We asked our members how their companies have managed risk during the COVID-19 Pandemic to continue their operations and avoid financial distress. We identified that a majority of respondents have navigated risks (and opportunities) well during the pandemic due to their strong risk management and liquidity positions built prior to the shock. However, for many firms, there have been significant changes in how they do business. Significant uncertainty about the future of their businesses remains real, making the role of corporate governance and Enterprise Risk Management (ERM) even more vital.
We surveyed risk executives from about 80 firms, spanning a wide range of firms in terms of revenue: About 35 percent had less than $100 million; 20 percent had more than $10 billion; and 45 percent were mid-sized in terms of revenue as of fiscal year end 2019. Out of these surveyed firms, 42 percent are financial firms from Insurance and Banking industries. Among nonfinancial firms, Professional Services (12 percent), Retail and Wholesale Trade (7 percent), and Food, Beverage & Franchised Restaurants (6 percent) are three industries with the largest representation.
Liquidity (cash flow) risk is ranked as one of the top risks not only during the crisis but also before the COVID-19 shock:
As firms had recognized the importance of liquidity prior to the pandemic, most of them were not liquidity constrained when the crisis hit, with only about 5 percent of respondents reporting they were illiquid while 64 percent responded that they had stored liquidity as cash holdings.
Firms that needed more liquidity during the COVID-19 shock mostly borrowed from banks through existing lines of credit and new loans (12 percent) or from the government-sponsored borrowing facilities (10 percent).
Majority of firms were highly resilient to the COVID-19 shock:
Although 68 percent of firms experienced a revenue decline, 76 percent of respondents reported that they were highly resilient: 77 percent did not furlough any associates at all; 65 percent did not close any locations; 83 percent of firms did not experience any change in their ability to secure insurance neither in terms of capacity nor cost; and almost all of the firms that deemed essential had the ability to meet customer demand.
Better governance and increased ERM helped in bad times:
About 40 percent of firms responded that their board of directors have been more engaged since the COVID-19 shock hit, with the risk and audit committees meeting more regularly. In about 30 percent of firms, the ERM function has been more involved in assessing risks related to the COVID-19 pandemic! While risk appetite of most firms (71 percent) did not change during the shock, 12 (17) percent of firms said they increased (decreased) their risk appetite due to the shock.
Over the past few years, firms have been discovering that using a comprehensive and integrated risk management approach leverages collaboration across business functions, increasing their ability to achieve corporate objectives and enhance shareholder value. The COVID-19 shock has been a real stress test for risk management of both financial and nonfinancial firms. Our survey results confirm that strong governance and enterprise risk management have helped firms manage their cash flow and other risks associated with the crisis. We look forward to continuing our conversation about risk management with you in the future as we know ERM will continue to help firms survive shocks like the COVID-19 pandemic, balance their risks, and create value for their stakeholders.
Written by: Isil Erel, David A. Rismiller Chair in Finance; Academic Director, The Risk Institute at The Ohio State University Fisher College of Business