A company's CEO may be the person who sets broad risk guidelines and approves an overall strategic risk plan. But to build and maintain an effective risk-management approach, it often falls to the chief financial officer to play the central executive role. Although the nature and extent of their role varies, CFOs are uniquely situated to build and communicate an integrated risk view, optimize business decisions, and build a strong risk culture.

In some organizations, such as financial institutions and commodity trading companies, the risk-measurement team typically reports directly to the CEO. For others, such as processing companies or consumer-services companies, the risk group reports to the CFO. Whatever reporting structure is chosen, the crucial element is that the CFO and the chief risk officer must be closely aligned. In this way the CFO and the risk-measurement group can provide solid direction to boards and senior management who are currently struggling to understand risk.

The CFO's financial-reporting role provides natural insight into the universe of risks across various business units and the impact that those risks, either alone or in combination, can have on the corporation as a whole. The CFO can leverage the finance organization's existing infrastructure to build an integrated-risk view, such as a risk heat map, and earnings-risk profile. A better understanding of risks and their impact on earnings can significantly improve the planning/budgeting and investor-communication processes. It allows companies to communicate the impact of certain market events—for example, a dollar-per-barrel increase in the cost of oil—on their overall earnings and adjust expectations accordingly.

Unique risk insights can permit a CFO to drive more effective strategy and business decisions, particularly in lining up the organization's capital structure with its strategy.

Unique risk insights can permit a CFO to drive more effective strategy and business decisions, particularly in lining up the organization's capital structure with its strategy. This is a dynamic process that shifts with company strategies and external market changes. Obviously, an overly aggressive balance sheet can lead to higher risk of downgrade and even bankruptcy. Conversely, an overly conservative balance sheet can also be undesirable, leading to lower utilization of tax shields.

CFOs can also assist in mitigating the price risk of certain business decisions. For example, after the risk organization at one processing company executed a hedging strategy to mitigate the earnings risks embedded in fixed-price contracts, it enabled a business unit to sell such contracts to customers. It was the CFO's organization that quantified the risk premium to embed in customer contracts and that determined which hedging contracts the company should buy to mitigate risk. This resulted in increased sales to customers who preferred this contracting arrangement (versus a formula price) and increased earnings certainty for the organization. Elsewhere, the CFO of a basic-materials company was instrumental in aligning sales and purchasing practices to ensure that market shifts in terms of prices and risks were considered in future contracts and pricing.

Finally, CFOs can also play a significant role in building a strong risk culture. This should include providing greater transparency into business-unit-level performance and implementing a full complement of risk-related performance metrics across the organization. For example, at one manufacturing company, one business-unit president's performance was historically based on the overall profitability of the division—even though the business-unit president controlled only 15 percent of the factors driving profitability. By isolating and measuring controllable factors, including sales contracts and marketing expenditures, from factors such as commodity price swings that cannot be controlled, the CFO initiated more accurate and transparent measurements of actual performance. In one large industrial processing company, management was unable to measure the performance of its purchasing organization due to the blending of different activities (e.g., hedging, commercial optimization) into one general guideline. The CFO steered the company toward clearly articulating levels of risk it could accept and related metrics and guidelines that made the links between performance goals and overall risk policy clearer.