Standard & Poor's Emphasizes ERM Importance

Since September 2008 when this blog was launched, Standard & Poor's has been evaluating enterprise risk management ("ERM") practices at both financial and non-financial companies as part of their credit rating evaluation process. Recently, Standard & Poor's issued a white paper discussing the importance of ERM and clarifying its review process of non-financial companies.  The white paper also contains a list of Frequently Asked Questions that provides a better understanding of the nature and scope of the reviews.  Here is their view of the importance of ERM today.

Managing enterprise-wide risks and capitalizing on opportunities are fundamental responsibilities of senior executives at all firms. Standard & Poor's Ratings Services' corporate credit ratings include evaluations of those managers' strategies, effectiveness, and credibility. These evaluations help us develop forward-looking opinions on credit strength by supplementing our fundamental analysis of the company's business and financial risk profile. Beginning in September 2008, we widened the scope of our analysis of some non-financial companies' management to enhance our review of managers' ability to identify, monitor, and manage key risks -- those endemic to its industry and those that managers elect to take when running their businesses. Specifically, we started to look at how a firm's culture (communications, structures, incentives, and risk appetite) affects the quality of its decisions and at the role risk considerations play when making strategic decisions. The public spotlight on risk management has intensified since we began this initiative.

1. The U.S. Securities and Exchange Commission (SEC) now requires that proxy statements that public companies file include disclosure of risk-based compensation policies, the role of the board of directors in risk oversight, and the nature of communications between executives and the board on risk issues.


2. The National Association of Corporate Directors' Blue Ribbon Report on Risk Governance urges boards to assess risk in strategy, closely monitor risks in culture and incentives, and consider emerging risks to the firm's business.


3. The International Organization for Standardization's ISO 31000 family of risk management standards define a common global approach to risk management.

Greater public scrutiny follows the extended global recession and accompanying wave of corporate defaults -- grim reminders of the consequences of unpreparedness and weak risk management.

Given the increased importance and added scrutiny, ERM is a certainly critical success factor for all companies today. If you are interested in how your ERM program measures up, Wheelhouse Advisors can provide a quick, complimentary diagnostic review.  To learn more, email us at NavigateSuccessfully@WheelhouseAdvisors.com.