The Essential CFO: A Corporate Finance Playbook

Chapter Three

Assessing Enterprise Risks

RISK MANAGEMENT HAS BEEN RECEIVING much more focus in recent years. Companies have been stepping up their risk procedures, the rating agencies are considering risk management in their credit evaluations, and boards of directors are devoting more of their agendas to risk oversight. Risk is now considered fundamental to a company's strategy; the best practice is to consider risk assessments as integral to strategic plan reviews.

ENTERPRISE RISK MANAGEMENT

This heightened focus on risk has been encapsulated in enterprise risk management (ERM) programs that take a systematic approach to identifying, monitoring, and mitigating risk exposures. Much of the impetus for ERM programs has come from regulatory pressures—notably from the Sarbanes-Oxley Act and the New York Stock Exchange's corporate governance rules—but undoubtedly they also have been motivated by recent events in the business, financial, and political environments—where so-called black swan events have challenged previously held beliefs concerning the predictability of the future. Furthermore, the financial crisis has caused considerable introspection concerning the degree to which incentive compensation may be causing behavior that is inimical to a company's long-term financial health—let alone to the overall economy.

Against this backdrop, CFOs are plunging head first into risk—reviewing its implications for strategy and analyzing its potential to create both downside and upside ...