Upfront: Are CFOs Underestimating Revenue Risks?

Corporate managers are far more confident that they can fend off threats to revenue than are investment pros.

What are the most serious threats to corporate revenue, and how prepared are organizations to respond to them? The answers depend on whom you ask, according to the "2004 Protecting Value Study," conducted by FM Global and Harris Interactive. The study polled more than 400 CFOs, treasurers and risk managers in North America and Europe, most of whom work for $1 billion-plus companies, along with some 200 securities analysts and investment portfolio managers.

The survey shows that risk managers and finance executives disagree about which systems and processes contribute most to corporate earnings. While risk managers chose manufacturing equipment and processes as their company's top revenue driver, CFOs most frequently selected delivery and logistics.

In addition, the study reveals a sharp difference of opinion between corporate managers and investment professionals about risks to revenue. Sixty-nine percent of finance and risk managers who participated said property-related hazards pose the greatest risk to their company. These threats include production and supply chain problems, as well as fire, explosion and natural disaster.

However, only 21 percent of the investment professionals chose this risk category as the most problematic. For 79 percent of respondents in the analyst category, events such as possible fluctuations in the pricing of a firm's products and the potential for government or regulatory changes -- along with management or employee malfeasance -- constitute the most significant threats to corporate revenue.

Most of the corporate respondents are confident that their company can protect its top revenue drivers. Eighty percent of them rated their organization's ability in that area as good or excellent. But investment professionals are less sanguine; almost half rated companies' ability to fend off major threats as fair or poor.

Both groups of survey respondents agree, however, that enterprise risk management (ERM) should be -- and is becoming -- a board-level issue. Notes Ruud Bosman, executive vice president of FM Global in Johnston, R.I., "Companies and investment firms are increasingly beginning to recognize that effective risk management programs can help reduce quarter-to-quarter volatility in revenue and contribute to a company's financial performance."

Seventy-eight percent of participating investment professionals reported that they frequently analyze the biggest hazards a company faces, yet more than half rated the quality of risk-related information in financial statements as fair or poor. According to Randy Kroszner, professor of economics at the University of Chicago Graduate School of Business, "The results of the study suggest that investment professionals would reward companies for more complete and detailed disclosures of how they identify and deal with major risks."

Adds Bosman: "Companies may want to enlist the help of their risk managers to help provide investment professionals with a more in-depth perspective of the risk management procedures they have in place to protect top revenue drivers and the value their businesses create."