Investors Seeking More ERM Disclosure

On a morning where the Dow Jones Industrial is down over 2%, many investors may be wondering how to get a better understanding of the companies in which they are looking to invest.  These investors might be well served to research the effort that a company is devoting to manage their risk effectively.  A recent article by Lawrence Richter Quinn provides interesting perspective for those looking to learn more about how to evaluate a company's enterprise risk management program.  Here's some of what he has to say.

It is a difficult task for investors to discover which companies are working to manage risk from an enterprise-wide perspective - and an even more difficult job discovering who is doing so effectively. Many board members don't understand ERM, believing it to be simply another potentially costly, hard-to-measure regulatory fiat from Washington. Many others believe that effective ERM can be achieved simply by expanding their SOX-related reporting and controls efforts, which is not the case.

Because it's a new management discipline, what constitutes "best practices" in ERM has yet to be defined; currently it's being defined industry by industry, but few if any companies promote themselves as being "best of the best" in ERM or risk management.

So, how do you know who's working hard at effective ERM? A growing number of companies, particularly outside the U.S., devote a significant portion of their annual reports discussing risk management, regardless of whether they specifically call it ERM. Generally, investors interested in discovering who's doing a comprehensive job at risk management - and reporting it publicly in their annuals - need to look abroad. Just north of the border, Canadian-based companies discuss risk extensively in their annuals and they are a good place to start looking into this area further.

One way to quickly see if the company you are researching does have ERM is to check for a Chief Risk Officer (CRO). While CROs are most often found in the energy, banking and insurance industries, more aggressive manufacturing companies are moving in that direction as well. Another clue is found in a tiny nut of companies that have managers specifically in charge of coordinating their ERM efforts. These managers will have the words "enterprise risk" in their titles.

While the U.S. is still playing catch-up on effective risk management disclosures (even though the SEC is beginning to crack-down with new proxy rules this year), U.S. companies are beginning to strengthen their enterprise risk management capabilities.  Those companies that are not working to strengthen their capabilities will certainly suffer a competitive disadvantage as a result.