2013 AFP Risk Survey

7/30/2019 2013 AFP Risk Survey

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Underwritten by

2013 AFPRisk SurveyReport of Survey Results

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Association for Financial Professionals

4520 East-West Highway, Suite 750

Bethesda, MD 20814

Phone 301.907.2862

Fax 301.907.2864

www.AFPonline.org

2013 AFPRisk SurveyReport of Survey Results

February 2013

Underwritten by


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Entering A New Age o Earnings Uncertainty:Companies that make risk-adjusted decisions will be industry leaders

Developing a sustainable competitive advantage in an increasingly uncertain environment is the most

challenging issue facing businesses today. More than half (53 percent) of senior nancial professionals saythey have greater difculty anticipating risks to their companies earnings today than they did before the

nancial crisis. Worse, most (86 percent) believe these challenging circumstances are here to stay, according

to results from this years Association for Financial Professionals Risk Survey, sponsored by Oliver Wyman.

Many of the variables that companies consider when making strategic decisions have become increasingly

unpredictable. At the same time, risks outside of the traditional purview of treasury and nance are having a

more immediate and meaningful impact on corporate performance.

Uncertainty creates opportunity. Those companies that understand how risks inherent in their inputs, outputs,

and operations will explicitly impact their nancial results are more likely to seize on new opportunities. Last

years survey revealed that a majority of treasurers and chief nancial ofcers were concerned about nancial

risks such as credit and liquidity. As companies have amassed more than $1 trillion of cash on their balance

sheets and their access to corporate credit has improved, many senior nancial professionals have turnedtheir attention to those issues more directly linked to growing the overall business, primarily strategic and

operational risks.

To combat these risks and gain a competitive advantage, the 2013 AFP Risk Surveyresults illustrate that

companies are embarking on a myriad of strategies ranging from information technology investments to

diversication into new markets to product innovation. More than half of respondents are also conducting more

reviews of emerging risks at a senior level.

While these efforts are commendable, the speed at which risks are reshaping industries requires a signicant

upgrade in tools and competencies. Most nancial professionals believe their forecasting capabilities are not

keeping up with rapidly evolving markets and the accompanying risks that impact their rms. Yet only

13 percent have signicantly changed the way they forecast critical variables over the last ve years.

Survey respondents who anticipate a more uncertain future are re-examining their risk appetites, changing

their strategic decision-making processes and enhancing their analytic capabilities at a disproportionately

higher rate than those at other organizations. We believe the rms that take this more proactive risk management

approach in the current environment will be able to capitalize on strategic opportunities that will clearly

differentiate them from their competitors.

Oliver Wyman is pleased to partner with the AFP in providing its members with information that will support

their ability to make risk-adjusted strategic decisions. The risk agenda for treasury and nance executives

is broadening at a time when it is more important than ever for senior nancial professionals to measure and

manage the impact of shifting risks on their companies earnings. We hope readers will nd the results of our

second annual risk survey informative and useful.

Alex Wittenberg

Partner, Oliver Wyman Group

Alex Wittenberg is a New York-based Partner in Oliver Wymans Global Risk & Trading Practice and head

of Oliver Wymans Global Risk Center. He has more than 20 years of cross-industry experience in risk

management advisory and risk transfer solutions. Alex specializes in integrating risk into strategic decision

making and nancial performance, designing risk governance for boards and management, and

developing risk assessment, mitigation, and analytical frameworks.


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www.AFPonline.org 2013 Association for Financial Professionals, Inc. All Rights Reserved 1

2013 AFP Risk Survey

IntroductionVolatility, interdependence, the increasing speed o change and what in the past were

only-once-in-100-year long-tail events (or black swans) are now, more than ever, den-

ing the operating environment or business. Financial proessionals at many organiza-tions are aced with the challenge o orecasting earnings in a new era o uncertainty.

Few nancial proessionals will be surprised to learn their peers report these dynamics

are accelerating, not abating. Consequently, risk management is becoming more vital

to every organization.

Recognizing the urgency o managing risk and earnings uncertainty in such an

environment, the Association or Financial Proessionals (AFP) and Oliver Wyman

have partnered together to produce a series o annual surveys to study the risk land-

scape or treasury and nance unctions specically, and or organizations as a whole.

The inaugural survey in this series, conducted in October 2011, examined the key risks

that were o paramount concern to organizations: nancial, macroeconomic, business/

operations, external risks and commodities. The current survey was conducted inNovember 2012, and ocuses on how organizations are addressing these risks through

a risk-adjusted ramework: orecasting, risk culture, organizational structure, metrics

and other solutions. The survey questionnaire was sent to AFPs senior level corporate

practitioner membership and generated responses rom 547 nancial proessionals at a

range o organizations, large and small, public and private, across North America.

Even as the troubled tides o the 2008-2009 nancial crisis continue to recede, more

than hal o this years survey respondents still expect the orecasting o critical variables to

become more dicult in the next three years. Three risk actors that survey

respondents rate the most signicant and dicult to orecast all outside the traditional

purview o treasury and nance: customer satisaction/retention, regulatory risk and

geo-political risk. Moreover, many nancial proessionals indicate their organizationsall short in their orecasting and risk management capabilities, with a large share

pointing to challenges involving data capture, integration and analysis even more so

than to a lack o resources or support.

Despite such ongoing uncertainty, nancial proessionals are responding with a

strategic investment o time, energy and resources. They are elevating the

importance o risk within their organizations through greater levels o awareness and

senior-level oversight, wider testing o assumptions, investments in IT, dashboards,

advice and insight. Some organizations are recalibrating their risk management

structure, roles, reporting lines and internal partnerships, as these are decidedly

mixed across organizations. The Chie Financial Ocer continues to lead risk

management at many organizations, with the role o Chie Risk Ocer emergingat relatively ew others. The structure o risk management is just one o many

questions this report addresses.

