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1 lllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll 2013 AFP Risk Survey Report of Survey Results Underwritten by

2 2013 AFP Risk Survey Report of Survey Results February 2013 Underwritten by Association for Financial Professionals 4520 East-West Highway, Suite 750 Bethesda, MD Phone Fax

3 Entering A New Age of 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 financial professionals say they have greater difficulty anticipating risks to their companies earnings today than they did before the financial crisis. Worse, most (86 percent) believe these challenging circumstances are here to stay, according to results from this year s 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 finance 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 financial results are more likely to seize on new opportunities. Last year s survey revealed that a majority of treasurers and chief financial officers were concerned about financial 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 financial professionals have turned their 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 Survey results illustrate that companies are embarking on a myriad of strategies ranging from information technology investments to diversification 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 significant upgrade in tools and competencies. Most financial professionals believe their forecasting capabilities are not keeping up with rapidly evolving markets and the accompanying risks that impact their firms. Yet only 13 percent have significantly changed the way they forecast critical variables over the last five 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 firms 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 finance executives is broadening at a time when it is more important than ever for senior financial professionals to measure and manage the impact of shifting risks on their companies earnings. We hope readers will find 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 Wyman s Global Risk & Trading Practice and head of Oliver Wyman s 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 financial performance, designing risk governance for boards and management, and developing risk assessment, mitigation, and analytical frameworks.

4 Introduction Volatility, interdependence, the increasing speed of change and what in the past were only-once-in-100-year long-tail events (or black swans) are now, more than ever, defining the operating environment for business. Financial professionals at many organizations are faced with the challenge of forecasting earnings in a new era of uncertainty. Few financial professionals 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 of managing risk and earnings uncertainty in such an environment, the Association for Financial Professionals (AFP) and Oliver Wyman have partnered together to produce a series of annual surveys to study the risk landscape for treasury and finance functions specifically, and for organizations as a whole. The inaugural survey in this series, conducted in October 2011, examined the key risks that were of paramount concern to organizations: financial, macroeconomic, business/ operations, external risks and commodities. The current survey was conducted in November 2012, and focuses on how organizations are addressing these risks through a risk-adjusted framework: forecasting, risk culture, organizational structure, metrics and other solutions. The survey questionnaire was sent to AFP s senior level corporate practitioner membership and generated responses from 547 financial professionals at a range of organizations, large and small, public and private, across North America. Even as the troubled tides of the financial crisis continue to recede, more than half of this year s survey respondents still expect the forecasting of critical variables to become more difficult in the next three years. Three risk factors that survey respondents rate the most significant and difficult to forecast fall outside the traditional purview of treasury and finance: customer satisfaction/retention, regulatory risk and geo-political risk. Moreover, many financial professionals indicate their organizations fall short in their forecasting and risk management capabilities, with a large share pointing to challenges involving data capture, integration and analysis even more so than to a lack of resources or support. Despite such ongoing uncertainty, financial professionals are responding with a strategic investment of time, energy and resources. They are elevating the importance of risk within their organizations through greater levels of awareness and senior-level oversight, wider testing of 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 Chief Financial Officer continues to lead risk management at many organizations, with the role of Chief Risk Officer emerging at relatively few others. The structure of risk management is just one of many questions this report addresses. Readers are invited to compare the 2013 AFP Risk Survey findings and data against their own organization s norms and practices and to stress test their own individual risk assumptions Association for Financial Professionals, Inc. All Rights Reserved 1

5 BY THE NUMBERS Risk factors expected to have the greatest impact on organizations earnings in the next three years, the 2013 Association for Financial Professionals Risk Survey, sponsored by Oliver Wyman. (Percent of survey respondents) 28 % Political risk 44 % Customer satisfaction/ retention 18 % Energy price volatility 37 % Regulatory risk 16 % Labor and HR issues 35 % GDP Growth 7 % Natural catastrophe

6 Increased Earnings Uncertainty More than half of financial professionals report that their organizations are exposed to more earnings uncertainty today than five years ago (59 percent). Fewer than one in eight believe their organizations are operating under conditions with less uncertainty than five years ago. Twenty-nine percent of survey respondents indicate the level of uncertainty has not changed. A higher percentage of 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 reflect, in part, a more active risk agenda. For example, SEC enforcement has become more aggressive in the aftermath of the financial crisis, issuing early warning disclosure guidance in 2010 for organizations management to identify and reassess risks for financial reporting. Many companies also consider a broader spectrum of risks and risk time frames, taking into account emerging risks and long-tail events. This reflects, in part, the fact that companies have greater exposure to international risks as the world continues to become a more unified and interdependent marketplace. Sixty percent of respondents say their companies have some portion of international exposure, and 45 percent of companies have increased their international activities over the past five years. As a result, even though the U.S.-based financial 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 the same level 29% Exposed to more 59% Exposed to less 12% Association for Financial Professionals, Inc. All Rights Reserved 3

