S&P Struggles with ERM Ratings

Yesterday, Compliance Week Magazine reported that Standard & Poor's ("S&P") is struggling to incorporate Enterprise Risk Management ("ERM") into its ratings methodology.  Evidently, the analysts at S&P are finding the challenge of reviewing risk management practices at non-financial companies to be more daunting than originally planned. Financial companies have had their ERM practices reviewed by S&P for years, but the task is easier since practices are more mature and standard across the industry. In addition to this challenge, S&P has also been distracted by the ratings debacle that led to the securitization meltdown late last year.  However, here is what Compliance Week reported about S&P's future plans for ERM evaluations.

S&P has no plans to abandon its ERM evaluations, but neither will it split out ERM as a separate component of a company’s overall rating score. Rather, ERM reviews for non-financial companies will be based primarily on information provided by issuers in public disclosures and through discussions with S&P. Following are the seven primary questions that analysts have been asking management teams concerning ERM:

• What are the company’s top risks, how big are they, and how often are they likely to occur? How often is the list of top risks updated?


• What is management doing about top risks?


• What size quarterly operating or cash loss have management and the board agreed is tolerable?


• Describe the staff responsible for risk-management programs and their place in the organization chart. How do you measure success of risk management activities?


• How would a loss from a key risk impact incentive compensation of top management and on planning/budgeting?


• Tell us about discussions about risk management that have taken place at the board level or among top management when making strategic decisions.


• Give an example of how your company responded to a recent “surprise” in your industry and describe whether the surprise affected your company and others differently.

Is your company prepared to answer these questions?  If not, Wheelhouse Advisors can help. Visit www.WheelhouseAdvisors.com to learn more.

S&P ERM Criteria to be Released Soon

A recent article in Treasury & Risk Magazine discusses the incorporation of ERM reviews in credit ratings by Standard & Poors.  These reviews have been a part of ratings reviews in the financial services industry, but now are being extended to non-financial companies.  Criteria for these reviews will be released soon as discussed in the excerpt below.

“Most companies these days recognize the value of risk management,” says Dale Hall, vice president and chief actuary at Bloomington, Ill., insurer Country Financial. But he says for a lot of them, it’s still mostly in the “should do” category.  Steve Dreyer, an S&P managing director who heads the ERM global integration project, says, “This is something we’re doing very deliberately and carefully.”

The plan is not for some kind of “big bang,” Dreyer says. Rather, S&P’s analysts, in the normal process of their reviews, are talking with corporate managers about risk management and developing criteria and a methodology, which will be published before ERM ratings are actually offered. “We’re getting the lay of the land,” he says. The target date for publishing the criteria to be used for risk management ratings is the third quarter of 2009.

Is your company prepared for these reviews?  If not, Wheelhouse Advisors can help.  To learn more, visit www.WheelhouseAdvisors.com.