Good risk management changes corporate culture, boosts earnings

Companies that made risk management practices part of their corporate culture tended to do better financially in the past eight years, according to a new Ernst & Young report on risk investment levels.

The study found that the companies that ranked in the top 20% for investments in risk-focused personnel, processes and technology generated nearly three times the earnings before interest, taxes, depreciation and amortisation (EBITDA) than the companies ranked in the bottom 20%.

Top-ranked companies also generated 58% more revenue than those in the bottom 20%, the study found.

“When it comes to strategy development and execution, it’s important for risk to enable business performance – not simply protect the business,” Michael Herrinton, E&Y’s Americas advisory risk leader, said in the report.

Based on a survey of more than 500 respondents in 16 countries and reviews of more than 2,500 analyst and company reports, the study results suggested that most companies perform the basics of risk management. But those in the top 20% not only do more to mitigate and control business risk, they also consistently follow some of the same practices.

The greatest weakness or opportunity for most companies is effectively harnessing technology to support risk management, according to the study.

To turn risk into results, the companies in the top 20%, for example, talk about risk with external stakeholders. They perform stress tests to validate how much risk is tolerable. They put in place standardised assessment and reporting tools and incorporate risk issues into business planning. And they monitor risk and manage it with the help of technology.

Good risk management goes beyond keeping the business out of trouble and protecting the brand, according to the E&Y report. It includes embedding risk management into performance management and optimising risk management functions.

“Many executives have no idea what the return on their risk investment is,” Jonathan Blackmore, E&Y advisory risk partner for Europe, the Middle East, India and Africa, said in the report. “If they say that their return is neutral, I tell them that I don’t think that’s good enough.”

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.