Readers are invited to compare the2013 AFP Risk Surveyndings and data against

their own organizations norms and practices and to stress test their own individual

risk assumptions.


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Political risk28

%

Energy price

volatility

44%

37%Regulatory risk Labor and HR issues

16%

7%

18%

Natural catastrophe

35%GDP Growth

BY THE

NUMBERS

Customer

satisfaction/

retention

Risk factors expected to have the greatest impact onorganizations earnings in the next three years, the

2013 Association for Financial Professionals Risk Survey,

sponsored by Oliver Wyman.

(Percent of survey respondents)


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Increased Earnings UncertaintyMore than hal o nancial proessionals report that their organizations are exposed to

more earnings uncertainty today than ve years ago (59 percent). Fewer than one in

eight believe their organizations are operating under conditions with less uncertaintythan ve years ago. Twenty-nine percent o survey respondents indicate the level o

uncertainty has not changed.

A higher percentage o survey respondents at publicly traded companies than at

privately owned organizations over two-thirds report that their organizations have

greater exposure to earnings uncertainty currently relative to the pre-recession period.

This may refect, in part, a more active risk agenda. For example, SEC enorcement has

become more aggressive in the atermath o the nancial crisis, issuing early warning

disclosure guidance in 2010 or organizations management to identiy and reassess risks

or nancial reporting.

Many companies also consider a broader spectrum o risks and risk time rames,

taking into account emerging risks and long-tail events. This refects, in part, the act

that companies have greater exposure to international risks as the world continues to

become a more unied and interdependent marketplace. Sixty percent o respondents

say their companies have some portion o international exposure, and 45 percent o

companies have increased their international activities over the past ve years. As a

result, even though the U.S.-based nancial crisis may be coming to an end, the

European sovereign debt crisis is almost as debilitating.

Change in Exposure to Uncertainty in Earnings Relative to Five Years Ago(Percentage Distribution)

Exposed to thesame level29%

Exposed to less12%

Exposed to more59%


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4 2013 Association for Financial Professionals, Inc. All Rights Reserved www.AFPonline.org


So, what do nancial proessionals identiy as the most infuential drivers o

increased earnings uncertainty? Responses were mixed. The largest share o survey

respondents (30 percent) cites macroeconomic actors such as GDP growth as

the most infuential ones. Financial actors (e.g., credit, liquidity) were the second

most-cited category, ollowed by external actors (such as regulatory risk) and actorssurrounding business/operations. Eleven percent o respondents indicate that

commodities are the primary driver in increasing exposure to earnings uncertainty.

Results diered, however, depending on the type o organization. Those

respondents rom publicly traded organizations were more likely than others to

indicate that commodities were the primary driver o increasing earnings

uncertainty. Conversely, commodities were the least infuential driver or privately

owned companies while nancial actors were the most requently cited driver

or these organizations. In addition, business operations are a more infuential

driver or privately owned organizations than publicly owned ones or, indeed, or

organizations as a whole.

The rank order o these ve drivers or all organizations also diers rom the

2012 AFP Risk Surveyresults. Financial actors appear to have declined in relative

importance, rom 33 percent in 2011 to 23 percent in the 2012 survey. Among

many possible infuences, this shit may refect sustained accommodative monetary

policy at the Federal Reserve. The act that companies have amassed more than $1

trillion in cash on their balance sheets could also have had some impact.

Primary Driver o Increase in Exposure to Earnings Uncertainty(Percentage Distribution o Organizations that Have Experienced Greater Earnings Uncertainty)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%All Publicly Traded Privately Owned

Macroeconomic

Financial

External

Business/Operations

Commodities

11

17

19

23

30

23

13

20

17

27

7

22

13

33

24


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Forecasting RiskConsistent with increased earnings uncertainty, more than hal o nancial proes-

sionals report that it is more dicult to orecast risk today relative to ve years ago

(beore the nancial crisis). This result is consistent across all types o organizations

large or small and public or private. Fewer than one in ve respondents indicatethat orecasting risk is currently easier.

While a majority o nancial proessionals 53 percent indicate that risk is more

dicult to orecast today, an almost identical share (52 percent) expect this trend to

continue. Thirty-six percent anticipate the same (elevated) level o orecasting di-

culty as exists currently. In short, nancial proessionals perceive dicult conditions

or orecasting risk as a new norm, even i they do not expect greater challenges in

the uture. A slim 12 percent o survey respondents oresee orecasting risk to become

easier three years rom now.

The main reason why organizations are struggling to orecast risk is that senior

nancial proessionals nd that many o the risk actors that are toughest to orecast

are having the greatest impact on their earnings. Many also expect these risk actors

will continue to infuence their nancial results in the uture.

The three risk actors nancial proessionals expect will have the greatest impact on

their organizations earnings over the next three years are customer/satisaction reten-

tion (cited by 44 percent o respondents), regulation (37 percent) and GDP growth

(35 percent). These risks are ollowed by political risk (28 percent), interest rates (21

percent) and credit risk (21 percent).

Survey respondents rom organizations with revenues under $1 billion cite customer

satisaction/retention more requently (46 percent) than do their peers at companieswith revenues above $1 billion (41 percent). Regulatory risk is cited by the same share o

organizations (37 percent), regardless o size. Financial proessionals rom publicly traded

companies and organizations with revenues over $1 billion are more likely than those

rom other companies to report exposure to earnings risk rom GDP growth will have

the greatest impact over the next three years (47 percent each compared to 26 percent at

smaller companies and 32 percent at privately owned organizations).1

Difculty o Forecasting Risk Today Relative

to 5 Years Ago (2007)(Percentage Distribution)

Anticipated Difculty o Forecasting Risk

Today Versus 3 Years rom Now (2015)(Percentage Distribution)

1. Regulatory risk and GDP growth were also cited as signicant risk factors in the2012 AFP Risk Survey.Customer satisfaction was not explored in the 2012 AFP Risk Survey.