7 So, what do financial professionals identify as the most influential drivers of increased earnings uncertainty? Responses were mixed. The largest share of survey respondents (30 percent) cites macroeconomic factors such as GDP growth as the most influential ones. Financial factors (e.g., credit, liquidity) were the second most-cited category, followed by external factors (such as regulatory risk) and factors surrounding business/operations. Eleven percent of respondents indicate that commodities are the primary driver in increasing exposure to earnings uncertainty. Results differed, however, depending on the type of organization. Those respondents from publicly traded organizations were more likely than others to indicate that commodities were the primary driver of increasing earnings uncertainty. Conversely, commodities were the least influential driver for privately owned companies while financial factors were the most frequently cited driver for these organizations. In addition, business operations are a more influential driver for privately owned organizations than publicly owned ones or, indeed, for organizations as a whole. Primary Driver of Increase in Exposure to Earnings Uncertainty (Percentage Distribution of Organizations that Have Experienced Greater Earnings Uncertainty) 100% 90% 80% 70% 60% 50% Macroeconomic Financial External Business/Operations Commodities 40% 30% % 10% % All Publicly Traded Privately Owned The rank order of these five drivers for all organizations also differs from the 2012 AFP Risk Survey results. Financial factors appear to have declined in relative importance, from 33 percent in 2011 to 23 percent in the 2012 survey. Among many possible influences, this shift may reflect sustained accommodative monetary policy at the Federal Reserve. The fact that companies have amassed more than $1 trillion in cash on their balance sheets could also have had some impact Association for Financial Professionals, Inc. All Rights Reserved

8 Forecasting Risk Consistent with increased earnings uncertainty, more than half of financial professionals report that it is more difficult to forecast risk today relative to five years ago (before the financial crisis). This result is consistent across all types of organizations large or small and public or private. Fewer than one in five respondents indicate that forecasting risk is currently easier. While a majority of financial professionals 53 percent indicate that risk is more difficult to forecast today, an almost identical share (52 percent) expect this trend to continue. Thirty-six percent anticipate the same (elevated) level of forecasting difficulty as exists currently. In short, financial professionals perceive difficult conditions for forecasting risk as a new norm, even if they do not expect greater challenges in the future. A slim 12 percent of survey respondents foresee forecasting risk to become easier three years from now. Difficulty of Forecasting Risk Today Relative to 5 Years Ago (2007) (Percentage Distribution) Anticipated Difficulty of Forecasting Risk Today Versus 3 Years from Now (2015) (Percentage Distribution) 18% Easier 12% 29% Same 36% 53% 60% 50% 40% 30% 20% 10% 0% More Difficult 52% 0% 20% 40% 60% The main reason why organizations are struggling to forecast risk is that senior financial professionals find that many of the risk factors that are toughest to forecast are having the greatest impact on their earnings. Many also expect these risk factors will continue to influence their financial results in the future. The three risk factors financial professionals expect will have the greatest impact on their organizations earnings over the next three years are customer/satisfaction retention (cited by 44 percent of respondents), regulation (37 percent) and GDP growth (35 percent). These risks are followed by political risk (28 percent), interest rates (21 percent) and credit risk (21 percent). Survey respondents from organizations with revenues under $1 billion cite customer satisfaction/retention more frequently (46 percent) than do their peers at companies with revenues above $1 billion (41 percent). Regulatory risk is cited by the same share of organizations (37 percent), regardless of size. Financial professionals from publicly traded companies and organizations with revenues over $1 billion are more likely than those from other companies to report exposure to earnings risk from 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) Regulatory risk and GDP growth were also cited as significant risk factors in the 2012 AFP Risk Survey. Customer satisfaction was not explored in the 2012 AFP Risk Survey Association for Financial Professionals, Inc. All Rights Reserved 5

9 Risk Factors Expected to Have the Highest Impact on Companies Earnings and to be Difficult to Assess The Top Five Risk Factors for Each Category (Percentage of Organizations) Risk factors with high impact All Respondents Risk factors difficult to forecast Ranked high-impact risk factor 5 or 4 in difficulty Customer satisfaction/retention 44% Natural catastrophe 72% Regulatory risk 37 Regulatory risk 67 GDP Growth 35 Product liability 67 Political risk 28 Political risk 62 Interest Rate 21 Commodity (non-energy) price volatility 58 Regulatory risk is the second highest rated factor expected to have the greatest impact on organizations earnings in the next year. Regulatory risk is also cited as the second most difficult risk to forecast, ranking just behind natural catastrophe risk. (Sixty-seven percent of survey respondents rated regulatory risk forecasting as very difficult or difficult. Seventy-two percent hold this view with regard to natural catastrophe risk.) Political risk is another risk factor for a majority of organizations, with 62 percent of survey respondents indicating it as a risk and relatively few organizations forecasting political risk. Information technology risk also ranks near the top of the list, with more than half of respondents rating it difficult to assess (56 percent), particularly threats such as those from cyberattacks and systems malfunctions Association for Financial Professionals, Inc. All Rights Reserved

