ERM Increases Company Valuation

the benefits are measurable

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 !

… our results suggest that firms that have reached mature levels of ERM are exhibiting higher firm value …

Gatzert and Martin

… results confirm a significant positive impact of ERM on shareholder value …

Farrell and Gallagher

references:

  • Risk Maturity Ladder is defined here
  • The valuation implication of ERM maturity. Mark Farrell & Ronan Gallagher, 2014
  • Determinants and value of ERM. Nadine Gatzert &┬áMichael Martin; 2016