Special Feature (Part 2): Building a risk strategy

CFOs have had to come up with risk scenarios on how to respond effectively to Covid-19.

Risk management in the modern day business landscape is becoming increasingly crucial as we navigate through uncertain times. In order for businesses to survive the storms, companies have to be ‘risk intelligent’. Chief risk officers are now charged with ensuring the organisation's financial stability and overall good company health, especially during stormy seasons like Covid-19.

by Narissa Subramoney.

Emerging technology has provided an opportunity for the market to respond to the need to provide data, specifically data as seen through the risk lens.

“These must be used as key risk indicators to build scenarios,” says Christopher Palm, chief risk officer at the Institute of Risk Management South Africa. “It’s not enough to present this information as, ‘We will be hit by a virus’. You need to walk in with scenarios on how to respond effectively when the virus hits. You need to present options to the board rather than coming in with a message of doom.” In companies without an appointed RO, this task falls under the duties of a CFO.

Companies differ on how they approach risk. Some adopt international standard organisational risk methodology, while others opt for an in-house developed risk management strategy. It comes down to what the country or company supports or what the culture of the organisation is more adaptive to. Some of the most popular approaches include research activities such as risk assessment for current company affairs or risk evaluation, which explores how the company has responded to handling risks and threats in the past.

Risk management is especially important for businesses using multi-currencies. Bianca Botes (pictured), executive director at Peregrine Treasury Solutions, says: “Any business that imports, exports or has any other form of foreign currency exposure, is subject to currency risk, the risk it faces when a financial transaction takes place in a currency other than the unit in which it operates.”

In this case the entity could suffer a financial loss should the currency move against it, in spite of sound underlying performance. She says, “The best way to deal with such risk is to put a strategy and a policy in place to enable businesses to focus more comprehensively on providing its core goods or services, allowing the forex to be managed more effectively and professionally.”

As a start, many companies are unaware of their break-even rand value. This needs to be established at the outset and only then can you determine where the risk lies. For instance, if your break-even is at R18 to the dollar, what would the impact on your business be if the currency were to rise to, say, R17 to the dollar? In such a case, exports become less competitive, thus hurting the profitability of exporters, while importers would benefit.

Bianca says:

“If a business has a currency risk policy that it follows, it is easier to understand and to explain why a particular course of action was taken, rather than why no action was taken.”

By following the policy, a company is able to manage the risk that it faces, as well as its potential loss of earnings.

In establishing a risk policy, a business needs to determine the types of risk that it faces, the degree of volatility that it is able or willing to tolerate and the way in which that risk will be managed and mitigated.

But it’s not enough for financial professionals to limit themselves to just understanding risk management. In-depth knowledge of the company and industry they represent is vital if you want to accurately assess risks that may become a reality without intervention by the organisation’s management. They also need to understand strategy, its development and execution and have a well-rounded approach to resilience. The best CROs know how to integrate all three, making organisations risk intelligent.

But even with these measures, a grim reality hangs over the heads of most, if not all, dedicated financial professionals.

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