Financial Crisis Spurs CFOs to Weigh Risk Management Practices

October 1, 2008

The financial crisis gripping the United States has senior finance executives more likely to be concerned about their firms’ risk management practices (72%) than they are about such issues as accessing both long-term debt financing (65%) and short-term financing (61%), relationships with their financial institutions (59%), pension plan asset allocation (40%) or their ability to secure equity financing (40%).

That’s according to a CFO Research Services study conducted in conjunction with global professional services firm Towers Perrin.

“The majority of reports have characterized the crisis as a financial crisis, and clearly on one level it is because companies’ access to capital – whether they are in the financial sector or otherwise – is severely strained right now, and the end is not yet in sight,” said Prakash Shimpi, Towers Perrin principal and head of the firm’s Enterprise Risk Management practice. “On another level, however, this crisis exposes material gaps in risk management – particularly operational risk – and the companies surveyed acknowledge that they will need to retool their risk management practices.”

Further, the economic woes have 55 percent of respondents saying their companies are likely to change risk management practices at their companies at either the board or the employee level, or both.

“CFOs and their teams are making decisions in the wake of this crisis that will affect not only their own companies, but the economy as a whole,” said Celina Rogers, director of Research at CFO Research Services. “The results of this survey show that senior finance executives are certainly concerned about funding their companies in the short term, but the long-term consequences of the crisis – its effect on companies’ ability to carry out strategic plans, and its risk management implications – are also first-order issues to emerge from this crisis.”

Additionally, while the majority (62%) acknowledged that the crisis would dampen profit expectations and leave a potentially lasting dent in the world economy, only 4% said they feared a major negative impact on their financial results, according to the survey, which was conducted last week, coinciding with reports of Secretary of the Treasury Henry Paulson’s efforts to create a proposed $700 billion financial services industry rescue package.

Banks’ Practices a Main Factor

When asked which items contributed to the current financial crisis, respondents as a whole blame risk management practices at banks (62%), followed by the increased complexity of financial instruments (59%) and financial market speculators (57%). Additionally, 24 percent said that fair-value accounting requirements were a major contributor to the crisis.

However, when broken out by sector (financial services versus nonfinancial services companies), the findings tell a somewhat split story:

Among CFOs at financial services companies, 78 percent cite the complexity of financial instruments as being responsible for the current economic environment, while 53 percent viewed banks’ risk management practices as a reason for the downturn – the same percentage that viewed financial market speculators and irresponsible homebuyers as contributors to the crisis.

Turning to nonfinancial services firms, 66 percent of their CFOs saw the banks’ risk management practices as a chief cause of the current economic situation, followed by financial market speculators (58%) and the increased complexity of financial instruments (53%).

Changes Likely

When it comes to making changes as the result of the financial turmoil, 49 percent said they are likely to alter their cash management practices, and a similar percentage is likely to change long-term investment strategy – both of which tie to funding. On the other hand, slightly more than one-quarter (26%) said that they were considering changing relationships with customers and suppliers, and even fewer (15%) said that they were likely to change their incentive packages.

“Despite the evident impact of the current financial crisis on liquidity and consumer confidence, the one agenda a majority of CFOs agree upon is that they plan to put their risk management practices under a microscope, and that this investigation will in many instances reach all levels of the organization, from the board down, and from the shop floor up,” said Patrick Finegan, Towers Perrin principal and senior consultant in the firm’s Enterprise Risk Management practice, underscoring the fact that most survey respondents say they will probably make changes to risk management practices in their companies.

Among some of the other key findings:

Despite the current concerted lobbying efforts of several U.S. auto manufacturers, a slight majority (52%) of respondents said they would be surprised by a large-scale bailout of the U.S. auto industry. However, 62 percent said they would be surprised by a large-scale bailout of one or more U.S. airlines.

Fifty-nine percent of respondents believe that the consolidation among financial services companies spurred by the current financial crisis will harm U.S. companies.

“If we ranked this crisis using the scale for hurricanes, we are in the midst of a Class Five perfect storm,” added Finegan. “The primary quest of finance executives, given the survey responses, is to get a better grip on the conditions that can expose a company – or the economy – to such a storm, measure the potential combined impact on short- and long-term financing needs, and then stock the balance sheet with the right mix and amount of provisions to weather the storm better than their competitors.”

About This Survey

The survey, “Senior Finance Executives on the Current Financial Turmoil,” was conducted by CFO Research, and launched Friday, Sept. 19, in the immediate aftermath of the developments on Wall Street and a federal bailout of the world’s largest insurer, and just days after the government bailout of Fannie Mae and Freddie Mac. In the following days, 125 survey responses from CFOs and other senior finance executives from a range of industries across the United States were tabulated. More than half of respondents come from companies with more than $500 million in annual revenue.

Sources: CFO Research Services
CFO Research Services is the sponsored research group within CFO Publishing Corp., which produces CFO magazine in the United States, Europe, Asia and China. CFO Publishing is part of The Economist Group.

Towers Perrin
Towers Perrin is a global professional services firm

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