ERM increases company valuation

Enterprise Risk Management is viewed favorably by rating agencies, stock exchanges, regulators and other stakeholders – this is all good news.

But some boards and CEOs remain skeptical about ERM’s value: sometimes a perception reigns that ERM is a pure cost, a governance exercise, some box-ticking event, doesn’t deliver any topline and produces nothing but a thick report that nobody reads. The ERM-journey up the risk maturity ladder requires board and management commitment, hence the question arises: what is the return on this investment, in other words how does a CRO convince the board and the CEO that ERM creates value for the company?

Over the past two years two independent, reasonably comprehensive studies have shown that there is a good correlation between good ERM-practice and a company’s valuation – in other words: it pays to do ERM !

Study No.1 says […our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value ….] and study No. 2 comes to a similar conclusion stating that […results confirm a significant positive impact of ERM on shareholder value…].

This is very good news for all ERM practitioners, boards and executives of all companies!!

Risk Maturity Ladder is defined here

The valuation implication of ERM maturity. Mark Farrell & Ronan Gallagher, 2014

Determinants and value of ERM. Nadine Gatzert & Michael Martin; 2016