Easier

Same

More Difcult

60% 50% 40% 30% 20% 10% 0%

53%

29%

18% 12%

36%

52%

0% 20% 40% 60%


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Regulatory risk is the second highest rated actor expected to have the greatest

impact on organizations earnings in the next year. Regulatory risk is also cited as

the second most difcult risk to orecast, ranking just behind natural catastrophe risk.

(Sixty-seven percent o survey respondents rated regulatory risk orecasting as very

dicult or dicult. Seventy-two percent hold this view with regard to naturalcatastrophe risk.)

Political risk is another risk actor or a majority o organizations, with 62 percent

o survey respondents indicating it as a risk and relatively ew organizations orecast-

ing political risk. Inormation technology risk also ranks near the top o the list, with

more than hal o respondents rating it dicult to assess (56 percent), particularly

threats such as those rom cyberattacks and systems malunctions.

Risk Factors Expected to Have the Highest Impact on Companies Earnings and to be Difcultto Assess

The Top Five Risk Factors or Each Category(Percentage o Organizations)

Risk actorswith high impact

Customer satisfaction/retention

Regulatory risk

GDP Growth

Political risk

Interest Rate

AllRespondents

44%

37

35

28

21

Risk actorsdifcult to orecast

Natural catastrophe

Regulatory risk

Product liability

Political risk

Commodity (non-energy)price volatility

Ranked high-impactrisk actor 5 or 4in difculty

72%

67

67

62

58


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These top potential risk actors and orecasting challenges share a common character-

istic they are external actors that are to a large degree outside o a companys control.

By contrast, those risks that are traditionally orecast within the treasury and nance

unctions including credit risk and interest rate risk are seen as easier to assess. Credit

risk, or example, ranks at the bottom o the list in terms o its diculty to orecast. Inact, credit-risk orecasting ranks even lower than does interest-rate risk orecasting. This

may be due to the act that interest rates have remained extraordinarily low and stable

under current policies o the Federal Reserve. Likewise, survey respondents report that

liquidity risk is also easier to orecast than are many other types o risk. This may also be

an indication o the act that since the nancial crisis, many companies have built up and

currently maintain large amounts o cash and investments on their balance sheets.

In the wake o the nancial crisis, companies had to develop more accurate orecasts

and ensure adequate access to capital. It is possible these assessments o risk and risk

orecasting refect the increasing distance rom the specic challenges nancial proessionals

aced during the nancial crisis, or the degree to which tools, limits and controls have

been put in place to assess and orecast credit and liquidity risk eectively.

Nevertheless, given both the breadth and depth o risk challenges, most nancial

proessionals indicate their organizations orecasting capabilities need improvement.

Forty-seven percent o respondents believe their companies should strengthen their

orecasting capabilities, while ten percent rate their capabilities as weak to non-existent.

Less than hal o respondents (43 percent) are relatively condent in their organizations

capabilities in orecasting critical variables. Financial proessionals rom publicly traded

companies tend to eel more condent than those rom privately owned companies (54

percent providing a top-two score versus 39 percent). This may refect the act that public

companies are more responsive to regulatory requirements. It may also point toward current

market demands: public companies have more at stake when they ail to manage Wall Streetexpectations and avoid negative surprises in earnings announcements.

Assessment o Organizations Capabilities at Forecasting Critical Variables(Percentage Distribution)

5% 40% 43% 11%

3% 7% 51% 32% 7%

3% 7% 47% 35% 8%

1-Weak to non-existent 2 3-Needs improvement 4 5-Robust

Public

Private

All

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


11/37



Organizations ace many challenges in orecasting key metrics. Chie among them is

data and analytics. This includes capturing relevant data within the company (rated an

impediment by 52 percent o respondents), integrating risk and orecasting data into

strategic decision making (47 percent), and capturing relevant data rom external (non-

company) sources (44 percent). Collectively, these actors may all under the headingo big data, refecting the diculty organizations have in capturing, managing, and

processing tremendous amounts o data in an actionable timerame. Forecasting and

analytical skills within the organization are also cited by about one-third o respondents

as key challenges (36 percent). It is worth noting, however, that resources and execu-

tive management support are much less common challenges in relation to orecasting

metrics (ranging rom 22 percent to 31 percent).

Data capture is even more o an impediment at large organizations and publicly

traded companies than at smaller companies and privately owned ones. This is likely

to be expected, given their greater size and complexity. Executive management support

is a greater concern or respondents at privately owned organizations than at publicly

traded ones (27 percent versus 16 percent).

While the time horizons that organizations use or orecasting out risk are dicult to

generalize, one year appears to be the most common time rame. For a large numbero organizations, relatively ew risks are orecast out less than one year. Liquidity and

currency/oreign exchange (FX) risk may be orecast out quarterly by about one in

ve organizations, while others may extend the orecast out three years or more. Some

companies elect not to orecast out liquidity risk at all.

Almost hal o all organizations 48 percent do not currently orecast natural

catastrophe risk. Just under a third do not orecast out political risk (29 percent), infa-

Challenges to Organizations Ability to Accurately Forecast Metrics(Percent o Organizations)

Capturing relevant data fromwithin the company

Integrating risk and forecastingdata to strategic decision making

Capturing relevant data fromexternal (non-company) sources

Forecasting and analytical skillsin organization

Corporate resources

Corporate IT resources

Executive managementsupport for forecasting

0% 10% 20% 30% 40% 50% 60%

52%

47%

44%

36%

31%

29%

22%


12/37



tion risk, intellectual property risk or product liability (27 percent or each). Interest-

ingly, although customer satisaction and retention are expected to have the greatest

impact on organizations earnings, one in our nancial proessionals indicates their

organizations do not orecast these at all. Relatively ew nancial proessionals orecast

out risks more than a year or two given the diculty amid change and volatility.

