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How Treasurers Can Use their Numbers Skills in ERM

  • By Nilly Essaides
  • Published: 3/16/2015
Treasurers’ leg up in capturing the chief risk officer role is their facility with quantification of risk in their traditional risk management mandate. It’s this risk acumen that has helped treasurers expand their role into broader operations and a holistic view of the organization. Here are four things treasurers are good at that make them more adept at measuring risk and, thus, good candidates to be their organizations' ERM champions:

1. Broaden the risk view.

By relying on their models such as cash flow at risk, treasurers can identify secondary types of risk—those that are very high-impact with a low probability of occurring—e.g., the risk of a meteor hitting corporate HQ. A lower probability of occurrence justifies a less robust effort around ERM. “The advent of more data that can be harnessed, and the greater development of more accessible analytical tools to manage that data, creates an opportunity to elevate the way that companies asses and analyze their risk. That’s where treasury can be a logical leader,” said Peter Frank, principal with PwC’s Risk Consulting Services.

2. Boil it down to dollars and cents.

The extension of that is taking data with more sophisticated analytical methods and tying it to cash flow and its impact on capital structure, by extension related to impact on risk on equity market value. The treasury could literally develop a probability distribution that says there’s a 10 percent chance of us suffering an x-million dollar loss for that risk. This makes it easier to see which risks are the most significant and justify investment, which risks shareholders will want management to deal with, and which risks can be dealt with through portfolio diversification.

3. Introduce the portfolio effect.
 
Finally, treasurers could introduce risk correlations, conceivably bundling risk into a portfolio and applying the theory of value at risk. Financial institutions already do this. “Take a similar approach with an economic capital model for nonfinancial companies and develop a risk-adjusted distribution of potential outcomes, maybe by individual business lines, moving into risk adjusted performance management in the non-financial sector,” Frank said. “That’s my vision for where companies could and should take ERM in the next level of its evolution.”

4. Align with other risk-based functions.

Finding common ground with other risk-based entities within their companies can also be of benefit to treasur¬ers. It can help build a greater understanding of the firm’s key risk-drivers and foster greater consensus throughout the organization regarding key areas for investment and improvement. “Treasurers can showcase themselves from a risk profile to push that conversation and dialogue,” said Kieran Stack, managing director at Aon Global Risk Consulting.

More guidance can be found here. This article appeared in the March edition of the Risk Newsletter.
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