10 These top potential risk factors and forecasting challenges share a common characteristic they are external factors that are to a large degree outside of a company s control. By contrast, those risks that are traditionally forecast within the treasury and finance functions including credit risk and interest rate risk are seen as easier to assess. Credit risk, for example, ranks at the bottom of the list in terms of its difficulty to forecast. In fact, credit-risk forecasting ranks even lower than does interest-rate risk forecasting. This may be due to the fact that interest rates have remained extraordinarily low and stable under current policies of the Federal Reserve. Likewise, survey respondents report that liquidity risk is also easier to forecast than are many other types of risk. This may also be an indication of the fact that since the financial crisis, many companies have built up and currently maintain large amounts of cash and investments on their balance sheets. In the wake of the financial crisis, companies had to develop more accurate forecasts and ensure adequate access to capital. It is possible these assessments of risk and risk forecasting reflect the increasing distance from the specific challenges financial professionals faced during the financial crisis, or the degree to which tools, limits and controls have been put in place to assess and forecast credit and liquidity risk effectively. Nevertheless, given both the breadth and depth of risk challenges, most financial professionals indicate their organizations forecasting capabilities need improvement. Forty-seven percent of respondents believe their companies should strengthen their forecasting capabilities, while ten percent rate their capabilities as weak to non-existent. Less than half of respondents (43 percent) are relatively confident in their organization s capabilities in forecasting critical variables. Financial professionals from publicly traded companies tend to feel more confident than those from privately owned companies (54 percent providing a top-two score versus 39 percent). This may reflect the fact 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 fail to manage Wall Street expectations and avoid negative surprises in earnings announcements. Assessment of Organization s Capabilities at Forecasting Critical Variables (Percentage Distribution) Public 5% 40% 43% 11% Private 3% 7% 51% 32% 7% All 3% 7% 47% 35% 8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1-Weak to non-existent 2 3-Needs improvement 4 5-Robust Association for Financial Professionals, Inc. All Rights Reserved 7

11 Organizations face many challenges in forecasting key metrics. Chief among them is data and analytics. This includes capturing relevant data within the company (rated an impediment by 52 percent of respondents), integrating risk and forecasting data into strategic decision making (47 percent), and capturing relevant data from external (noncompany) sources (44 percent). Collectively, these factors may fall under the heading of big data, reflecting the difficulty organizations have in capturing, managing, and processing tremendous amounts of data in an actionable timeframe. Forecasting and analytical skills within the organization are also cited by about one-third of respondents as key challenges (36 percent). It is worth noting, however, that resources and executive management support are much less common challenges in relation to forecasting metrics (ranging from 22 percent to 31 percent). Data capture is even more of 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 for respondents at privately owned organizations than at publicly traded ones (27 percent versus 16 percent). Challenges to Organizations Ability to Accurately Forecast Metrics (Percent of Organizations) Capturing relevant data from within the company 52% Integrating risk and forecasting data to strategic decision making Capturing relevant data from external (non-company) sources 44% 47% Forecasting and analytical skills in organization 36% Corporate resources 31% Corporate IT resources 29% Executive management support for forecasting 22% 0% 10% 20% 30% 40% 50% 60% While the time horizons that organizations use for forecasting out risk are difficult to generalize, one year appears to be the most common time frame. For a large number of organizations, relatively few risks are forecast out less than one year. Liquidity and currency/foreign exchange (FX) risk may be forecast out quarterly by about one in five organizations, while others may extend the forecast out three years or more. Some companies elect not to forecast out liquidity risk at all. Almost half of all organizations 48 percent do not currently forecast natural catastrophe risk. Just under a third do not forecast out political risk (29 percent), infla Association for Financial Professionals, Inc. All Rights Reserved

12 tion risk, intellectual property risk or product liability (27 percent for each). Interestingly, although customer satisfaction and retention are expected to have the greatest impact on organizations earnings, one in four financial professionals indicates their organizations do not forecast these at all. Relatively few financial professionals forecast out risks more than a year or two given the difficulty amid change and volatility. Period of Time Risk is Forecast Out (Percentage Distribution of Organizations that Cite Risk as Having Great Impact on Earnings) One Three Not quarter Six One Two or more As currently and less months year years years needed forecasted Commodity (non-energy) price volatility 13% 17% 35% 12% 18% 3% 3% Country risk > Credit Currency/FX Customer satisfaction/retention Energy price volatility GDP Growth Inflation Information technology risk (e.g., cyber security or systems failure) Intellectual Property Interest Rate Labor and HR issues Liquidity Natural catastrophe Outsourcing > Political risk Product liability > Regulatory risk Supply chain disruptions Tax risk Association for Financial Professionals, Inc. All Rights Reserved 9