Period o Time Risk is Forecast Out(Percentage Distribution o Organizations that Cite Risk as Having Great Impact on Earnings)

One Three Notquarter Six One Two or more As currentlyand less months year years years needed orecasted

Commodity (non-energy)price volatility 13% 17% 35% 12% 18% 3% 3%

Country risk 5 2 30 >1 29 14 20

Credit 10 3 28 12 21 10 16

Currency/FX 22 7 36 11 7 4 14

Customer satisfaction/retention 6 3 29 6 18 12 25

Energy price volatility 8 13 25 10 23 6 15

GDP Growth 2 4 28 9 27 9 20

Ination 3 4 33 8 18 7 27

Information technology risk(e.g., cyber security

or systems failure) 3 7 25 10 18 16 22

Intellectual Property 3 8 16 5 35 5 27

Interest Rate 11 4 24 20 23 11 7

Labor and HR issues 6 9 26 4 21 10 24

Liquidity 22 12 28 11 16 4 8

Natural catastrophe 3 3 7 3 21 14 48

Outsourcing 9 4 17 17 >1 35 17

Political risk 2 3 19 12 22 12 29

Product liability 7 13 27 >1 20 7 27

Regulatory risk 6 7 15 13 20 15 26

Supply chain disruptions 19 11 34 2 6 11 17

Tax risk 7 9 28 6 25 10 16


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Responses to Current and Emerging Business RiskMany organizations are taking actions designed to outperorm their peers in an uncertain

environment by improving eciencies and expanding into new markets. Among the

most common initiatives is increasing investment in IT systems (cited by 57 percent o

respondents). More companies are turning to automation in their nancial processes,ocusing interest on treasury systems and technology in order or treasury to provide real-

time access to inormation. Others are increasing revenue growth targets (53 percent) and

ocusing on risk awareness and culture within the organization (52 percent).

Expanding into new markets and launching new product lines/oerings, which

diversiy revenue streams, are steps taken by 51 percent and 49 percent o organizations,

respectively, according to respondents. Nearly two out o ve respondents are increasing

capital expenditures (39 percent) and considering mergers and acquisitions (43 percent).

Despite the range o actions to increase organizational activities, and consistent

with our survey results in 2011, relatively ew nancial proessionals indicate their

organization is expanding the size o its workorce (29 percent). Instead, one thirdo organizations are reducing the number o their workers.

Actions Taken in Response to Current and Emerging Business Risks

Investment in IT systems

Revenue growth targets

Focus on risk culture and awareness with organization

Geographic markets served

Product lines/offerings

Margin growth targets

M&A activity

Capital expenditures

Use of external resources/experts

Size of organization workforce

40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70%

8%

20%

6%

6%

12%

22%

18%

25%

17%

33%

57%

53%

52%

51%

49%

45%

43%

39%

39%

29%

Decreased Increased

Percentage o Organizations


14/37



Looking more closely at changes in risk management activities, we see that the or-

ganizational response to current and emerging risks starts at the top at many organiza-

tions. The most common management response to current and emerging risks (cited

by 63 percent o respondents) is greater executive review o strategy/assumptions. An

increase in specic risk analysis occurs at 46 percent o organizations, as does report-ing up through increasing risk reporting to management (44 percent). These most

oten-cited actions center on increased attention and ocus on risk.

In response to current and emerging challenges, less than one quarter o organiza-

tions have increased risk mitigation through hedging or insurance, according to

survey results. Other activity appears to center on gaining business advice/guidance

and insight rom external consultants and proessional associations. The percentage o

organizations that appears to solicit risk guidance proactively rom banks is the same as

the percentage that takes no steps at all (13 percent).

Increasing specic risk analysis appears slightly more common at publicly traded

organizations than at private ones (53 percent versus 41 percent). A larger share o

those companies that are both publicly traded or with annual revenues o more than

$1 billion are increasing risk reporting to management (50 percent each) compared to

41 percent o privately owned companies and 42 percent o organizations with annual

revenue under $1 billion that are doing the same.

Changes in Risk Management Activities in Response to Current and Emerging Risks(Percent o Organizations)

Greater executive review ofstrategy assumptions

Increasing specic risk analysis

Increasing risk reportingto management

Increasing risk forecasting

Re-examining its risk appetite

Increased risk mitigationmechanisms-e.g., hedging

Increased risk transfermechanisms-e.g., insurance

Increasing risk managementguidance from external consultants

Increasing use of insights fromprofessional associations

No changes to strategic decisionmaking process

Increasing risk managementguidance from banks

0% 10% 20% 30% 40% 50% 60% 70%

63%

46%

44%

33%

31%

23%

21%

18%

17%

13%

13%


15/37



Risk Management Structure and CultureThe risk management structures o the organizations surveyed range rom highly

centralized to decentralized models. A signicant proportion o survey respondents

say their companies operate under ully centralized processes and execution, as with

many enterprise risk management unctions (28 percent). Large companies and privatecompanies are more likely than smaller ones and publicly traded ones to maintain this

centralized structure (35 percent). At the other end o the spectrum, some (12 percent)

have ully decentralized or siloed risk management structures where operating units

look at their risks separately.

Still, most rely on a ederated risk management structure. A majority o organizations

60 percent ollow a centralized process/decentralized execution model or risk man-

agement, and an even higher share o large and publicly traded companies (68 percent)

embrace this structure. Such centralized monitoring o risks would have reporting and

systems at headquarters, but the execution o the management is carried out by experts.

The advantage o a ederated model is that it permits business units to nimbly respond torisks, while a centralized process enables a company to evaluate and manage how seemingly

isolated risks could impact the risk prole o the organization as a whole.

