Managing Corporate Currency Risk: How CEOs Lay the Foundation for Success

Photo: Sundar Pichai by The Verge

Photo: Sundar Pichai by The Verge

CEOs are increasingly aware of the threat that persistent FX market volatility poses to revenues. The chief executive now has greater responsibility to embrace multi-currency risk and support FX management strategies brought forth by the CFO and other corporate treasury executives.

Before 2011, FX rates seldom made it onto a CEO’s list of concerns. That year saw the first wave of Fortune 500 companies reporting sizeable hits to revenues because of currency market volatility. These numbers have spiralled upwards since, reaching a peak of over $100 billion in 2015, according to some estimates.

Jarring numbers like these have grabbed the attention of CEOs and shareholders. 73% of chief executives in PWC’s latest Global CEO Survey reported being either “somewhat” or “extremely concerned” with exchange rate volatility, making it the third biggest overall threat to growth prospects behind geopolitical uncertainty and overregulation.

Where can CEOs affect change? Chief executives may seem somewhat removed from the FX risk management efforts of corporate treasury teams, but they play a critical role through their partnership with CFOs. As strategic partners, CEOs rely on CFOs to collaborate on the major financial initiatives that shape the direction of the business, like forecasting, cost-benefit analysis and risk frameworks. And, as we’ll examine in our next blog, the CFO is at the helm of all macro-level FX risk management initiatives.

CFOs and CEOs have a long road ahead of them amid geopolitically driven market volatility, stubbornly low interest rates, and the latest currency ‘race to the bottom.’ Thus, best practices need to center on the creation of a sustainable atmosphere for CFOs and corporate treasury teams to address the issue:

1)     Embrace the risk – CEOs have to accept multi-currency risk as an organic by-product of doing international business. The global FX market is so complex that, often, when one problem is eradicated, more emerge in its place. Rather than treat currency volatility as a one-off threat, CEOs need to acknowledge the omnipotence of FX risk in their short, mid and long-term risk planning.

2)     Give strategic, even unconditional, support to the CFO – The CFO is the intersection between the CEO’s top-down vision and the treasury team’s bottom-up activities. By engaging regularly on the currency issue and offering full backing for initiatives, the CEO empowers the CFO with the tools, tactics and morale to fight a sustainable battle.

3)    Invest in a variety of initiatives – Like the flu, currency risk can mutate and render solutions obsolete within a short time. This brief shelf life can be exacerbated by the high volume of organizations that pile into similar strategies, such as options buying. The key to navigating FX volatility is to invest in a variety of smaller tactics that, together, create a stronger foundation for a sustainable effort. This means everything from dynamic hedging strategies down to the accuracy of the exchange rates sourced. Impeccable FX rates lead to less errors down the chain.

4)    React thoughtfully – If and when a major devaluation hits revenues, the response from the CEO needs to be methodical rather than knee-jerk. In other words, rushing to fix the problem and treating a devaluation as an isolated event can overlook inherent weaknesses with an organization’s FX risk structure or in the market itself. By pausing and examining each currency market event as part of a more systemic phenomenon, CEOs can enhance the potency of their actions.

As dealing with turbulent multi-currency markets becomes a normal part of business, the CEO’s role in managing FX risk has transformed from mindful spectator to strategic advocate. With shareholders watching, it is up to the CEO to work ever more dutifully with the CFO and enable the creation of a dynamic and sustainable approach.