How Do You Balance Risk and Finance?

How Do You Balance Risk and Finance?

March 17

Are chief risk officers (CROs) and chief finance officers (CFOs) working together better? It’s an interesting question given that some companies must decide which is more important, if they can support both positions, or if they should instruct the CFO to do both jobs.

Most decisions companies make have aspects of both finance and risk, making it imperative to a company’s next move to have each as close to perfect harmony as can be.

In previous years, it could be that animosity was keeping these two from a healthy, long-term courtship. A few years ago, the CRO was perhaps thought of as a threat. Following the economic collapse, it was this position that began to rise among the ranks, and even getting a seat at the CEO’s table – considered a place of distinction where the CRO wasn’t typically asked.

The person sitting in the risk chair now is reporting to the CEO so the caliber has to be higher,” Neil Hindle, who runs the CRO search practice at Egon Zehnder International in New York, told Bloomberg in 2011. “There has been a real increase in power over the last two years.”

Five years before that, the CRO didn’t report higher than the CFO, the article said. Plus, compensation for the chief risk officer started topping out at $10 million at large financial institutions compared with $500,000 as early as 2001.

Others have found the relationship to be progressing. In 2012, Steve Culp, senior managing director of Accenture Finance and Risk Services and Paul  Boulanger, who leads Finance & Enterprise Performance at Accenture, worked with Richard Lumb, group chief executive of Accenture Financial Services, to look at “how the rise of the chief risk officer in many organizations and ongoing changes in the sector are giving risk to a new partnership between CROs and chief financial officers.”

Accenture surveyed about 1,400 senior risk and finance executives from 17 financial institutions worldwide and found that the economic volatility started in 2008 caused many CFOs to form “stronger, mutually beneficial relationships with their CROs.”

Culp wrote in a Forbes article that one of the challenges shared between the two positions was data integration.

“Because regulators often increasingly require the consistency of information from back office to front office and across the multiple lines of reporting, the underpinning support structures can be put under significant pressure to operate at a pace consistent with business demands,” he wrote. “In parallel, improving the quality and reliability of the data inputs can help to make this work effectively.”

To help run things more smoothly, the Accenture group identified areas where CROs and CFOs were trying to work together. Those included regularly reviewing data quality, coordinated the types of data sources both departments are using, collaborating on risk and capital models and working to eliminate redundancy between their departments.

Overall, it seems the economic downturn played a significant role in getting CROs and CFOs to get on the same team. By learning to forget why they didn’t play well together in the past, they are now working toward similar agendas and a better collaboration that will ultimately result in better consistency across risk and finance.

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