13 Responses to Current and Emerging Business Risk Many organizations are taking actions designed to outperform their peers in an uncertain environment by improving efficiencies and expanding into new markets. Among the most common initiatives is increasing investment in IT systems (cited by 57 percent of respondents). More companies are turning to automation in their financial processes, focusing interest on treasury systems and technology in order for treasury to provide realtime access to information. Others are increasing revenue growth targets (53 percent) and focusing on risk awareness and culture within the organization (52 percent). Expanding into new markets and launching new product lines/offerings, which diversify revenue streams, are steps taken by 51 percent and 49 percent of organizations, respectively, according to respondents. Nearly two out of five respondents are increasing capital expenditures (39 percent) and considering mergers and acquisitions (43 percent). Despite the range of actions to increase organizational activities, and consistent with our survey results in 2011, relatively few financial professionals indicate their organization is expanding the size of its workforce (29 percent). Instead, one third of organizations are reducing the number of their workers. Actions Taken in Response to Current and Emerging Business Risks Decreased Increased Investment in IT systems Revenue growth targets 20% 8% 57% 53% Focus on risk culture and awareness with organization 6% 52% Geographic markets served 6% 51% Product lines/offerings 12% 49% Margin growth targets 22% 45% M&A activity 18% 43% Capital expenditures 25% 39% Use of external resources/experts 17% 39% Size of organization workforce 33% 29% 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% Percentage of Organizations Association for Financial Professionals, Inc. All Rights Reserved

14 Looking more closely at changes in risk management activities, we see that the organizational response to current and emerging risks starts at the top at many organizations. The most common management response to current and emerging risks (cited by 63 percent of respondents) is greater executive review of strategy/assumptions. An increase in specific risk analysis occurs at 46 percent of organizations, as does reporting up through increasing risk reporting to management (44 percent). These most often-cited actions center on increased attention and focus on risk. In response to current and emerging challenges, less than one quarter of organizations have increased risk mitigation through hedging or insurance, according to survey results. Other activity appears to center on gaining business advice/guidance and insight from external consultants and professional associations. The percentage of organizations that appears to solicit risk guidance proactively from banks is the same as the percentage that takes no steps at all (13 percent). Increasing specific risk analysis appears slightly more common at publicly traded organizations than at private ones (53 percent versus 41 percent). A larger share of those companies that are both publicly traded or with annual revenues of more than $1 billion are increasing risk reporting to management (50 percent each) compared to 41 percent of privately owned companies and 42 percent of 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 of Organizations) Greater executive review of strategy assumptions 63% Increasing specific risk analysis Increasing risk reporting to management Increasing risk forecasting Re-examining its risk appetite Increased risk mitigation mechanisms-e.g., hedging Increased risk transfer mechanisms-e.g., insurance 23% 21% 33% 31% 46% 44% Increasing risk management guidance from external consultants Increasing use of insights from professional associations No changes to strategic decision making process Increasing risk management guidance from banks 18% 17% 13% 13% 0% 10% 20% 30% 40% 50% 60% 70% Association for Financial Professionals, Inc. All Rights Reserved 11

15 Risk Management Structure and Culture The risk management structures of the organizations surveyed range from highly centralized to decentralized models. A significant proportion of survey respondents say their companies operate under fully centralized processes and execution, as with many enterprise risk management functions (28 percent). Large companies and private companies are more likely than smaller ones and publicly traded ones to maintain this centralized structure (35 percent). At the other end of the spectrum, some (12 percent) have fully decentralized or siloed risk management structures where operating units look at their risks separately. Still, most rely on a federated risk management structure. A majority of organizations 60 percent follow a centralized process/decentralized execution model for risk management, and an even higher share of large and publicly traded companies (68 percent) embrace this structure. Such centralized monitoring of risks would have reporting and systems at headquarters, but the execution of the management is carried out by experts. The advantage of a federated model is that it permits business units to nimbly respond to risks, while a centralized process enables a company to evaluate and manage how seemingly isolated risks could impact the risk profile of the organization as a whole. In order for this risk management structure to work, however, there needs to be a high degree of coordination between central functions and business units. It must also be customized to fit an organization s pre-existing culture, structure and risk management goals. For example, one organization may try to limit the impact of a risk mismanaged at a division s level by giving its business units more risk management responsibilities and building ring fences 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 of a company s business structure and how different its business units are, as well as how their risk profiles compare to the organization s appetite for risk overall. Risk Management Structure Fully centralized process and execution 28% Fully decentralized 12% Primary Responsibility for Organization s Risk Management Management-level Risk Committee 14% CEO/COO 28% Treasurer 11% Chief Risk Officer 9% Centralized process/ decentralized execution 60% CFO 38% Association for Financial Professionals, Inc. All Rights Reserved

