ROI on ERM

Rating Risk Performance

Organizations with better risk management reap better financial returns, according to research.
By: | April 7, 2014

Companies that elevate risk management may get a financial boost, according to ongoing research by Aon and The Wharton School of the University of Pennsylvania.

The research, still in its early stages, is designed not as an investment guide but as a benchmarking tool for risk managers.

They can use the findings to show the potential payoff of their efforts, especially if they are seeking greater investment from senior executives, said Chris Ittner, the Ernst & Young professor of accounting at The Wharton School in Philadelphia.

“It’s something to think about because, potentially, there are some financial benefits,” Ittner said.

Since 2010, Ittner and researchers at Aon have been surveying companies around the world about their risk management practices, and scoring them on a “Risk Maturity Index.” More than 1,000 risk managers have been surveyed.

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The more advanced a company’s risk management practices, the higher its score on a scale of 1 to 5 — and, based on survey results — the better the financial performance.

Between March 2012 and March 2013, for instance, the stock of public companies with a risk maturity score of 5 outperformed companies with lower scores. Companies with higher scores also were projected to experience lower share-price volatility following market-rattling shocks, such as a disaster on the scale of the Japanese earthquake and tsunami in 2011.

In the months ahead, the two organizations hope to gather enough information to tailor the data by industry and figure out what risk management steps are most effective, Ittner said. The organizations expect to issue two reports per year.

In the meantime, corporate risk managers may be able use the latest data to lobby senior leaders for more attention and resources. They can compare their scores on the Risk Maturity Index to the average, and determine whether any improvement is needed. Some might decide they are doing OK, said Kieran Stack, managing director at Aon Global Risk Consulting.

“It really depends on the appetite and the culture,” Stack said.

The findings of the Aon/Wharton research seem to underscore what investors know intuitively, said Keith Aleardi, chief investment officer of Fulton Financial Advisors in Lancaster, Pa. “It seems to make sense that companies that are diligent on risk management are just likely better-quality companies.”

Joel Berg is a freelance writer and adjunct writing teacher based in York, Pa. He has covered business and regulatory issues. He can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]