Finance

Name:

Course:

Lecturer:

Date:

http://www.cfo.com/article.cfm/13012407/1/c_13047759?f=search

Financial Risk:

            In February 2^nd, 2009, an article appeared in CFO Europe Magazine regarding why companies are being let down by risk management and how it can be managed. This article was authored by Janet Kersnar and was titled Warning Signs. The basis of this article is risk management, how companies are being let down by it and what can be done to alleviate its consequences (Kersnar 1). According to the article, risk management makes up the integral part of good management due to its ability to identify as well as mitigate financial and all other types of risks. This however, has been the reverse as discovered by most risk managers of diverse corporations in the world. This problem largely affects banks as compared to other corporations. Reasons for this phenomenon are provided based on the statistics of Federation of European Risk Management Associations. In accordance to the article, this however does not mean that the problem cannot be solved. Several methods have been provided by the article on how to resolve the problem.

            The reason why this article was selected is because risk management has been utilized and recommended as an integral part of good management without focusing on the repercussion of adopting it in identifying and mitigating company risks. Many companies approach the practice from a wrong angle making the whole process to be useful to some extent and detrimental to some other extent (Kersnar 1). Out of all corporations in the world, the most badly hit by the problem are banks and other corporations in the financial services industry due to their role of providing financial solutions to their customers. The more they provide financial solutions the more the rate of their financial risk increases. This can be evidenced by the fact that risk managers or CROs could not foresee the financial crisis that banks went through in 2009. This article provides the clear-cut reasons behind the failure of banks where risk management is concerned, which can be translated into their reliance on esoteric mathematical models as well as quantitative analyses that are data driven. Another reason linked to the selection of the article is the fact that different solutions are provided for mitigating the risk management problem based on the success of strategies that have been adopted by different corporations.

            The significant financial issue covered by the article is the problems linked to risk management and how these problems can be solved. Most companies have embarked on employing risk managers to deal with risk management while other company officials take a back stage. This has resulted into the plunging of companies into never ending financial crisis because of relying on a certain method of financial risk management (Kersnar 1). The effectiveness of risk management has been reduced by the methods applied into it. Urenco, a company owned by Dutch, British and German is provided as an identifier of this prevalent issue in the article. This is because with the increase in their global market share from 15% to 25%, the company’s executive team has to come up with a comprehensive pro-active risk approach that will enhance their success in selling the growth plans of the company to its investors and board.

            Complacency is the main restraint arrived at based on the reasons holding back the execution of effective risk management. Allowing risks to take their own life is another reason that can escalate the risk management problem. Corporations like MAN, which is a German engineering, commercial vehicles and Engines Company, have adopted such risk management methods as traffic-light system in which the first and second lights signify manageable risk while from the third to the fourth lights indicate less manageable risks that have to be mitigated after a consultations with the board (Kersnar 2). They have also adopted scenario budgeting, which works together with the annual budget in creating an early warning sign on risks especially on the onset of changing market conditions. This works towards asserting the role of risk management as an instrument of enabling managers to manage business well and not only a legal obligation.

            The two methods adopted are identified as pro-active risk management, which can enable companies to deal with the problem of being let down by risk management. Another important aspect of pro-active risk management covered by the article includes the maintenance of regular internal and external communication on methods to be utilized in mitigating risks. This method has been applied successively by Ashtead Group, which is a UK and US based Equipment Hire Company (Kersnar 2). Their company’s share price increased substantially after the communication of the financial risks facing it and ways in which the whole company can contribute in mitigating them. Discussions with rating companies are also covered as a method of solving the risk management problem as evidenced by the success story of Urenco. The article concludes by stating that risk management should be combined with internal audit and insurance for solving complex global risks.

            The new information learnt from this article is that comprehensive planning has to be undertaken before risk management can be applied to a company. This is because the substantive risk management being conducted by most companies is not for their own benefits but as a legal obligation (Kersnar 3). Many people do not realize that risk management has been letting down many companies as it is linked to significant benefits for those companies who engage in it. This means that if companies in the financial services industry took risk management seriously, they would not be the most hit by the letting down of risk management. Risk management should not only world alone but should also work with internal audit in covering more complex global risks. Comprehensive planning means undertaking proactive risk management after the conduction of discussions between company executives and the board to ensure that the boards is aware of all the risks and risk management tools at the disposal of the company.

            Most companies in the modern world require CFOs and being a finance major equips the student with the skills required for working effectively as a risk manager of CFO. For this reason, the new information learnt from the article enables a fiancé student aspiring to be a CFO in future with the skills required when approaching risk management. it enables the student to understand that risk management is not an undertaking that should be taken by the CFO alone but the board of the company and other executives should also be aware of f the risks and risk management tools at the disposal of the company as risk management should not only be the responsibility of the CFO but the company in general (Kersnar 3). The article provides good methods of approaching risk management which can be modified and adopted by different companies in future. This will enhance the effectiveness and efficiency of the future CFO in his work hence, providing him with job satisfaction as well as becoming a company’s asset rather than liability.

            Risk management is a topic that has been discussed by most companies and financial authors with relish due to its advantages and benefits for the companies that adopt it. What most people do not realize is that the practice of risk management should be embarked upon with a lot of seriousness and different approaches have to be injected into the process for it to be successful (Kersnar 3). This is because in accordance to the article Warning Signs by Janet Kersnar which appeared in CFO Europe Magazine on February 2, 2009, Risk management has been letting down companies and different methods on how to solve this problem exist. Proactive risk management is the main solution provide by the article because it includes the involvement of company executives, CFO and the board in coming up with efficient and effective risk management approaches. This new information on risk management as extracted from the article can aid students who aspire to be future CFOs in becoming efficient and effective in their work. In conclusion, risk management should be combined with internal audit to make it more effective even where complex global risks are involved.

 

 

 

Works Cited

Kersnar, Janet. “Warning Signs.” CFO Europe Magazine. CFO Publishing LLC., 2 Feb.2009. Web. 4 October 2010.