Analysts at Standard & Poor's are considering whether enterprise risk management (ERM) should be expanded as a factor in rating companies, an executive with the firm said yesterday.
The rating firm's interest in ERM was discussed by Steven Dreyer, managing director at Standard & Poor's, during a Web seminar titled "Getting The Value Out Of Enterprise Risk Management," sponsored by Chicago-based insurance brokerage firm Aon.
ERM, he said, has already made a difference in company ratings, pushing them either up or down depending on the process the company employs. S&P's concern with employing ERM, said Mr. Dreyer, is limited to how it affects payment obligations or the creditor of financial service companies.
However, S&P is considering expanding the role ERM plays in the ratings process on nonfinancial service companies, Mr. Dreyer explained, and employing the process early on in the evaluation phase of the rating.
He said there will be no right or wrong answers in the evaluation, but rather an understanding of how a company can envision the unknowns and its resilience after an event–specifically preparedness and contingency planning.
"One thing we know for sure is something unexpected will happen and we know we won't be able to predict what that is," he said.
S&P published a paper on this proposal in November and is seeking feedback. He said the rating service is most interested in hearing from two groups that would be most affected by inclusion of ERM in ratings calculations. They are the chief financial officers, whose job is directly affected by ratings, and investors.
People, he said, accept changes in ratings after events, but "what the market may be less enthusiastic about is our changing ratings before something happens."
He added, "If we were to adopt this, our ratings would be that much more forward looking and, by definition, less predictable–and that is something investors have a pretty strong view about."
Laura Taylor, managing director of Aon Global Risk Consulting and national practice leader for ERM for the Americas, Aon Risk Services, said enterprise risk management is a practice aimed at helping companies "to understand, manage, mitigate and leverage risk to increase their competitive advantage."
A recent survey released by the brokerage on ERM found that most corporations (one in four surveyed) are at the early stage of development, she said, meaning they are aware of ERM, but there is no structure in place. Twenty-five percent have a structure in place, but it has inconsistent results. One in ten say they have an integrated approach to managing risk, but only a few have a program that is dedicated to growth, she noted.
Sim Segal, head of ERM service offerings for the Americas and senior member of Aon Global Risk Consulting, noted that ERM philosophy is not just a question of identifying and reporting on risk but making better risk informed decisions.
The process is continuous, he said, from recognizing risk to quantification, response and implementation. Eventually, this process becomes part of a company's disclosure process as the process of quantification becomes part of the culture, he noted.
The full Web seminar is available at www.aon.com/webseminars/.
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