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Companies need to take a more forward-looking approach to risk, a study suggests.
Celina Rogers, CFO Magazine
July 15, 2010
Odds are good your company won't make the same risk-management mistake that BP did — if, that is, your company has recently caused a major oil spill. According to a study of 168 senior finance executives from CFO Research Services (in conjunction with Liberty Mutual Group), companies often pay disproportionate attention to recent disruptions when planning for future risks.
The risks that CFOs say will be of greatest concern to their companies over the next five years — financial exposure (51%) and supply-chain or logistics disruption (37%) — mirror events that have shaken companies in the recent past. When the unexpected happens, it seems prudent to build cash reserves in anticipation of future credit crises or diversify suppliers to mitigate the risk of future volcanic eruptions. But with few resources to spare and a raft of competing priorities, companies need to focus on preparing themselves for the next crisis — not the last one.
Although the research suggests that many companies would benefit from a more forward-looking approach to managing risk, one-quarter of respondents say that systematically identifying risk exposures is "very challenging" at their companies. Finance executives might be expected to turn their attention to improving that capability in light of recent disasters, but justifying investment is a challenge: respondents most often cite the difficulty of determining the return on risk-management spending as an obstacle to improvement. The good news is that most risk falls somewhere in between the certainty of death and taxes and the infamous "black-swan" events of 2008. Companies can address those risks, usually through a combination of insurance and internal-process improvements; many methods exist for determining how to spend just enough to match risk appetite without spending so much that you risk insolvency.