16 Most respondents identified the CFO as the individual responsible for the entire organization s risk management (38 percent). The Treasurer is cited by 11 percent of respondents while only nine percent of organizations rely primarily on the Chief Risk Officer. At smaller companies, the Chief Executive Officer is more commonly the primary risk contact than at larger ones (36 percent versus 19 percent). Privately owned companies are slightly more likely to rely on the CFO than are publicly traded ones (42 percent versus 32 percent). Financial professionals indicate the level of importance of risk assessment is highest at the executive management level and lower within business units and departments. Executive management and the Board of Directors have a strong focus on risk, uncertainty and the impact on business performance: 86 percent of financial professionals indicate risk management is important or very important at the executive management level and 82 percent report this to be the case at the Board of Directors level. 2 The ranking of importance in risk assessment drops to 68 percent at the department level, possibly reflecting a difference 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 organizations. This may be due to the absence of mandated disclosures of risk factors as required for publicly held enterprises. Level of Importance of Risk Assessment within the Organization (Percent of Organizations Rating Risk Assessment Important or Extremely Important ) At the executive management level At the Board of Directors level (e.g., Audit Committee) 86% 82% Within business unit Within department 68% 75% 0% 20% 40% 60% 80% 100% The executive team is the main partner outside the treasury function to reassess risk assumptions, as noted by 82 percent of respondents. The second most commonly cited partner is legal (47 percent). Many organizations involve other functions as well. Financial planning & analysis (FP&A) and tax functions are very commonly involved, reassessing assumptions at about half of large organizations and publicly traded companies. 2. This data is consistent with survey research among Boards of Directors. For example, the annual surveys of public and private companies by the National Association for Corporate Directors reveal that risk oversight has been a top-ranked Board governance priority for the past four years. For more, please visit: Association for Financial Professionals, Inc. All Rights Reserved 13

17 Key Partners Outside of Treasury Who Reassess Key Assumptions for Risks (Percent of Organizations) Executive Team 82% Legal 47% Tax FP&A 37% 30% Sales Investor Relations 13% 17% Other 8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% The CFO is the business partner to whom treasury most often reports changes in risk assumptions, according to 72 percent of financial professionals, followed by the CEO (43 percent). Because treasury usually reports to the CFO, it is also common for the CFO to interface directly with an organization s Board of Directors regarding risk assumptions. In a quarter of companies, the Treasurer also receives such reporting. Only 15 percent of survey respondents indicate that changes in risk assumptions are reported to a CRO. This result points to the limited presence of the C-level role as part of enterprise risk structures across organizations. The CFO is even more likely to assume the role of reviewing risk assumptions at large publicly traded companies, whereas a higher percentage of smaller organizations see both CEOs and Boards of Directors taking on the risk oversight function. Treasurers similarly take on more risk responsibility at organizations with annual revenue of 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). Partners to Whom Treasury Reports Changes in Risk Assumptions (Percent of Organizations) CFO CEO 43% Board of Directors 28% Treasurer 25% Board Audit Committee 24% Management-level Risk Committee 21% Chief Risk Officer 15% COO 14% Other Management Committee 9% 72% 0% 10% 20% 30% 40% 50% 60% 70% 80% Association for Financial Professionals, Inc. All Rights Reserved

18 Risk Management Advisory Support Many financial professionals report their organizations rely on an extensive network of external professionals to assist with risk management. Among those external experts, consultants are the most popular source of expertise (cited by 62 percent of respondents), followed by banks (53 percent) and auditing firms (50 percent). Forty-four percent of survey respondents indicate their organizations turn to professional associations for assistance while just over one-third gain some form of assistance from a trade association. While consultants are the leading source of expertise on risk management, large organizations 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 of banks as expert sources on risk management, with even greater differences seen based on organization size and ownership structure. Auditing firms may be more common sources of expertise for publicly traded companies than for privately owned ones as well (55 percent versus 45 percent). External Experts Assisting Organization with Risk Management (Percent of Organizations) Consultants Banks Auditing Firms Professional Associations Trade (industry specific associations) Think-tanks Other 5% 9% 35% 44% 50% 53% 62% 0% 10% 20% 30% 40% 50% 60% 70% Association for Financial Professionals, Inc. All Rights Reserved 15

19 In the wake of the financial crisis, however, many corporate practitioners have mixed feelings 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 partners as not very responsive or not responsive at all. Financial professionals from privately owned organizations are almost three times as likely to give banks the lowest rankings as respondents from publicly traded companies (31 percent versus 11 percent). At the other end of the spectrum, 46 percent of publicly traded companies give their banking partners a top-two rating (out of five) on responsiveness, versus 29 percent of privately owned organizations. Responsiveness of Banking Partners in Helping Organization Better Understand and Assess Risk (Percentage Distribution) 45% 40% 42% 35% 25% 20% 26% 15% 10% 5% 8% 14% 10% 0% Not responsive Not very Somewhat Responsive Very at all responsive responsive responsive Association for Financial Professionals, Inc. All Rights Reserved

