In viewing the results of the 2018 AFP Risk Survey, one thing that struck me was the importance of business risk to corporate treasury and finance professionals. When looking ahead, practitioners are particularly worried about the risks posed by the strategic risk of keeping their customers.
Finding your Amazon
The survey results reminded me of a recent conversation with a treasury practitioner over the question of “Who is your Amazon?”—that is, what do you need to do to step up to the operational challenge and compete with the major players? It sounds like I’m just stating the obvious, but treasurers need to carefully evaluate the Amazons of the world and see what they’re doing that’s making them so successful.
Conversely, if you are the biggest business in a particular place, now is not the time to become complacent. How are you protecting your market share? Just because a competitor is smaller than you doesn’t mean that they can’t come up with a great idea that could turn an industry on its head. A decade ago, if you told me that taxicabs across the world would be facing stiff competition from private citizens providing transport to people via a mobile app, I probably would have laughed. But we see how quickly things can change.
Lacking an appetite
However, despite the concern over strategic risk, the survey also revealed a more troubling statistic: 54 percent of companies have no board-approved risk appetite policy. That’s right—for whatever reason, at many companies, senior management has not made it a priority to define a formal risk appetite. They are instead relying on assumptions of commonly understood implicit risk appetite.
That’s not to say that there’s no hope; 17 percent of respondents said that their organizations are in the process of developing risk appetite statements, and 46 percent have either a statement in place. But to truly confront strategic risk head on, it’s my view that you need to clearly define your risk appetite, which will provide clear guidelines for decision-making.
Know your risks
Treasury and finance professionals frequently fill the role of risk manager at their organizations. And if there’s one thing I know about financial professionals, it’s that they like certainty. Not having a clearly defined set of guidelines for risk-taking is pretty much the antithesis of certainty. So if your organization doesn’t have one, I’d recommend pushing for it.
I don’t know how clearly defined Amazon’s risk appetite is. Perhaps Amazon has grown to the point where the company doesn’t even worry about it anymore. But in most cases, I would say that it only benefits you to have a clear idea in mind of the risks that you’re going to take.
So, to recap:
- Take a look at the biggest player in your market and try to determine what they’ve done to make themselves that way. Then consider what you need to do to emulate that success in a way that works for your business.
- If you are the biggest player in your market, think about how can protect your market share.
- A majority of companies have no board-approved risk appetite policy. As treasurers are often the risk managers in the organization, it may be up to you to advocate for a policy.
View the full results of the 2018 AFP Risk Survey, supported by Marsh & McLennan Companies Global Risk Center, here.