk-based management decisions. The optimal end result is the creation of a competitive advantage. Be warned – a financial officer must always be aware of how risk can also destroy value in much the same way as value is created.

“Risk management is everyone’s job,” Duchac said, stressing the fallacy of making it all the responsibility of the CFO or a dedicated risk officer.

What are the prevalent risks for today’s financial executives? The audience was divided into six groups and encouraged to discuss the risks they face, with a reminder that risk is not isolated to negative occurrences. Here is a list of the 10 most discussed areas of risks (in no particular order):

1) Funding: Venture capital, private equity, lending, and donations

2) Key personnel: How do you handle critical employees?

3) Legislation/regulation: Taxation and health care reform were the biggest concerns

4) What to do with any profits: Do you invest in marketing, return it to investors, or stash the cash?

5) Cost cutting: Where do you cut? R&D, marketing, training, travel, benefits? When do you decide to bring those expenses back?

6) Brand image/reputational risk: Many were concerned about the impact of social media such as Facebook and Twitter

7) Supply and demand: How do you manage both, and what is the right pricing to use?

8) Shared risk: Do joint ventures make sense right now?

9) How to handle the agenda of an overly ambitious CEO

And finally

10) Are we taking on enough risk? Many are shell-shocked by current conditions and are too timid to take chances … are they missing out on the recovery?

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