Firms that engage in ERM are able to better understand the aggregate risk inherent in different business activities. This provides them with a more objective basis for resource allocation, thus improving capital efficiency and return on equity. A further source of value from ERM programs arises due to improved information about the firm’s risk profile. Outsiders are more likely to have difficulty in assessing the financial strength and risk profile of firms that are highly financially and operationally complex. ERM enables these financially opaque firms to better inform outsiders of their risk profile and also serves as a signal of their commitment to risk management. By improving risk management disclosure, ERM is likely to reduce the expected costs of regulatory scrutiny and external capital.
In a challenging economic environment, this study proves that companies will be well served to invest in effective ERM programs. Not only will companies realize an increase in value, but will gain a significant competitive advantage that will drive longer-term increases in value. Wheelhouse Advisors specializes in building ERM programs to help companies achieve these advantages. To learn more, visit www.WheelhouseAdvisors.com.