In order or this risk management structure to work, however, there needs to be a

high degree o coordination between central unctions and business units. It must

also be customized to t an organizations pre-existing culture, structure and risk

management goals. For example, one organization may try to limit the impact o a

risk mismanaged at a divisions level by giving its business units more risk manage-

ment responsibilities and building ring ences around them. Another may choose

to introduce more centralized risk reporting processes to exert more direct control.

Factors considered in reaching these important decisions include the complexity o a

companys business structure and how dierent its business units are, as well as howtheir risk proles compare to the organizations appetite or risk overall.

Risk Management Structure Primary Responsibility or OrganizationsRisk Management

Fully centralizedprocess andexecution28%

Fullydecentralized12%

Centralized process/decentralized execution60%

CEO/COO28%

Management-levelRisk Committee14%

Treasurer11%

Chie RiskOfcer9%

CFO38%


16/37



Most respondents identied the CFO as the individual responsible or the

entire organizations risk management (38 percent). The Treasurer is cited by 11

percent o respondents while only nine percent o organizations rely primarily

on the Chie Risk Ocer. At smaller companies, the Chie Executive Ocer is

more commonly the primary risk contact than at larger ones (36 percent versus19 percent). Privately owned companies are slightly more likely to rely on the

CFO than are publicly traded ones (42 percent versus 32 percent).

Financial proessionals indicate the level o importance o risk assessment is

highest at the executive management level and lower within business units and

departments. Executive management and the Board o Directors have a strong

ocus on risk, uncertainty and the impact on business perormance: 86 percent

o nancial proessionals indicate risk management is important or very im-

portant at the executive management level and 82 percent report this to be the

case at the Board o Directors level.2

The ranking o importance in risk assessment drops to 68 percent at the

department level, possibly refecting a dierence in expectations, accountability

or a broader risk culture within operating units. The observed decline that tracks

with organizational hierarchy is most pronounced at privately owned organiza-

tions. This may be due to the absence o mandated disclosures o risk actors as

required or publicly held enterprises.

2. This data is consistent with survey research among Boards of Directors. For example, the annual surveys of public and private companiesby the National Association for Corporate Directors reveal that risk oversight has been a top-ranked Board governance priority for the pastfour years. For more, please visit: www.nacdonline.org.

Level o Importance o Risk Assessment within the Organization(Percent o Organizations Rating Risk Assessment Important or Extremely Important)

The executive team is the main partner outside the treasury unction to reassess risk

assumptions, as noted by 82 percent o respondents. The second most commonly cited

partner is legal (47 percent). Many organizations involve other unctions as well. Financial

planning & analysis (FP&A) and tax unctions are very commonly involved, reassessing

assumptions at about hal o large organizations and publicly traded companies.

At the executive management level

At the Board of Directors level

(e.g., Audit Committee)

Within business unit

Within department

0% 20% 40% 60% 80% 100%

86%

82%

75%

68%


17/37



The CFO is the business partner to whom treasury most oten reports changes in riskassumptions, according to 72 percent o nancial proessionals, ollowed by the CEO

(43 percent). Because treasury usually reports to the CFO, it is also common or the

CFO to interace directly with an organizations Board o Directors regarding risk

assumptions. In a quarter o companies, the Treasurer also receives such reporting. Only

15 percent o survey respondents indicate that changes in risk assumptions are reported

to a CRO. This result points to the limited presence o the C-level role as part o

enterprise risk structures across organizations.

The CFO is even more likely to assume the role o reviewing risk assumptions at large

publicly traded companies, whereas a higher percentage o smaller organizations see both

CEOs and Boards o Directors taking on the risk oversight unction. Treasurers similarly take

on more risk responsibility at organizations with annual revenue o more than $1 billion and

at publicly traded companies (39 percent and 37 percent, respectively) compared to smaller

organizations or privately owned enterprises (14 percent and 13 percent, respectively).

Key Partners Outside o Treasury Who Reassess Key Assumptions or Risks(Percent o Organizations)

Executive Team

Legal

Tax

FP&A

Sales

Investor Relations

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

82%

47%37%

30%

17%

13%

8%

Partners to Whom Treasury Reports Changes in Risk Assumptions(Percent o Organizations)

72%

43%

28%

25%

24%

21%

15%

CFO

CEO

Board of Directors

Treasurer

Board Audit Committee

Management-level Risk Committee

Chief Risk Ofcer

COO

Other Management Committee

0% 10% 20% 30% 40% 50% 60% 70% 80%

9%

14%


18/37



Risk Management Advisory SupportMany nancial proessionals report their organizations rely on an extensive network o

external proessionals to assist with risk management. Among those external experts,

consultants are the most popular source o expertise (cited by 62 percent o respondents),

ollowed by banks (53 percent) and auditing rms (50 percent). Forty-our percent osurvey respondents indicate their organizations turn to proessional associations or

assistance while just over one-third gain some orm o assistance rom a trade association.

While consultants are the leading source o expertise on risk management, large orga-

nizations are more likely to turn to consultants than are smaller ones (69 percent versus

57 percent) as are publicly traded ones compared to privately owned ones (65 percent

versus 55 percent). The same pattern is seen with the use o banks as expert sources on

risk management, with even greater dierences seen based on organization size and own-

ership structure. Auditing rms may be more common sources o expertise or publicly

traded companies than or privately owned ones as well (55 percent versus 45 percent).

External Experts Assisting Organization with Risk Management(Percent o Organizations)

62%

53%

50%

44%

35%

Consultants

Banks

Auditing Firms

Professional Associations

Trade (industry specic associations)

Think-tanks

Other

0% 10% 20% 30% 40% 50% 60% 70%

5%

9%


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Responsiveness o Banking Partners in Helping Organization Better Understandand Assess Risk(Percentage Distribution)

In the wake o the nancial crisis, however, many corporate practitioners have mixed

eelings about banking partners helping them to better understand and assess risk.

Only one in ten survey respondents rate their banking partners as very responsive.

