Rethinking Risk

Companies have never been more motivated to revisit risk management, but improvements will come slowly.

Last August, when Virgin Mobile CFO John Feehan spotted signs of looming bankruptcy at Circuit City, a retail outlet for his company’s cell phones, he didn’t sit idly by. Instead, Virgin Mobile tightened billing terms, demanded cash payments, and adjusted shipments daily. When Circuit City finally filed for bankruptcy in November, the bad news did not leave Virgin Mobile stuck with a pile of illiquid receivables.

Score one for risk management, a discipline that is being taken far more seriously these days thanks to the profound culpability it would seem to bear for the current financial crisis. According to a survey of 125 CFOs last September, 62 percent of finance executives blamed the crisis on risk management’s inability to understand complex financial instruments; nearly three quarters of the respondents said risk management now outranks in importance such issues as long-term and short-term debt financing, relationships with financial institutions, pension-plan asset allocation, and the ability to secure equity financing.

But, to paraphrase the “Seinfeld” joke about car reservations, it’s not enough to have risk management, you have to practice risk management. Consider Citigroup. The banking behemoth dutifully spelled out, as item 1A in its hefty 2007 10-K, a roster of lurking perils that ranged from credit, market, and market-liquidity risk to fiscal and monetary policy concerns. But barely six months after filing that document, top Citi managers headed to Washington, D.C., hats in hand, hoping for a $25 billion loan to keep the nation’s No. 2 bank viable.

Pressure from Above

What makes the current situation so dire is the way in which so many major risks are converging all at once: a credit crisis, volatile commodity prices, soaring government debt, rising unemployment and its attendant impact on consumer spending — the list goes on.

None of those risks are lost on CFOs, of course, who now have an additional impetus to address them: more pressure from boards. Corporate directors in most industries have gotten risk religion, says Henry Ristuccia, U.S. leader of Deloitte’s governance and risk-management practice in the Northeast. “More external directors are asking senior management: What are the company’s major risk issues? What are the dimensions of governance and risk management? What levers and tools does the company have in place for risk management?”

Steve Young, CFO of Franklin Covey, a global consulting and training company, says that as credit markets have tightened and the economy has worsened, his directors have pushed for a clearer picture of what to expect in a strained economy.

But how to satisfy such requests? Risk management takes many forms. Large firms often have chief risk officers (an increasingly popular post) or even dedicated departments. Smaller firms usually can’t afford that kind of resource, but that doesn’t mean they can’t effectively assess risk. Some take a moderately decentralized approach; at Hughes Communications, for instance, CFO Grant Barber manages risk related to capital and cash flow, the head of HR handles facilities risk and insurance, and IT handles computer security, data protection, and similar forms of what might be called electronic risk.

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