Are CFOs Ignoring the True Costs of Behavioural Risks?

This article builds on our earlier report, Why CFOs Must Take Ownership of Behavioural Risk Reporting, which introduced the hypothesis that CFOs are uniquely positioned to lead behavioural risk reporting. In this second part of the series, we delve deeper into why CFOs must assume this role and collaborate across organizational functions to address behavioural risks comprehensively.

You can read the original publication on LinkedIn: https://www.dhirubhai.net/pulse/why-cfos-must-take-ownership-behavioural-risk-freddie-mcmahon-c3yme

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The Hidden Dangers of CFOs Not Leading Behavioural Risk Reporting

Regulations like the EU Corporate Sustainability Reporting Directive (CSRD) demand that non-financial data be treated with the same rigor and transparency as financial data. Yet, behavioural risks often go underreported or misrepresented. When HR relies on anecdotal evidence, limited analysis, or suppresses critical metrics like bullying risk volumetrics, organizations create blind spots. These gaps jeopardize financial stability, operational efficiency, and compliance, exposing companies to regulatory penalties and reputational harm.

Unchecked behavioural risks lead to cascading challenges across sectors. Traditional approaches, such as focusing narrowly on absenteeism or turnover, fail to account for broader financial, operational, and societal impacts. Without CFO leadership, organizations miss vital opportunities to address these risks holistically, compromising their resilience and sustainability.

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Unlocking Organizational Value: The CFO's Role in Behavioural Risk Management

CFOs are uniquely positioned to transform behavioural risk management into a strategic advantage, creating measurable improvements across the organization. Their leadership in this area fosters enhanced operational performance, robust governance, and long-term organizational success.

1. Boosting Workforce Productivity and Retention

• Elevated Performance: A positive, supportive workplace culture drives productivity and engagement.
• Lower Absenteeism: Addressing stress-related behavioural risks reduces sick leave and enhances operational continuity.
• Enhanced Retention: Healthy workplace environments reduce turnover, saving recruitment and training costs.

2. Ensuring Operational Continuity and Customer Service

• Efficient Resource Allocation: Reducing dependence on temporary staff optimizes costs and operational stability.
• Streamlined Service Delivery: Mitigating behavioural risks eliminates inefficiencies, improving customer satisfaction.
• Minimized Backlogs: Proactive risk management prevents unresolved issues, maintaining team morale and service quality.

3. Reducing Financial Exposure and Strengthening Resilience

• Lower Legal Costs: Transparent reporting reduces litigation risks and related expenses.
• Decreased Insurance Premiums: Effective risk mitigation results in lower liability insurance costs.
• Strategic Resource Allocation: Funds freed from risk provisions can be reinvested in innovation and growth.

4. Strengthening Cyber Security Resilience

• Addressing Bullying Risks: Tackling workplace bullying reduces behavioural risks that could compromise organisational security.
• Elevating Code of Conduct Adherence: A strong code of conduct helps employees navigate complex situations, such as cyber security, with clarity and accountability.
• Democratising Behavioural Risk Identification: Machine Interactions enable all employees to actively identify and mitigate behavioural risks in real time.

5. Maximizing ROI on Strategic Investments

• Cultural Enablement: Healthy workplace environments amplify modernization and infrastructure project outcomes.
• Comprehensive Risk Governance: CFO-led risk frameworks reduce whistleblowing incidents and regulatory exposure.
• Regulatory Compliance: Aligning with standards like the EU CSRD strengthens investor trust and credibility.

6. Strengthening Brand Reputation and Stakeholder Confidence

• Enhanced Public Perception: Proactively managing behavioural risks bolsters brand reputation and trust.
• Protection for Board and Executives: Effective risk governance shields senior leaders from reputational harm and regulatory scrutiny.
• Stronger Stakeholder Relationships: Transparent reporting builds confidence among employees, customers, and investors.

7. Fostering Talent Development and Innovation

• Attracting Top Talent: Commitment to behavioural risk management enhances employer brand.
• Knowledge Preservation: Retaining experienced staff safeguards institutional expertise.
• Driving Creativity and Growth: Positive cultures foster collaboration and innovation, fuelling organizational progress.

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Key Benefits of CFO-Led Behavioural Risk Reporting

1. Quantifying the Financial Impact of Risks: CFOs bring financial expertise to accurately calculate the impact of behavioural risks, such as absenteeism, productivity losses, litigation, and reputational damage. By quantifying these costs, CFOs make a compelling case for investments in solutions like training, cultural transformation, or enhanced reporting mechanisms.
2. Holistic Risk Assessment: CFOs can evaluate behavioural risks within the broader financial and operational context, uncovering hidden costs and interdependencies that influence organizational performance.
3. Enhanced Accountability and Governance: CFOs ensure robust mechanisms for tracking, reporting, and addressing behavioural risks. By collaborating closely with the Chief Risk Officer (CRO) and the Risk Committee, CFOs integrate these risks into the organization's broader governance framework, aligning efforts across all levels.
4. Strategic Alignment with Organizational Goals: By embedding behavioural risk management into financial and operational strategies, CFOs align mitigation efforts with long-term objectives, such as sustainability, resilience, and competitiveness.

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Conclusion: Bridging the Gap

The traditional approach of assigning behavioural risk reporting solely to HR is no longer sufficient. While HR focuses on resolving issues like workplace bullying, misconduct, and toxic cultures, it lacks the financial tools and governance frameworks necessary to identify and quantify these risks comprehensively.

To close this gap:

• CFOs must lead the identification and reporting of behavioural risks, leveraging their expertise in data analysis, financial reporting, and governance. They must collaborate closely with the CRO and the Risk Committee to ensure a cohesive approach to risk management.
• HR must focus on resolution, implementing policies, training, and cultural transformation informed by CFO-led data insights.

This collaborative framework enables organizations to meet regulatory requirements, improve governance, and mitigate the cascading effects of unchecked behavioural risks. The cost of inaction is too great. By taking ownership of behavioural risk reporting, CFOs can safeguard organizational success and ensure resilience in an increasingly complex business landscape.

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