By Joseph Neu
Deep within the fires of enterprise risk management frameworks and related corporate governance mandates, a new title is being forged: that of the Chief Financial Risk Officer (CFRO). Before this, according to “tradition,” a senior treasurer that took on more strategic activities—or had non-core treasury areas reporting into him—could jump up to a VP, Finance (or SVP) title, acting formally or informally as a deputy CFO, while waiting for the call to become CFO somewhere. But now there is a new path for treasurers to follow, one with this new title.
Putting Financial in CRO
While most governance structures contemplate a Chief Risk Officer (CRO), far fewer segment out financial risk from all other enterprise risk to create a CFRO—and one corporate, in particular, is leading in this regard, see page 13. The rationales for a CFRO are as follows:
1) The business risks of the enterprise are owned by the leaders of the businesses. Thus, they should not be delegated to a CRO-type in any way that confuses responsibility for them. This follows the similar logic of firms that insist, for example, that the CEO should be the CRO, and not have his or her integral risk responsibilities delegated.
Not having a CRO as enterprise risk head also tracks the emerging consensus among non-financial corporates, voiced within The NeuGroup’s Corporate ERM Peer Group, that ERM lives to create and embed risk awareness, assessment, mitigation and related processes into the existing governance and planning frameworks— and then fade away once the planted seeds flower.
2) Financial risks may be different. Just as companies centralize FX or interest rate risk within treasury and take ownership away from (or share it with) the businesses, additional risks that are principally financial in nature, or where risk mitigation is conducted via financial instruments, arguably should follow suit. These financial risks, not owned entirely by the businesses, both call for a “chief risk officer” and don’t violate the first ERM principle that business risks should not have owners outside the business.
The logic of this second rationale shows the way for treasury to play a more prominent role in ERM initiatives in line with its ongoing centralization of market risk management. So, why shouldn’t a treasurer just take on this role without creating a CFRO?
Just leave it to the treasurer?
Treasurers contemplating the prospect of companies creating a senior financial risk title above (or alongside) them will need to consider the scope of their current role and their preferred focus. For most companies, the decision to have a CFRO apart from the treasurer will likely stem from the desire to establish a distinct senior executive anchor for ERM in their risk governance structure.
While the current consensus may be to embed and disband a corporate ERM framework, compliance with a growing list of governance mandates that call for board and sub-board-level risk committees will need a chief risk liaison, if not explicitly a chief risk officer. To satisfy such mandates, while staying true to the idea that business risks should be clearly owned by the businesses, the CFRO serves as a clever tool.
Plus, companies can be creative in the way that they implement a CFRO title, e.g., that person can play the part of a CRO in offering advice and counsel on non-financial risks and step in to ensure business leaders take ownership of such risks when they rise to an enterprise level of materiality.
Further, while ERM programs in the non-financial realm seem to shy away from formalized quantification of enterprise risks, financial risks do tend to lend themselves to quantitative analysis. To the extent a firm’s risk management objective is about being compensated appropriately for the risks its managers are taking, then pricing that risk in quantitative terms needs to happen somehow.
Hence a CFRO can help spearhead thinking about how to apply risk pricing methodologies used in financial markets, alongside those used in insurance, to other types of enterprise risk.
To do this job right, at some point, even the most talented treasurer would be unable to keep up with other aspects of his role. Before it comes to this, a decision should be made to create this alternative professional path—if not for the current treasurer, then perhaps for a risk-sharp chief lieutenant who otherwise might leave the company. Before this, according to “tradition,” a senior treasurer that took on more strategic activities—or had non-core treasury areas reporting into him—could jump up to a VP, Finance (or SVP) title, acting formally or informally as a deputy CFO, while waiting for the call to become CFO somewhere. But now there is a new path for treasurers to follow, one with this new title.