20 Performance Metrics Despite widespread views about increased uncertainty, financial professionals report varying levels of change in their forecasting of critical variables relative to five years ago. While 37 percent of respondents report they are forecasting critical variables somewhat differently, only 13 percent believe they have made a significant adjustment. Smaller organizations in particular appear to believe they have made greater modifications than their peers at larger companies (45 percent of companies with annual revenue under $1 billion versus 26 percent of those with annual revenue over $1 billion). Level of Change in Organization s Forecasting of Critical Variables Relative to 5 Years Ago (Percentage Distribution) 40% 37% 35% 25% 20% 15% 10% 5% 18% 9% 23% 13% 0% 1-Little-to-no change 2 3-Somewhat different 4 5-Significantly different Organizations monitor and forecast a variety of metrics in their risk management activity. More than nine in ten organizations forecast sales, margins, cost of goods sold and EBIT, according to financial professionals. Capex/R&D and EPS are also common metrics for at least four in five organizations. Two-thirds calculate the return on capital, even though an additional 20 percentage points more indicate that they would like to forecast this. Status of Metrics Organizations Forecasts Currently forecasts Would like to forecast Sales Margins Cost of goods sold EBIT Capex/R&D expenditures Earnings per share Interest per share FTEs (organization wide) Inventory Debt-to-earnings A/R balance Return on capital 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of Organizations 68% 77% 76% 76% 75% 86% 80% 86% 79% 89% 96% 96% 93% 97% 91% 96% 91% 97% 91% 89% 89% 90% 88% 95% *Calculations exclude respondents who provided a not applicable response on a given metric Association for Financial Professionals, Inc. All Rights Reserved 17

21 Fully 90 percent of publicly traded organizations maintain executive dashboards. The number and nature of the key performance indicators (KPIs) that should be tracked in a dashboard at an executive level varies greatly depending on the complexity of a business, the key concerns, and the specifics of a major project. The pursuit of too many metrics can produce contradictory results and fail to capture management s attention. AFP research suggests that treasuries should aim for simplicity and impact: a focus on eight-to-ten measures is probably sufficient to be effective. 3 Among public companies, 43 percent track six to ten key performance indicators (KPIs). Another 38 percent use between 11 and 20 indicators. By comparison, only one quarter of privately owned organizations track more than 10 KPIs. Nearly one-third of small companies (those with annual revenue less than $1 billion) track between one and five KPIs compared to only 17 percent of companies with annual revenue over $1 billion. Number of Key Performance Indicators Tracked on Executive Dashboards (Percent of Organizations that Maintain an Executive Dashboard Tracking KPIs) Number of key performance indicators 1 to 5 6 to to to 20 0% 0 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% All Revenues Under $1 Billion Revenues Over $1 Billion Publicly Traded Privately Owned 9% 11% 14% 14% 13% 17% 19% 18% 19% 18% 22% 20% 24% 28% 31% 44% 46% 42% 43% 47% 3. CTC Guide: Treasury Metrics: Scorecards and Dashboards. See Association for Financial Professionals, Inc. All Rights Reserved

22 Conclusion In a business environment where long-tail events are more common, markets more volatile and the speed of change faster, anticipating risk events is increasingly challenging. The phrase risk management itself may be overly ambitious if it suggests a formulaic process or solution for such unknowns rather than measuring and managing the impact of 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 meaningful impact on corporate performance. Regulatory risk and geo-political risk, to say nothing of natural disasters and other risk factors, remain difficult for many organizations and their treasury and finance functions to forecast. 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 their multiplicity of responsibilities, do CFOs continue to represent the best source for 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 for 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 staff? Amid wide variation in metrics and reporting, which KPIs are predictive and more risk-sensitive? Which ones provide only noise? How much forecasting is needed and how far out? A wide-ranging survey on risk and earnings uncertainty surely generates more questions than it answers, but so too does the risk management enterprise itself. Awareness, dialog and the continued reexamination of organizational norms and assumptions may be the surest direction forward, as financial professionals navigate their business through a new era of earnings uncertainty Association for Financial Professionals, Inc. All Rights Reserved 19

