RC3 represents the best practical approach to managing risk
It has never been more difficult to predict the future: election results, financial market outturns and even sporting outcomes have repeatedly confounded us in recent times, while unexpected events continue to take us by surprise. Moreover, at a time when market volatility is remarkably low – perhaps because the markets have become accustomed to shocks – it might be tempting to give up on trying to anticipate what lies ahead.
That would be a mistake, however. Thinking about the future – and protecting their organizations from risk – is as crucial a role as ever for treasurers. In practical terms, that requires you to take the RC3 approach:
- Risk - consider known and unknown risks as fully as is currently possible, whether operational or existential.
- Capital structure – a strong balance sheet is the best protection against unexpected risks.
- Capital allocation – focus on the choice between M&A, distributions, capex and R&D according to the nature of your business.
- Communication – aim for open and honest disclosures to shareholders and other key stakeholders.
Treasurers can learn from the emergency services
How do our emergency services manage to respond to serious incidents so superbly? The reality is that the police, ambulance and fire services routinely train for such incidents, repeatedly conducting drills to hone their response to a wide range of potential problems to ensure they are able to act quickly and effectively when the worst happens. Treasurers have much to learn from this approach – conducting their own drills, stress-testing for a range of scenarios, will help them to cope with future issues and crises.
Our Pre-Forum Survey shows many treasurers have not felt the need to make substantive changes to their FX hedging strategies over the past two years; nor do many organizations anticipate changes to their debt hedging policies. If this reflects complacency, treasurers should be concerned, but it is more likely that many have learned the lessons of the past and have now built flexible policies on the basis of practice runs and emergency drills.
Risk frameworks are a good starting point, but flexibility is key
“Statisticians are sometimes like artists, in that they fall in love with their models,” one delegate to the conference warned. It’s an important point: treasurers argued in favour of risk frameworks, constructed on the basis of their organizations’ appetite for risk and a thorough understanding of the full range of potential exposures, but they also argued for flexibility and vigilance. Such frameworks must be constantly fine-tuned to reflect changing circumstances.
No industry exists within a vacuum, so shared lessons have enormous value
Potential risks today range from measurable financial anxieties to an expanding array of more subjective anxieties, from reputational risk to cyber, for example. Treasurers in any single industry may have a good understanding of the dangers they have traditionally had to confront, but sharing best practice more broadly will facilitate a much broader analysis of risk than working within industry confines.
Take the holistic view of risk and prepare accordingly
The bottom line is that treasurers must strive to be holistic, considering risk in the widest possible sense of the word – including the existential risk posed by disruptive new entrants to their organizations’ marketplace. Liquidity is the backstop – does your organization have sufficient cash to keep it running whatever happens to it?