Stocks Rise with Risk Management

 
 

The link between risk management and the financial performance of a company has always been difficult to quantify. After all, it is harder to put an exact figure on losses avoided than it is on profits gained.

But according to the Aon Risk Maturity Index, which was developed by broker Aon in partnership with the Wharton School at the University of Pennsylvania, companies with the highest level of risk maturity (a measure that gauges the development of an organization’s risk strategy and framework) experience 50% lower stock price volatility than their less-developed counterparts.

In addition, during the two years tracked (between 2010 and 2012), companies with higher risk maturity ratings saw greater annual stock price returns. This was especially apparent during the volatile markets of 2011 and 2012, when the only companies to see positive returns were those with the highest risk maturity ratings. Those lower on the scale saw losses between 17% and 30% by the end of the year.

The findings underline the importance of a fully developed risk management program (something the index calls “advanced”) that is characterized by a strong awareness of the complexity of risk and a willingness to incorporate risk management practices into strategic decisions throughout the organization.

 
Morgan O'Rourke

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About the Author

Morgan O’Rourke is editor in chief of Risk Management and director of publications for the Risk & Insurance Management Society, Inc. (RIMS)

 
 

4 Comments

  • Hi Morgan – Your article is very interesting. How could a private comapany access their risk management?

    Julie Freer, Controller
    Ascentis

     
    • Bill Bryant

      Julie – I am going to be presumptious and assume that you meant to ask "how could a private company ASSESS their risk management?" I am doing precisely this in my present organisation and have developed a Risk Maturity Model (an approach similar to the AON Risk Maturity Index) that looks at a range of Attributes considered to be essential to not only developing and delivering an effective risk management framework but also developing the culture and behaviours to derive real benefit from doing risk management.

       
    • Bill Bryant

      The approach taken was to evaluate a large number of risk maturity models from a variety of organisations across the globe (including the offerings of the major consultancies) and develop a model that incorporated the best, most relevant attributes of these together with identifying and developing attributes that could help the organisation given its current size, culture and challenges. These attributes were used to survey the organisation from the CEO through to the front line workers to determine where the organisation was at, where it wanted/needed to be and, more importantly, what were the practical things that need to be focussed on to gain the desired shift in maturity.

      I will be writing a paper on this once the findings have been digested by the Board and executive leadership but am more than happy to provide further information if you want to explore this now.

       
  • If we don't rally big time in the next 1-2 weeks, this cyclical bull is probably over. And every rally is really to get totally out of stocks to wait out the winter. It has been almost 4 good years. What more can you ask?

     
 

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