A plurality rate them somewhat responsive while 22 percent rate their banking part-

ners as not very responsive or not responsive at all.Financial proessionals rom privately owned organizations are almost three times as

likely to give banks the lowest rankings as respondents rom publicly traded compa-

nies (31 percent versus 11 percent). At the other end o the spectrum, 46 percent o

publicly traded companies give their banking partners a top-two rating (out o ve) on

responsiveness, versus 29 percent o privately owned organizations.

45%

40%

35%

25%

20%

15%

10%

5%

0%

8%

14%

42%

26%

10%

Not responsive Not very Somewhat Responsive Very

at all responsive responsive responsive


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3. CTC Guide: Treasury Metrics: Scorecards and Dashboards. See http://www.corporatetreasurers.org/

Number o Key Perormance Indicators Tracked on Executive Dashboards(Percent o Organizations that Maintain an Executive Dashboard Tracking KPIs)

Fully 90 percent o publicly traded organizations maintain executive dashboards. The

number and nature o the key perormance indicators (KPIs) that should be tracked in a

dashboard at an executive level varies greatly depending on the complexity o a business,

the key concerns, and the specics o a major project. The pursuit o too many metrics can

produce contradictory results and ail to capture managements attention. AFP researchsuggests that treasuries should aim or simplicity and impact: a ocus on eight-to-ten

measures is probably sucient to be eective.3

Among public companies, 43 percent track six to ten key perormance indicators (KPIs).

Another 38 percent use between 11 and 20 indicators. By comparison, only one quarter

o privately owned organizations track more than 10 KPIs. Nearly one-third o small

companies (those with annual revenue less than $1 billion) track between one and ve KPIs

compared to only 17 percent o companies with annual revenue over $1 billion.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Numberofke

yperformanceindicators

1 to 5

6 to 10

11 to 15

16 to 20

All

Revenues Under $1 Billion

Revenues Over $1 Billion

Publicly Traded

Privately Owned

24%

31%

17%

19%

28%

44%

46%

42%

43%

47%

18%

14% 22%

20%

14%

13%

9%

19%

18%

11%


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ConclusionIn a business environment where long-tail events are more common, markets more

volatile and the speed o change aster, anticipating risk events is increasingly

challenging. The phrase risk management itsel may be overly ambitious i it

suggests a ormulaic process or solution or such unknowns rather than measuringand managing the impact o risks on operations and earnings.

Nevertheless, it is clear that earnings uncertainty and the risks associated with

them both qualitative and quantitative will only continue to have a more

immediate and meaningul impact on corporate perormance. Regulatory risk and

geo-political risk, to say nothing o natural disasters and other risk actors, remain

dicult or many organizations and their treasury and nance unctions to orecast.

The big question is: how can organizations best operate within this environment

and mitigate risk in the areas that are controllable? That question generates others.

What risk structures are well-suited to what organizations? Are centralized processes

and decentralized execution models serving organizations well? Amid theirmultiplicity o responsibilities, do CFOs continue to represent the best source or

risk reporting and coordination?

Then there are the procedural and analytical challenges. How can organizations

improve their data capture, integration and analysis so integral to risk management?

What investments, in IT and otherwise, generate the best return or risk

management? Who are the trusted advisors in this space? How can an organization

develop a risk culture and instill a risk-conscious approach in its entire sta? Amid

wide variation in metrics and reporting, which KPIs are predictive and more

risk-sensitive? Which ones provide only noise? How much orecasting is needed

and how ar out?

A wide-ranging survey on risk and earnings uncertainty surely generates morequestions than it answers, but so too does the risk management enterprise itsel.

Awareness, dialog and the continued reexamination o organizational norms and

assumptions may be the surest direction orward, as nancial proessionals navigate

their business through a new era o earnings uncertainty.


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About the SurveyIn November 2012, the Research Department o the Association or Financial Proessionals

(AFP) surveyed its senior level corporate practitioner membership about uncertainty and

how their organizations manage risk.

The survey was sent to AFP members with job titles o CFO, treasurer, controller, vicepresident o nance and assistant treasurer, along with member subscribers to AFPs Risk!

newsletter. The 3,936 surveys sent to this group generated 327 responses. The resulting

response rateadjusted or undelivered emailwas eight percent. AFP also sent surveys to

non-members with similar job titles, generating an additional 220 responses. The total 547

responses are the basis o this report. The respondent prole closely models that o AFPs

membership. A demographic prole o the survey respondents is presented below.

AFP thanks Oliver Wyman or being a valued partner on the AFP Risk Survey. In

addition to its underwriting support, Oliver Wyman provided AFP with subject mat-

ter expertise or the design o the questionnaire and or the nal report. The Research

Department o the Association or Financial Proessionals is solely responsible or thecontent o this report.

Annual Revenues (USD)(Percentage Distribution o Organizations)

Under $50 million 19%

$50-99.9 million 8

$100-249.9 million 11

$250-499.9 million 9

$500-999.9 million 9

$1-4.9 billion 22

$5-9.9 billion 10

$10-20 billion 5

Over $20 billion 7

Level o International Revenue(Percentage Distribution of Organizations)

0% of revenue 41%

1-25% of revenue 26

25-50% of revenue 18

50-75% of revenue 9

75-100% of revenue 5

Change in International Activities Over LastFive Years(Percentage Distribution o Organizations)

Increased 45%

Remained the same 46

Decreased 9

Ownership Type(Percentage Distribution o Organizations)

Publicly owned 36%

Privately held 44

Non-prot (not-for-prot) 12

Government (or government owned entity) 8


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Industry Sector(Percentage Distribution o Organizations)

Agriculture 3%

Air Transport 1

Automotive 2

Chemicals 2

Communications 3

Consumer products 7

Energy 10

Financial services 19

Government/ Not for Prot 11

Healthcare provider 3

Media/professional services 4

Mining and metals 2

Pharmaceuticals/Biotechnology 1

Retail 4

Surface Transport 1

Technology 8

All other manufacturing 6

Other industry 14


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Appendix: Survey Data Tables

