Communicating risk to senior management can help companies implement best practices and a better tone at the top.
Getting management educated on the risks of the company could help treasury get more resources and in turn, create an environment that fosters best practices. That’s the idea that was presented at a recent NeuGroup FX Managers’ Peer Group (FXMPG) meeting in September. The theory goes that to achieve best practices, there needs to be a tone from the top that this is a priority and that resources will be dedicated to it. Helping develop that tone could be how treasury communicates risk.
Views differ when it comes to what senior management should know and what they do know about risk management, especially as it regards quantification of risk. In the survey ahead of the meeting, more than half of the respondents indicated that they do not quantify and report risk as part of the normal reporting of risk-management activities to senior management. This can be a drawback in the company’s goal to implement best practices, according to one banker who specializes in risk management. That’s because without quantification, it is difficult to talk about risk. This banker noted that companies fail because of control problems, and one of those problems is not communicating risk appropriately.
The banker felt CEOs should know the risks and their consequences, as they are ultimately responsible for forecasting results. However, FXMPG members noted that not everything is communicated all the way to the top, on the rationale that, as one member put it, “quantified and material exposures are hedged.” However, the banker’s broader point was that senior management should at least be informed of the risks in a quantifiable way, and know which exposures are and are not hedged and why. One group member said that his treasury does have conversations with the company’s CFO, but he and his team don’t feel he has the same detailed level of understanding of the risks. Thus it is still the treasury’s job to better understand them and build a framework to deal with them.
So while treasury practitioners do agree on the need for a well-designed and executed risk-management program, there remains reluctance to communicate that program to management. Could this be limiting to the resources available to treasury?