Balancing Risk Management with Growth

During The Economist’s CFO Summit, a group of leading CFOs took part in a panel focused on how to predict

and manage threats.

From left to right: Julian Metherell, CFO and Executive Director at Genel Energy, Jean Drouffe, Group Finance, Risk and Strategy Director at

AXA UK and Ireland, Edward Ainsworth, Managing Director at 4C Associates, Mark Morris, Finance Director at Rolls Royce, Jeff van der

Eems, Chief Operating Officer and CFO at United Biscuits, Andrew Palmer, Finance Editor at The Economist

Today’s CFOs find themselves in a position where they have to guard against an increasing number of threats, whilst

driving business growth. The challenge for finance leaders is to successfully mitigate threats and ensure that tighter

margins do not translate into a lack of preparedness.

Predicting Black Swans

Speaking on the issues which are currently affecting the oil business, Julian Metherell, CFO and Executive Director at

Genel Energy, explained that although some risks, such as commodity price volatility, affect most industries, his

sector was facing some unique threats. The rapid escalation of the current situation in Algeria, for example, was

unpredictable. “How do you counter terrorism?” asked Metherell. “[It is difficult as terrorists] focus on high impact,

low risks.”

Many of the speakers discussed the use of risk registers as the best way to manage risks. Monthly or quarterly

meetings, during which a list of identified threats is reviewed and analysed were seen as best practice. Whereas this

procedure provides a structure to the process, Mark Morris, Finance Director at Rolls Royce, warned against

installing a “tick box” mentality when gauging constantly evolving threats.

Companies which remain successful despite the economic landscape remain greatly affected by the current climate

of austerity. Morris explained that although Rolls Royce as a company could benefit from opportunities resulting

from the crisis, other partners were not in the same situation. “We have access to cheap funding but many of our

own suppliers do not,” he said. Morris also highlighted the sheer complexity of some of the industry’s products as a

potential risk. Most recently, Boeing saw its new Dreamliner range grounded after a series of technical issues caused

concern.

The Emergence of New Risks

Edward Ainsworth, Managing Director at 4C Associates, pointed out that the continued global expansion of many

companies was opening them up to new risks. He underlined the need for businesses to call on an external

viewpoint, or simply other members of staff, to gain fresh insights into this area. “The key for leading companies is

to find a way of optimising cost and risk,” he said. “An important element of this is recognising new threats, such as

the risk of new, more agile, low cost entrants, into the market.”

Jean Drouffe, Group Finance, Risk and Strategy Director at AXA UK and Ireland, agreed, and added that as insurance

is being increasingly distributed online, new competitors were entering the market. Drouffe, highlighted easily

accessible data as the main reason companies such Google, Tesco and car manufacturers, were beginning to move

into the insurance sector. Remaining vigilant and learning from the mistakes of others, were seen as key elements

for any company wishing to remain successful.

For Rolls Royce a key concern relates to the unintended consequences of recent government regulation. Proposed

reforms in the banking sector could continue to create problems for seemingly unrelated industries, including Rolls

Royce and their supply base.

Leading companies are thinking much more carefully about what risks they are taking and communicating these to

investors. This allows for an approach focused on mitigating or eliminating threats. Ainsworth pointed out that by

doing this in a structured way, company value can be increased. Metherell agreed and explained that at Genel,

investors understand their exposure to the Middle Eastern and North African oil markets and consequently demand

a high return on equity. On the other hand, investors are not expecting risks to be run with funds secured on the

overnight market.

Long Term Threats and Constant Assessment

The panel ended with a discussion regarding longer term risks, such as changing demographics and climate change.

Jeff van der Eems, Chief Operating Officer and CFO at United Biscuits, employs a “shooting duck strategy” to ensure

UB stays on top of consumer trends. This entails predicting future changes in consumer behaviour and reacting to

them slightly before they take place. The difficulty lies in ensuring changes are not made too soon or too late.

“Snacking has been going on for years and this is an industry in which changes happen slowly,” he said. “We have

already removed trans-fat and palm oil from our products and will continue to evolve with our customers.”

The panel discussion highlighted the need for businesses operating in all sectors to constantly review and update

their approach to managing risk. Risk registers were discussed as an important element of company strategy, yet

were criticized for their perceived inflexibility. Predicting, reacting and adapting to emerging and established threats

will continue to be a key element in the role of the CFO.

About the Panel

The “Risk Insights” panel took place at The Economist’s CFO Summit 2013, 22 January 2013, and was made up of

Edward Ainsworth, Managing Director at 4C Associates, Jean Drouffe, Group Finance, Risk and Strategy Director,

AXA UK and Ireland, Julian Metherell, CFO and Executive Director at Genel Energy, Mark Morris, Finance Director at

Rolls Royce and Jeff van der Eems, Chief Operating Officer and CFO at United Biscuits. The discussion was hosted by

Andrew Palmer, Finance Editor at The Economist.