Organizations Increasing Focus on Risk Management is Catalyst for Broad Financial Transformation According to New Research

Focus on relationship between risk management and value creation is expanding role of treasury in mitigating risk and as the ‘chief liquidity officer’ of organizations

June 26, 2006 - Bethesda, MD - An increasing focus on risk management at the highest levels within organizations has been the catalyst for broad financial transformation initiatives, according to a research project undertaken by the Corporate Treasurers Council of the Association for Financial Professionals (AFP). This increased attention, according to the research findings, goes beyond the initial attention brought upon by Sarbanes-Oxley and other international regulatory efforts, and is increasingly related to the direct relationship between risk management and value creation.

"There is an increasing dialogue and accountability at the executive management and board levels for enterprise risk management, and treasury's role has grown in the process," said Jeff Glenzer, Executive Director of the Corporate Treasurers Council of the AFP. "One of the key recurring topics at our Treasurers Roundtables was the dramatic and accelerating changes in the roles of treasury and a growing desire to understand best practices and how risk management fits into the role of the treasurer. Our research found that as the guardians of cash flow, treasury has a vested interest in managing risk and the role of the treasurer is evolving into that of the 'chief liquidity officer' for the organization."

The research findings demonstrate a growing movement toward enterprise risk management (ERM) in organizations. A quarter of organizations (25 percent) are currently managing an ERM program and another 30 percent are planning to launch an ERM initiative within the next 24 months, according to the survey. This movement reflects the growing recognition of the dynamic relationship between risk and opportunity, as well as the importance of understanding the aggregate impact of risk factors on business performance, according to the research findings. Three-quarters (76 percent) of organizations conduct risk management with the objective of reducing the variability of earnings and/or cash flow.

While the main impetus for launching an enterprise risk management program is often related to regulatory requirements such as Sarbanes-Oxley (15 percent), the survey confirms that the explicit driver of nearly half of all ERM programs is a Board, CEO, or CFO mandate. The increased interest in risk management at the highest levels of the organization is demonstrated by the fact that 65 percent of respondents state that their interaction with the Board on risk management strategy and governance issues has increased in the past three years.

Treasury commonly has direct responsibility for the enterprise risk management program or plays a leadership role. Treasury has overall responsibility for ERM in 16 percent of organizations, and plays a key leadership role in another 19 percent of organizations. "This is likely because treasury is one of the few functions that can combine risk management process expertise, broad knowledge of the business and working relationships with business units," comments Glenzer.

Other significant trends identified in the survey include:

• Treasurers' risk management responsibilities are expanding. Treasury's risk management responsibilities include: managing liquidity (90 percent); foreign exchange (90 percent); interest rate (88 percent); market (68 percent); credit (64 percent); energy (33 percent); non-agricultural commodity (30 percent); and agricultural commodities (14 percent).

• Treasury's role has expanded to active involvement in insurance management. Nearly half (48 percent) of treasurers responding to the survey are responsible for selecting and administering property insurance coverage, with many also responsible for selecting and administering errors and omissions (42 percent), product liability (40 percent) and workers compensation (29 percent) insurance coverage.

• Risk management and corporate strategic objectives are not consistently aligned. Just over half of respondents indicate that they currently align objectives throughout their organization. Moreover, 17 percent of organizations cite a conflict between financial risk management and corporate strategic objectives.

• Most organizations lack meaningful risk measurements and performance metrics. Only one in three organizations with ERM programs track spending on the initiative, and only one in six tracks the return on their ERM efforts. Further, ERM programs that are mandated by the Board, CEO or CFO are significantly less likely to track costs or have measurements in place to evaluate success than those that originate because of the impact or potential impact of existing risk exposures.

"As corporations focus on ways to effectively mitigate risk, the role of the treasurer and treasury function will continue to grow in influence," said Jim Kaitz, AFP President and CEO. "AFP's Corporate Treasures Council gives its members access to a nationwide network of senior treasury executives to foster interaction and solution sharing among peers and provides a critical resource to support the treasurer."

The Association for Financial Professionals formed the Corporate Treasurers Council (CTC) in March 2005 to help treasurers drive improvements in business performance. The CTC has been hosting Treasurers Roundtables throughout the United States, providing a unique, candid forum for peer-to-peer sharing of ideas, information and experiences.

In March 2006, AFP sent detailed questionnaires to senior-level corporate practitioners, including all of the attendees to the Corporate Treasurers Council meetings. Three hundred and forty-two finance professionals responded to the questionnaires and were followed up with in-person interviews. Ernst & Young's Global Treasury Services served as technical advisors on the research report, which can be found at www.AFPonline.org/research.

The Association for Financial Professionals, headquartered in Bethesda, Maryland, supports more than 15,000 individual members from a wide range of industries throughout all stages of their careers in various aspects of treasury and financial management. AFP is the preferred resource for financial professionals for continuing education, career development, certifications, research, representation to legislators and regulators, and the development of industry standards. Sponsored by the Association for Financial Professionals, the CTP designation is the globally recognized industry standard for treasury and a requirement for a changing profession. More than 16,000 professionals have earned AFP's certification since 1986. For more information about AFP, visit http://www.AFPonline.org