In today’s new era of risk and permanent volatility, the chief financial officer–chief risk officer partnership (CFO-CRO) can promote a more effective, integrated approach to risk management, while driving further operational efficiencies in financial firms, helping to build agility and retain and attract talent.
This report reviews Accenture’s research findings on how global financial firms worldwide have been changing how the way the risk and finance functions work together, particularly since the global financial crisis.
A strong CFO-CRO partnership can set the foundation for a next-generation risk management initiative that is designed to align global strategy with risk, optimize the use of data and analytics and draw on sophisticated tools for coping with unknown and non-traditional risks.
CFOs and CROs in the financial sector, particularly in many advanced economies, are facing a “perfect storm” of volatility in the economy and financial markets, escalating regulatory demands and intensifying pressures on business profitability. Against this backdrop, and in a context in which the risk function increasingly has an independent reporting line, achieving the risk-finance coordination necessary to ride out this storm can place the CFO-CRO partnership under strain.
Even as many financial firms have sought to ensure greater authority for the risk function, factors such as a move toward the use of risk-adjusted capital adequacy frameworks and regulatory pressure for more integrated reporting are creating pressure for greater operational integration.
Accenture undertook a blend of quantitative and qualitative research, including in-depth interview discussions with CFOs and CROs from 17 leading financial institutions worldwide, and analysis of the financial sector results from three major global surveys of senior executives—including more than 1,400 respondents in total—regarding risk management, finance and risk analytics.
Combined with regulatory change and economic volatility, pressures on profitability are producing waves that threaten to swamp some financial firms.
More than 90 percent of financial firms Accenture surveyed are implementing or planning better integration of risk and finance processes and information over the next two years.
Even as regulators seek to enhance the authority of the risk function, regulatory demands since 2008 are perhaps the single greatest force bringing risk and finance together.
Since the CFO and CRO can have slightly different roles and agendas from time to time, it is important to keep those differing roles and maintain their independence.
In many cases, CFOs and CROs have collaborated on major overhauls of corporate data processes, systems and data quality issues.
The new importance assigned to stress testing is another potent force for risk-finance integration.
The elevation of risk and finance to more strategic roles is driven by increasing regulatory demands and economic conditions.
Overall, when it comes to steering the business, financial firms differ in terms of whether they emphasize as the most important goal, the integration of risk, finance, and strategy; or the independence of risk.Since the global financial crisis hit, the attractiveness of the risk and finance functions as places to work seems to have increased, thus attracting top talent.
A closer partnership between risk and finance can result in the following potential benefits: faster and more accurate reporting of exposure data; more seamless compliance with regulation; and better capital management.
Research reveals that the CFO-CRO partnership is in transition, and faces considerable uncertainty, but for some the patterns are clear. Perhaps the key element of uncertainty is the dramatically reduced profitability for some financial sector business activities, which may lead to radical restructuring of how these functions are carried out (as well as divestitures and business unit closures). Another element of uncertainty is regulatory change. While general themes are clear—holistic reporting, use of risk-adjusted capital metrics and the independent authority of the risk function—many specifics of implementation and enforcement remain untested.
Amidst these elements of uncertainty, the CFO-CRO partnership will continue to evolve, sometimes in unexpected directions. For instance, the CFO-CRO partnership is increasingly a partnership of equals, and healthy debate is increasingly emphasized as a mechanism to produce the best information, when decisions that entail tradeoffs must be made. At the same time, in order for the partnership not to become needlessly adversarial, companies are focusing on the operational integration of risk and finance, creating shared services areas around data, systems and modeling, as well as programs for the rotation of personnel.
These efforts seek to prevent unproductive misunderstandings and disputes. This type of integration also enables companies to respond more fluidly and confidently to the demands for holistic reporting through the use of risk-adjusted capital models in strategic decisions.
Based on extensive interviews and survey research, Accenture has identified six lessons learned for enhancing the CFO- CRO partnership:
Establish integrated and shared data sources. Collaborating to solve data quality issues, including the development of shared data processes and systems, can be an effective way to reduce a common area of conflict and improve the risk-finance working relationship.
Collaborate in developing risk and capital models, which can enhance the risk finance partnership at the operational level. For both functions, improving efficiency means eliminating redundancy in process and technology, as well as data.
Strike the right balance to promote good interdependence and cross-leverage between risk and finance. It is important for risk to maintain the ability to push back against finance if commercial and risk objectives come into conflict.
Ensure risk has input into strategy.
Increase the value-added provided by the risk function. Elements of this value-added include developing advanced risk analytics and modeling capabilities, having a perspective on risks emerging from the volatile global environment, and providing enterprise-wide risk input into management of operational, emerging and even strategic risks.
Rotate personnel between risk and finance. Even if risk and finance personnel sometimes find themselves in opposition on an issue,speaking a common language and having common experiences can help enhance operational effectiveness.
The financial services industry is particularly affected, and this is prompting closer collaboration between the chief financial officer (CFO) and chief risk officer (CRO). Culp says that the risk management and finance functions are integrating, and now play a key role in defining and driving business strategy. He outlines six recommendations to help these two functions work together more effectively.