Table 1: Change in Exposure to Uncertainty in Earnings Relative to Five Years Ago*(Percentage Distribution)

Revenues RevenuesUnder Over Publicly Privately

All $1 Billion $1 Billion Traded Owned

Exposed to more 58% 60% 64% 68% 59%

Exposed to the same level 29 29 25 22 26

Exposed to less 12 12 11 10 15



Macroeconomic (GDP growth, ination, consumer price index (CPI))

30% 26% 28% 27% 24%

Financial (credit, liquidity, interest rate, currency/FX)

23 30 21 17 33

External (country risk, regulatory, natural disaster)

19 18 21 20 13

Business/Operations (supply chain disruptions, production interruptions, litigation, labor, outsourcing, IT)

17 20 11 13 22

Commodities (energy, agricultural, non-agricultural)

11 6 20 23 7

Table 2: Primary Driver o Increase in Exposure to Earnings Uncertainty(Percentage Distribution o Organizations that Have Experienced Greater Earnings Uncertainty)

Table 3: Difculty o Forecasting Risk Today Relative to 5 Years Ago (2007)(Percentage Distribution)



Easier 18% 19% 17% 18% 18%

Same 29 26 30 25 27

More Difcult 53 55 54 57 55

Percentages may not sum to 100 percent due to rounding. All column numbers may fall outside of sub-segments displayeddue to incomplete reporting of revenue and organization type.


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Table 6: Level o Difculty in Assessing and Forecasting Risk(Percentage Distribution o Organizations that Cite Risk as Having Great Impact on Earnings )

Very Somewhat Not

Difcult (4) Difcult (2) Difcult

Natural catastrophe 64% 8% 16% >1% 12%

Regulatory risk 49 18 27 4 1

Political risk 49 13 31 4 3

Country risk 43 8 37 10 2

Information technology risk(e.g., cyber security orsystems failure) 43 13 31 7 6

Commodity (non-energy)price volatility 38 20 33 8 1

Currency/FX 36 19 30 7 7

Energy price volatility 36 13 37 8 5

Tax risk 33 19 36 8 5

Intellectual Property 32 14 46 3 54

Supply chain disruptions 32 16 42 5 5

Customer satisfaction/retention 29 19 40 7 4

GDP Growth 27 23 38 8 4

Product liability 27 40 20 7 7

Ination 27 13 48 3 9

Liquidity 23 16 39 14 8

Labor and HR issues 20 12 57 8 3

Interest Rate 20 17 42 8 13

Outsourcing 17 9 39 22 13

Credit 13 20 51 11 5


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Table 7: Risk Factors Expected to Have Greatest Impact on Organizations Earnings over Next 3 Years(Percent o Organizations)



Customer satisfaction/retention 44% 46% 41% 42% 47%

Regulatory risk 37 38 38 39 36

GDP Growth 35 26 47 47 32

Political risk 28 29 29 26 19

Interest Rate 21 24 15 18 22

Credit 21 27 11 16 26

Liquidity 18 22 13 15 22

Energy price volatility 18 14 25 20 19

Ination 17 20 11 11 19

Commodity (non-energy)price volatility 17 14 24 24 20

Labor and HR issues 16 20 11 9 16

Currency/FX 15 14 19 20 16

Tax risk 15 13 16 15 16

Information technology risk(e.g., cyber security or

systems failure) 15 19 13 14 14

Supply chain disruptions 14 13 17 18 17

Country risk 13 10 14 15 11

Intellectual Property 8 8 8 6 9

Natural catastrophe 7 7 6 4 9

Outsourcing 5 5 4 5 5

Product liability 3 3 4 5 3


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Table 8: Challenges to Organizations Ability to Accurately Forecast Metrics(Percent o Organizations)



Capturing relevant data fromwithin the company 52% 45% 60% 58% 49%

Integrating risk and forecastingdata to strategic decision making 47 49 44 49 44

Capturing relevant data fromexternal (non-company) sources 44 47 41 47 45

Forecasting and analytical skillsin organization 36 35 38 33 38

Corporate resources 31 29 32 29 33

Corporate IT resources 29 28 29 35 25

Executive managementsupport for forecasting 22 25 18 16 27

Table 9: Actions Taken in Response to Current and Emerging Business Risks(Percent o Organizations)

Increased Same Decreased

Investment in IT systems 57% 35% 8%

Revenue growth targets 53 27 20

Focus on risk culture and awareness within organization 52 42 6

Geographic markets served 51 43 6

Product lines/offerings 49 40 12

Margin growth targets 45 33 22

M&A activity 43 39 18

Capital expenditures 39 36 25

Use of external resources/experts 39 44 17

Size of organization workforce 29 39 33


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Table 10: Changes in Risk Management Activities in Response to Current and Emerging Risks(Percent o Organizations)



Greater executive review ofstrategy/assumptions 63% 65% 62% 66% 62%

Increasing specic risk analyses 46 48 45 53 41

Increasing risk reportingto management 44 42 50 50 41

Increasing risk forecasting 33 34 32 34 33

Re-examining its risk appetite 31 31 30 34 30

Increased risk mitigationmechanisms - e.g., hedging 23 22 25 28 24

Increased risk transfermechanisms - e.g., insurance 21 22 19 21 20

Increasing risk managementguidance from external consultants 18 18 16 18 16

Increasing use of insights fromprofessional associations 17 22 13 15 16

No changes to strategicdecision making process 13 10 14 12 13

Increasing risk managementguidance from banks 13 10 14 15 7

Other 1 1


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Table 12: Primary Responsibility or Organizations Risk Management(Percentage Distribution)