23 About the Survey In November 2012, the Research Department of the Association for Financial Professionals (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 of CFO, treasurer, controller, vice president of finance and assistant treasurer, along with member subscribers to AFP s Risk! newsletter. The 3,936 surveys sent to this group generated 327 responses. The resulting response rate adjusted for undelivered was 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 of this report. The respondent profile closely models that of AFP s membership. A demographic profile of the survey respondents is presented below. AFP thanks Oliver Wyman for being a valued partner on the AFP Risk Survey. In addition to its underwriting support, Oliver Wyman provided AFP with subject matter expertise for the design of the questionnaire and for the final report. The Research Department of the Association for Financial Professionals is solely responsible for the content of this report. Annual Revenues (USD) (Percentage Distribution of Organizations) Under $50 million 19% $ million 8 $ million 11 $ million 9 $ million 9 $1-4.9 billion 22 $5-9.9 billion 10 $10-20 billion 5 Over $20 billion 7 Level of International Revenue (Percentage Distribution of Organizations) Change in International Activities Over Last Five Years (Percentage Distribution of Organizations) Increased 45% Remained the same 46 Decreased 9 Ownership Type (Percentage Distribution of Organizations) Publicly owned 36% Privately held 44 Non-profit (not-for-profit) 12 Government (or government owned entity) 8 0% of revenue 41% 1-25% of revenue % of revenue % of revenue % of revenue Association for Financial Professionals, Inc. All Rights Reserved

24 Industry Sector (Percentage Distribution of Organizations) Agriculture 3% Air Transport 1 Automotive 2 Chemicals 2 Communications 3 Consumer products 7 Energy 10 Financial services 19 Government/ Not for Profit 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 Association for Financial Professionals, Inc. All Rights Reserved 21

25 Appendix: Survey Data Tables Table 1: Change in Exposure to Uncertainty in Earnings Relative to Five Years Ago* (Percentage Distribution) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Exposed to more 58% 60% 64% 68% 59% Exposed to the same level Exposed to less Table 2: Primary Driver of Increase in Exposure to Earnings Uncertainty (Percentage Distribution of Organizations that Have Experienced Greater Earnings Uncertainty) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Macroeconomic (GDP growth, inflation, consumer price index (CPI)) 30% 26% 28% 27% 24% Financial (credit, liquidity, interest rate, currency/fx) External (country risk, regulatory, natural disaster) Business/Operations (supply chain disruptions, production interruptions, litigation, labor, outsourcing, IT) Commodities (energy, agricultural, non-agricultural) Table 3: Difficulty of Forecasting Risk Today Relative to 5 Years Ago (2007) (Percentage Distribution) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Easier 18% 19% 17% 18% 18% Same More Difficult Percentages may not sum to 100 percent due to rounding. All column numbers may fall outside of sub-segments displayed due to incomplete reporting of revenue and organization type Association for Financial Professionals, Inc. All Rights Reserved

26 Table 4: Anticipated Difficulty of Forecasting Risk Today Versus 3 Years from Now (2015 (Percentage Distribution) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Easier 12% 13% 11% 15% 11% Same More Difficult Table 5: Assessment of Organization s Capabilities at Forecasting Critical Variables (Percentage Distribution) Weak to Needs Non-existent Improvement Robust (1) (2) (3) (4) (5) All 3% 7% 47% 35% 8% Revenues Under $1 Billion Revenues Over $1 Billion Publicly Traded Privately Owned Association for Financial Professionals, Inc. All Rights Reserved 23

27 Table 6: Level of Difficulty in Assessing and Forecasting Risk (Percentage Distribution of Organizations that Cite Risk as Having Great Impact on Earnings ) Very Somewhat Not Difficult (4) Difficult (2) Difficult Natural catastrophe 64% 8% 16% >1% 12% Regulatory risk Political risk Country risk Information technology risk (e.g., cyber security or systems failure) Commodity (non-energy) price volatility Currency/FX Energy price volatility Tax risk Intellectual Property Supply chain disruptions Customer satisfaction/retention GDP Growth Product liability Inflation Liquidity Labor and HR issues Interest Rate Outsourcing Credit Association for Financial Professionals, Inc. All Rights Reserved

28 Table 7: Risk Factors Expected to Have Greatest Impact on Organization s Earnings over Next 3 Years (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Customer satisfaction/retention 44% 46% 41% 42% 47% Regulatory risk GDP Growth Political risk Interest Rate Credit Liquidity Energy price volatility Inflation Commodity (non-energy) price volatility Labor and HR issues Currency/FX Tax risk Information technology risk (e.g., cyber security or systems failure) Supply chain disruptions Country risk Intellectual Property Natural catastrophe Outsourcing Product liability Association for Financial Professionals, Inc. All Rights Reserved 25

29 Table 8: Challenges to Organizations Ability to Accurately Forecast Metrics (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Capturing relevant data from within the company 52% 45% 60% 58% 49% Integrating risk and forecasting data to strategic decision making Capturing relevant data from external (non-company) sources Forecasting and analytical skills in organization Corporate resources Corporate IT resources Executive management support for forecasting Table 9: Actions Taken in Response to Current and Emerging Business Risks (Percent of Organizations) Increased Same Decreased Investment in IT systems 57% 35% 8% Revenue growth targets Focus on risk culture and awareness within organization Geographic markets served Product lines/offerings Margin growth targets M&A activity Capital expenditures Use of external resources/experts Size of organization workforce Association for Financial Professionals, Inc. All Rights Reserved

