To understand finance professionals' feelings about financial risk management, as well as their thoughts on the economy overall, TD Bank polled CFOs, controllers, treasurers, and directors of finance from across the United States. Respondents come from both midmarket companies, defined by TD Bank as being under $250 million in annual revenue, and "corporates," defined as organizations with revenues above $250 million.
The survey revealed that these executives' confidence in the U.S. economy is increasing—and their confidence in their own organization is growing even faster. The largest proportion (41 percent) said they are more confident about the U.S. economic outlook over the next 12 months than they were over the previous 12 months. Thirty-one percent said they're less confident today, and 29 percent said their confidence level hasn't changed in the past year.
But when asked how they feel about the prospects for their organization over the next 12 months, vs. the previous year, a full 60 percent said they're more confident, and nearly half of those (26 percent of all respondents) said they're much more confident today. In contrast, only 11 percent of respondents are less confident about the next year than the past year, and only 3 percent are much less confident. Fred Graziano, head of regional commercial banking and executive vice president with TD Bank, says these numbers are up from the bank's 2012 survey: "The difference from a year ago is that companies are feeling a little bit better about themselves and how they manage their business."
Indeed, many of the organizations represented in the survey have made substantial changes to their risk management policies in the past several years. Half have gained more visibility into their cash position since the start of the financial crisis, and nearly as many have begun evaluating suppliers’ risk management practices and terminating business relationships that carry too much risk (see Figure 1, below). More than a third have improved their risk reporting practices, and more than one in five have implemented an enterprise risk management (ERM) program since 2008.
However, most organizations did not respond to the financial risks brought to light in the financial crisis by making significant management or technology changes. Only 11 percent have deployed new risk management software, and fewer than 5 percent have established a chief risk officer (CRO) position.
"Companies have made internal changes, such as adding people and improving reporting," Graziano says, "and then externally they've gone out and done a better job of evaluating their vendors and suppliers. By adding more resources to risk management, they've positioned themselves better, both internally and externally."
Although they've gained important insights into their financial risks, most companies' willingness to take on financial risks hasn't changed much in the past year. When asked how they would rate their organization's current financial risk appetite compared with a year earlier, the majority (56 percent) said it hasn't changed. Nearly a quarter (24 percent) are somewhat more willing to take financial risks this year than they were last year, and 3 percent are much more willing to take risks. However, 10 percent are somewhat less willing—and another 7 percent much less willing—to take financial risks today.
Respondents made clear the reasons why they're reluctant to take on new risks: They feel a good deal of uncertainty in the external environment, both in terms of regulations that may be coming in the future and in terms of the economy and their competitiveness in their marketplace (see Figure 2, below). "In 2008 and 2009, the big concern among CFOs was their ability to secure credit," Graziano says. "This year, that concern is near the bottom of the list. Instead, CFOs today are thinking about things like understanding financial risk, regulatory risk, and cash positions."
Indeed, when asked to identify the risk that concerns them most, more than a third of survey respondents chose "regulatory changes/uncertainty." Nearly 20 percent cited economic uncertainty, and 15 percent cited competitive pressures. Fewer than 1 percent said that securing credit is their primary concern, with 2 percent saying they're most worried about the rising cost of credit.
Perhaps because external uncertainties are their number-one concern, more than half of the surveyed finance executives said that their ability to forecast future financial risk is an ongoing challenge. Many also struggle to control their current financial risks, in large part because they feel they don't have the right data to manage those risks.
Corporate policies are creating some challenges, as well. Twenty percent of respondents said they're operating without a clear financial risk management strategy. And similar proportions of CFOs grapple with their company's conservative risk appetite (16 percent) as with their organization's aggressive risk appetite (12 percent).
"When you start taking on credit, and you want to invest in your company—whether it's people, buildings, equipment, or other fixed assets—you want to have the ability to forecast, and you want to feel comfortable that there's some stability, before you make that long-term investment," Graziano says. "I think what this survey emphasizes is that companies are forecasting a little better, but there's still a lot of uncertainty about the future. CFOs would like to face less uncertainty, but they're finding ways to manage those external risks."