Balancing Risk and Performance with an Integrated Finance Organization: The Global CFO Study 2008, IBM Global Business Services, In cooperation with The Wharton School and Economist Intelligence Unit

This report contributes to the emergent discussion about how businesses can better adapt to the new realities of the global marketplace. The report focuses specifically on how globalization is evolving beyond mere multinational presence in different countries to a more complex interdependent network of worldwide assets that can “optimize” resources horizontally and vertically. The report argues that current enterprise management structures such as holding companies, decentralized operating companies and integrated operating companies, do not lead to differentiation in revenue and stock price growth. Instead, the report argues that companies need improved risk management institutions to create effective enterprise management. The report notes that although  62% of companies with revenues over $5 billion experienced material risk events in the last three years, only 52% had any sort of formalized risk management program. The report further suggests that the CFO needs to be the key driver of information integration throughout the enterprise with a focus on four key elements: enterprise-wide common data definitions, a standard Chart of Accounts, standard common processes and globally mandated standards. Currently, according to the report, fewer than one in seven enterprises govern and manage the integration of their Finance organizations using these standards.

The report articulates the role that CFOs should play as “providers of the truth” and leaders in risk management. “The truth” is defined as a single set of facts about the business that reflects the reality of the enterprise performance generated by hard data. The report emphasizes the importance of shifting the conversation from whether the numbers are right to how the numbers can be used to improve the business. This a shift from the transactional to the analytical. To facilitate this search for the truth, the report recommends that the business adopt global standards though process ownership and simplified enabling systems and organizational structures. And with the improved information system, the CFO should assume leadership in risk management. Since many businesses struggle to define and understand their “holistic enterprise risk profile”, CFOs should ensure that risk is orchestrated from middle management through to the Board. The report also identifies some specific forms of risk management that should be used including monitoring, reporting, historical comparisons, evaluation tools, predictive analytics, risk-adjusted forecasts and process controls.

This report adds to the increasing number of reports that acknowledge that while businesses recognize the importance and increased relevance of risk management, they do have adequate institutional or technical tools to address this need. This report focuses on the role that the CFO should play in orchestrating risk management within the enterprise. Regardless of which C level position is best positioned to lead effective enterprise risk management, the important point is that upper level management oversight and skill is needed beyond that which currently exists in most businesses. A more interesting point is the implication inherent in the report’s call for global standards for enterprise management, including risk management. This call to rethink the institutional implications for global firms could be far-reaching. What this report and others have yet to offer is useful analysis of the mechanics of how to achieve this new global strategy and which strategies may be more efficacious than others, particularly where global enterprise-wide risk management is concerned. The report is a useful starting point to a conversation that still is not part of global firms enterprise management and risk management strategic internal dialogues: how to better manage and institutionalize knowledge and “truth” about the risks of global business enterprises.

Reviewed by Robert Adamson, Executive Director, CIBC Centre for Corporate Governance and Risk Management