The risk-aware finance leader

Andy Halford can certainly be considered a risk-aware finance leader. When he joined Standard Chartered as CFO in July 2014 the global bank had already been fined $640m of penalties two years earlier after it was found to have breached US sanctions on Iran.

But then a month after his arrival the bank was handed a further fine of $300m from the New York State Department of Financial Services (DFS) over lapses in its money-laundering procedures. Since then the bank, under Halford and the other members of the management team, has delivered strong returns while at the same time mitigating risk.

In making the right calls to deliver investment returns, Halford says: “A large part of making a business like this work is forming  judgements as to which parts one should push hard on and which ones should one retain a [minimum] presence in,” he says. Given the constant ebb and flow of economies it is often hard to make the right call when risk profiles can change so much, says Halford, who was previously the CFO of Vodafone-another global group.

“A more difficult market today may actually be a great market in a few years down the line. We had difficulties in our Korean market three years ago, when we lost over $100m in a year, made a number of management changes and two years later, that is now back into a $100m profit,” he says.

Andrew Harding, chief executive, Chartered Institute of management Accountants (CIMA), says it is vitally important for finance directors to be risk-aware. “Part of that is because they are looking into the future, looking forward. When you’re looking forward, you have uncertainty- uncertainty is what risk is all about.

“It’s about what you can do to mitigate that uncertainty, so you can feel more confident in what you’re doing, but also how prepared you can be for those waves that are going to hit you,” he says.

Harding says it falls to the CFO who owns financial risk to extend it further into other risk mitigation as someone has to lead, “so for me that’s why it goes to the CFO,” he says.

 A dangerous year

The risks affecting international companies are likely to grow in the weeks and months ahead as trade wars, economic slowdown of China and Brexit all edge closer. Even for UK-based businesses the ripple effects will be felt from larger customers and broader economic effects on consumers.

“The world that has changed beyond recognition. So for the role of the CFO, the whole mindset has had to change,” says Andrew Harding, chief executive- Chartered Institute of Management Accountants. “The CFO is not the quiet person looking after the business, he really has to be the person reaching outside the business,” he says.

But the area of data analytics that many see as providing the insights to mitigate risk, may actually bring inherent risks if not understood effectively, says Harding. “The difficult thing is conceptually understanding what is happening with data and what it shows and doesn’t show. You don’t have to be able to do the calculations, but you have to understand what you’re looking at, to understand whether you can draw the right implications from that data. We hear lots of stories of poor data assumptions, because people do not understand what they’re comparing,” he says.

“If you look at what’s happening over 10 years, you can draw a line and say this is what’s happening, but that might not have been valid because customers in 2008 may be completely different people from customers in 2018, so they can draw a false assumption which then drives the wrong solution. So it’s really important that when we talk about understanding data of the need to understand the implications of that data, what they’re looking at and what the validity is,” says Harding.

Appetite for risk

Harding says finance leaders’ approach to risk appetite is changing because of their increasingly expansive role in driving business strategy. “The CFO is in place to facilitate business success, making sure that resources are channelled to the right places at the right time. They’re being appraised on the impact on the business, not on producing reports to a deadline, as that’s being automated,” he says.

“So questions are: How are they enabling the business to succeed? Equally, what are they stopping the business from doing that could have damaged it? How do they do that? Have they got the balance right? So understanding a business’s risk appetite is vital,” he adds.

Harding says companies will have different risk appetites. “If the appetite for risk is high then the CFO is going to have to think quite carefully about mitigation, it means they are going to have to have more resilience, to ensure longevity. They also need better communications skills to ensure key messages around risk are delivered.

“Finance has to be a storyteller, not a scorekeeper, because the core technical finance skills are increasingly becoming automated,” says Harding. “That means that finance with automated tools at hand, has the time to invest in telling their story, time to invest in influencing- which makes businesses make good decisions,” he adds.

Diversity and inclusivity should play a key part in a finance leader’s strategy for risk mitigation, says Harding. “The CFO has to have a diverse range of sources to inform that risk assessment, but also to think about that mitigation, that could be demographically, gender or geographically diverse. If you’re running a business which is working internationally, which increasingly almost everybody is, you’ve got to have all those lenses,” he insists.

The risk professional

For Penny James, CFO of general insurer Direct Line, previous experience of being chief risk officer at life insurance giant Prudential, where it was a board position, proved to be a hugely valuable experience. She says the role differed dramatically from her previous roles that were senior finance positions.

“Finance- whether a quarterly or half yearly close, has a rhythm. Risk kind of rips up the rhythm. The transition into risk was much more challenging than I thought it would be, because all the things I assumed and clung to, the bits that drive the normality of life didn’t really exist in risk because everybody is really being encouraged to think out of the box and stretch their thinking in one direction or another,” says James.

“The art is to get the person that you’ve got confidence in who does understand the issue, be it cyber security or another issue, who can articulate it to you,” she says. As risk becomes a bigger priority for finance leaders in a challenging year ahead, that may be sound advice.

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