“What is the RoI on Enterprise Risk Management?”, is probably the most frequent question clients of Megrow or other stakeholders ask me when we talk about ERM.
The following two points are core to my answer:
Firstly, correlative studies1 have shown that companies with good ERM-practice achieve a valuation that is app 20% higher than their peers with a sub-standard ERM-approach.
Secondly, all major internal rating agencies put significant emphasis on ERM. For instance, under AM Best’s new rating methodology poor ERM-standards can trigger a maximum of four-notch negative drag on the baseline rate. Hence, good ERM contributing to an uplift of the baseline rate will substantially reduce financing costs for the company.
In a nutshell: The returns are measurable and they are very significant!
PS: thanks to Susanna Lam, MD of Acacia Advisory Ltd Hong Kong, for valuable input to this post.
1 Gatzert et al 2016.
Displaying an organisation’s risk landscape in two dimensional impact / likelihood matrices with a colour coding showing the corresponding threat level from green (“can live with it”) to red (“live threatening”) is part of the ERM gold-standard. It is intuitive, relatively easy to do, appeals to all stakeholders, ensures consistency and allows, to a certain extend, peer-comparison.
In an ever-accelerating1 world an additional dimension depicting the velocity or propensity of each risk to change would come handy. Wouldn’t it be helpful to add some indication of the velocity of change to this graph, a third dimension showing how quickly a risk evolves?
Let’s look at two examples to make this point: longevity, a risk and an opportunity for many businesses, is comparatively well understood. The risk is not static, however the speed of evolution is relatively slow as long as we disregard black swan events (such as the discovery of the fountain of youth…..). In the 3D chart outlined above, we would probably put ‘longevity’ close to zero on the velocity axis.
Cyber Risk, on the other hand, is in stark contrast: on the likelihood axis we would put it (close to) ‘certain’, impact probably medium (depends on the nature of the business under discussion). For sure, everybody would put the cyber risk way out on the velocity axis!
When we do ERM work with our customers, we always give consideration to the velocity of change. This forward-looking, dynamic approach to risk mapping makes Megrow’s customers better prepared to capture the opportunites that arise out of the changes!
1 “The Great Acceleration: How the World is Getting Faster, Faster” by Robert Colvile
I was @PARIMA Conference in Kuala Lumpur: a great showcase of the industry’s capabilities and an inspiration for me with regards to the journey ahead of the risk management community in Asia. Have a look at the organiser’s website here.
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
Boards and CEOs increasingly perceive Enterprise Risk Management as a forward looking, strategic tool.
The launch of the first “Board Risk Committee Guide” in Singapore on 31.03.2016 with 280 people in attendance was a landmark event for ERM in that respect. Great presentations and panel discussions, and most important of all: strong emphasis on ERM as a business enabler.
Precisely this enabling aspect of ERM is the focus of the work at Megrow: together with our clients we map out the risk landscape and convert the findings into opportunities.
Great to see how ERM is gaining momentum in emerging markets!
Take a look at “Enterprise Risk Management (ERM) in High-Growth Insurance Markets; The Trust Re Experience”1. I really like the emphasis on “enabling“!!
When we do ERM-related work with our clients, the opportunity-aspect gets a lot of attention.
Megrow Pte Ltd – your partner for all things ERM.