30 Table 10: Changes in Risk Management Activities in Response to Current and Emerging Risks (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Greater executive review of strategy/assumptions 63% 65% 62% 66% 62% Increasing specific risk analyses Increasing risk reporting to management Increasing risk forecasting Re-examining its risk appetite Increased risk mitigation mechanisms - e.g., hedging Increased risk transfer mechanisms - e.g., insurance Increasing risk management guidance from external consultants Increasing use of insights from professional associations No changes to strategic decision making process Increasing risk management guidance from banks Other 1 1 <1 <1 1 Table 11: Risk Management Structure (Percentage Distribution) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Fully decentralized 12% 12% 11% 10% 14% Centralized process/ decentralized execution Fully centralized process and execution Association for Financial Professionals, Inc. All Rights Reserved 27

31 Table 12: Primary Responsibility for Organization s Risk Management (Percentage Distribution) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned CFO 37% 37% 38% 32% 42% CEO/COO Management-level Risk Committee/other management committee Treasurer Chief Risk Officer Table 13: Level of Importance of Risk Assessment within the Organization (Percent of Organizations Rating Risk Assessment Important or Extremely Important ) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned At the executive management level 86% 82% 89% 88% 82% At the Board of Directors level (e.g., Audit Committee) Within business unit Within department Association for Financial Professionals, Inc. All Rights Reserved

32 Table 14: Key Partners Outside of Treasury Who Reassess Key Assumptions for Risk (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Executive Team 82% 84% 79% 81% 82% Legal Tax FP&A Sales Investor Relations Other Table 15: Partners to Whom Treasury Reports Changes in Risk Assumptions (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned CFO 72% 63% 84% 82% 66% CEO Board of Directors Treasurer Board Audit Committee Management-level Risk Committee Chief Risk Officer COO Other management committee Association for Financial Professionals, Inc. All Rights Reserved 29

33 Table 16: External Experts Assisting Organization with Risk Management (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Consultants 62% 57% 69% 65% 55% Banks Auditing firms Professional associations Trade (industry specific associations) Think-tanks Other Table 17: Responsiveness of Banking Partners in Helping Organization Better Understand and Assess Risk (Percent of Organizations) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned Very responsive 10% 9% 11% 15% 8% Responsive Somewhat responsive Not very responsive Not responsive at all Table 18: Level of Change in Organization s Forecasting of Critical Variable Relative to 5 Years Ago (Percentage Distribution) Little-to Somewhat Significantly no-change Different Different (1) (2) (3) (4) (5) All 18% 9% 37% 23% 13% Revenues Under $1 Billion Revenues Over $1 Billion Publicly Traded Privately Owned Association for Financial Professionals, Inc. All Rights Reserved

34 Table 19: Status of Metrics Organization Forecasts (Percentage Distribution) Would like to Does not forecast, Currently forecast, but does not forecasts currently does not anticipate doing so Sales 96% 2% 1% Margins Cost of goods sold EBIT Capex/R&D expenditures Earnings per share Interest coverage FTEs (organization wide) Inventory Debt-to-earnings A/R balance Return on capital *Calculations exclude respondents who provided a not applicable response on a given metric. Table 20: Number of Key Performance Indicators Tracked on Executive Dashboards (Percentage of Organizations that Maintain an Executive Dashboard Tracking KPIs) Revenues Revenues Under Over Publicly Privately All $1 Billion $1 Billion Traded Owned 1 to 5 24% 31% 17% 19% 28% 6 to to to Association for Financial Professionals, Inc. All Rights Reserved 31

35 AFP Research AFP Research provides financial professionals with proprietary and timely research that drives business performance. The AFP Research team is led by Managing Director, Research and Strategic Analysis, Kevin A. Roth, PhD, who is joined by a team of research analysts. AFP Research also draws on the knowledge of the Association s members and its subject matter experts in areas that include bank relationship management, risk management, payments, and financial accounting and reporting. AFP Research also produces AFP EconWatch, a weekly economic newsletter. Study reports on a variety of topics, including AFP s annual compensation survey, and AFP EconWatch, are available online at Oliver Wyman With offices in 50+ cities across 25 countries, Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm s 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit The Global Risk Center is Oliver Wyman s research 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 Wyman s rigorous analytical approach to risk management with leading thinking from research partners. For more information, please contact: Alex Wittenberg Partner in the Global Risk & Trading Practice at Oliver Wyman and the head of Oliver Wyman s Global Risk Center [email protected]

36 About the Association for Financial Professionals The Association for Financial Professionals (AFP) headquartered in Bethesda, Maryland, supports more than 16,000 individual members from a wide range of industries throughout all stages of their careers in various aspects of treasury and financial management. AFP is the preferred resource for financial professionals for continuing education, financial tools and publications, career development, certifications, research, representation to legislators and regulators, and the development of industry standards. General Inquiries Web Site [email protected] Phone

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