Treasury's Growing Role in Risk Management

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Risk has become a key topic for corporate management, boards of directors, and stakeholders—mounting competitive pressure, enhanced compliance requirements, and rapid globalization have focused business leadership on underlying exposures.

It's very clear that treasury's role is changing. The role is becoming more strategic and is taking on more initiatives that drive business performance in their organizations. The role also is expanding outward by leading or playing key roles in other functions, such as long-term capital responsibilities and risk management. Through our interactions with AFP members we have seen first-hand how dramatically the role of treasury is changing, not only that it is broadening, but that the pace of change is accelerating.

While treasury has long been responsible for managing cash flows, it is increasingly involved in activities throughout the organization that impact or have the potential to seriously threaten cash flows. Treasury, as the guardian of the organization's cash flows, has a vested interest in managing these risks.

Treasury departments typically are skilled in managing liquidity, foreign exchange, and interest rate risks-exposures that have long been in their domain. With increasing frequency, members are sharing with us their experiences of leading or contributing to the management of other risks. Credit risk, market risk, and energy risk now are on treasury's plate. Though to a lesser degree, treasury also works with other parts of their organizations to address commodity and non-financial risks, such as strategic and operational risks.

And why not, treasury is one of the few functions that can combine process expertise, long standing business unit relationships, and detailed knowledge of their businesses to inform a cohesive organization-wide risk management program.

While the movement toward increased treasury involvement in risk management is clear, the responsibilities assigned to treasury vary by industry and company. Moreover, a clear consensus has yet to emerge on the role that treasury should play in risk management or the ways in which the treasury skill set can add value to risk management processes.

Without benchmarks, treasury departments that are assigned new risk management responsibilities or seeking to expand their influence over risk management have no basis to judge whether they are in line with best-in-class treasury practices or others in their industry.

Treasury's Role In ERM

Risk has become a key topic for corporate management, boards of directors, and stakeholders-mounting competitive pressure, enhanced compliance requirements, and rapid globalization have focused business leadership on underlying exposures.

This focused effort has been the driver for broad initiatives that integrate firm-wide risk management with corporate culture and governance frameworks in an effort to create stronger, more accountable organizations. At the base of the unified framework are current best practices of risk management and strategic objectives alignment, defined risk program ownership and commitment from the highest levels of the organization.

In line with what we have heard from our members regarding individual risk programs, treasury increasing has gained direct responsibility for their organization's ERM program or they play a key leadership role. As corporations continue to move towards ERM programs, treasury's role is likely to increase.

AFP is currently involved in a research project regarding treasury's role in risk management that is part of an important step toward creating a baseline for treasury's activities in risk management. The research report is scheduled for release this summer.