According to a new survey, firms today are spending a significant amount of time and resources to enhance their risk governance practices, especially in areas involving treasury such as liquidity and funding. This development has also received considerable attention from external stakeholders such as regulators, shareholders, creditors and rating agencies.
KPMG LLP and AFP recently conducted a survey of treasury risk governance practices across a broad range of U.S. corporations. Respondents to the survey included 114 nonfinancial firms and 42 financial firms. A number of key industry treasurers, senior finance executives and board members were also interviewed to gain their perspectives on survey topics.
“A well designed and executed risk governance structure is critical for any business to function effectively, and getting governance right is important not only at the board level but everywhere in an organization,” said Rob Ceske, Principal at KPMG and Head of its Treasury Practice.
- Risk committees are increasingly part of the risk governance structure, especially for financial firms. Over 85 percent of financial firms reported that they have a risk committee. In contrast, only 42 percent of nonfinancial firms operated with a Risk Committee.
- CFOs and CROs are the most frequently cited risk committee members for both financial and nonfinancial firms, with CFOs serving in over 75 percent of the risk committees. Treasurers served in risk committees less frequently—only 40 percent of the time for financial firms and 50 percent of the time for nonfinancial firms.
- Communication and access to data are key risk governance challenges for both financial and nonfinancial firms. The challenges around access to data are occurring partly in response to increased regulatory scrutiny and reporting requirements in the financial industry.
- Firms are reasonably successful at building centralized databases. Between 60 to 80 percent reported having centralized data. However, providing business users easy access to this data continues to be a challenge, especially in treasury and risk areas.
- Risk appetite statements are now a standard part of the risk governance structure for 83 percent of financial firms, versus only 53 percent of nonfinancial firms. In the vast majority of the cases, firm risk appetite statements are approved by the board or a board committee.
- Financial firms clearly lead nonfinancials in the use of risk limits as an active risk management tool. Less than 10 percent of financial firms reported not using some form of risk limit across their major risk categories compared with almost 40 percent for nonfinancial firms.
- Financial firms were also further along at penetrating risk limits down the corporate hierarchy to the legal entity level. In contrast, for nonfinancial firms, the vast majority reported setting risk limits only at the corporate level, leaving open the question of how business activities at the legal entity level are pulled back when risk limits violations need to be mitigated.
- Both financial and nonfinancial firms commonly use risk-return based metrics to discuss and/or accept new projects and opportunities. However, it is still uncommon for firms to have a comprehensive view of available risk-return opportunities across the organization.
- Financial firms use contributions to risk-adjusted returns as an objective part of an employee’s compensation more often than nonfinancial firms. This difference is especially noticeable for front and middle-office roles such as sales and management.
“One thing apparent from these results—and dozens of conversations with corporate treasurers across industries and the country—is that risk management and governance are at the top of their agendas,” said Craig Martin, executive director of AFP’s Corporate Treasurers Council.
Download the full survey here.