CFO 37% 37% 38% 32% 42%

CEO/COO 28 36 19 24 32

Management-levelRisk Committee/othermanagement committee 14 10 18 20 9

Treasurer 11 7 15 13 9

Chief Risk Ofcer 9 8 10 11 8

Table 13: Level o Importance o Risk Assessment within the Organization(Percent o Organizations Rating Risk Assessment Important or Extremely Important)



At the executive management level 86% 82% 89% 88% 82%

At the Board of Directors level(e.g., Audit Committee) 82 75 88 86 79

Within business unit 75 68 80 83 67

Within department 68 64 74 77 60


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Table 14: Key Partners Outside o Treasury Who Reassess Key Assumptions or Risk(Percent o Organizations)



Executive Team 82% 84% 79% 81% 82%

Legal 47 42 55 49 45

Tax 37 31 46 49 38

FP&A 36 23 53 53 31

Sales 17 15 19 22 19

Investor Relations 13 9 16 23 5

Other 8 6 11 11 5

Table 15: Partners to Whom Treasury Reports Changes in Risk Assumptions(Percent o Organizations)



CFO 72% 63% 84% 82% 66%

CEO 43 53 34 40 45

Board of Directors 28 35 19 20 28

Treasurer 25 14 39 37 13

Board Audit Committee 24 21 28 33 12

Management-level Risk Committee 21 16 28 34 12

Chief Risk Ofcer 15 12 18 22 10

COO 14 17 9 15 15

Other management committee 9 9 8 7 12


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Table 16: External Experts Assisting Organization with Risk Management(Percent o Organizations)



Consultants 62% 57% 69% 65% 55%

Banks 53 47 63 63 48

Auditing rms 50 49 51 55 45

Professional associations 44 45 41 44 40

Trade(industry specic associations) 35 37 33 34 33

Think-tanks 9 8 9 7 9

Other 5 7 4 4 6

Table 17: Responsiveness o Banking Partners in Helping Organization Better Understandand Assess Risk(Percent o Organizations)



Very responsive 10% 9% 11% 15% 8%

Responsive 26 25 29 31 21

Somewhat responsive 42 40 44 43 40

Not very responsive 14 16 12 8 20

Not responsive at all 8 10 4 3 11

Table 18: Level o Change in Organizations Forecasting o Critical Variable Relative to5 Years Ago(Percentage Distribution)

Little-to Somewhat Signifcantlyno-change Dierent Dierent

(1) (2) (3) (4) (5)

All 18% 9% 37% 23% 13%

Revenues Under $1 Billion 16 9 30 27 18

Revenues Over $1 Billion 21 8 45 19 7

Publicly Traded 18 10 41 23 9

Privately Owned 20 7 32 23 18


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Table 19: Status o Metrics Organization Forecasts(Percentage Distribution)

Would like to Does not orecast,Currently orecast, but does notorecasts currently does not anticipate doing so

Sales 96% 2% 1%

Margins 93 4 3

Cost of goods sold 91 5 4

EBIT 91 6 3

Capex/R&D expenditures 86 9 5

Earnings per share 80 6 13

Interest coverage 79 12 9

FTEs (organization wide) 77 12 11

Inventory 76 13 11

Debt-to-earnings 76 13 11

A/R balance 75 15 11

Return on capital 68 20 13

*Calculations exclude respondents who provided a not applicable response on a given metric.

Table 20: Number o Key Perormance Indicators Tracked on Executive Dashboards(Percentage o Organizations that Maintain an Executive Dashboard Tracking KPIs)



1 to 5 24% 31% 17% 19% 28%

6 to 10 44 46 42 43 47

11 to 15 18 14 22 20 14

16 to 20 13 9 19 18 11


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AFP Research

AFP Research provides nancial proessionals

with proprietary and timely research that drives

business perormance. The AFP Research team

is led by Managing Director, Research andStrategic Analysis, Kevin A. Roth, PhD, who

is joined by a team o research analysts.

AFP Research also draws on the knowledge

o the Associations members and its subject

matter experts in areas that include bank

relationship management, risk management,

payments, and nancial accounting and

reporting. AFP Research also produces

AFP EconWatch, a weekly economic newsletter.

Study reports on a variety o topics, includingAFPs annual compensation survey, and

AFP EconWatch, are available online at

www.AFPonline.org/research .

Oliver Wyman

With oces in 50+ cities across 25 countries,

Oliver Wyman is a leading global management

consulting rm that combines deep industry

knowledge with specialized expertise in strategy,operations, risk management, organizational

transormation, and leadership development. The

rms 3,000 proessionals help clients optimize

their businesses, improve their operations and

risk prole, and accelerate their organizational

perormance to seize the most attractive op-

portunities. Oliver Wyman is part o Marsh &

McLennan Companies [NYSE: MMC]. For

more inormation, visit www.oliverwyman.com

The Global Risk Center is Oliver Wymansresearch institute dedicated to analyzing

increasingly complex risks that are reshaping

industries, governments, and societies. Its

mission is to assist decision makers to address

these risks through research and insights that

combine Oliver Wymans rigorous analytical

approach to risk management with leading

thinking rom research partners.

For more inormation, please contact:Alex Wittenberg

Partner in the Global Risk & Trading Practice

at Oliver Wyman and the head o

Oliver Wymans Global Risk Center

+1.646.364.8440

[email protected]


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About the Association or Financial Proessionals

The Association or Financial Proessionals (AFP) headquartered in Bethesda, Maryland,

supports more than 16,000 individual members rom a wide range o industries throughout

all stages o their careers in various aspects o treasury and nancial management. AFP is the

preerred resource or nancial proessionals or continuing education, nancial tools and

publications, career development, certications, research, representation to legislators and

regulators, and the development o industry standards.

General Inquiries [email protected]

Web Site www.AFPonline.org

Phone 301.907.2862


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2013 AFP Risk Survey

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