Study Shows Risk Management Boosts Corporate Valuations

Companies showing "mature risk management practices" may have valuations of up to 25 percent more as a result.
David KatzApril 29, 2014

DENVER — Risk managers attending the annual Risk and Insurance Management Society conference here are all abuzz about the need to “speak in the language of the CFO.” One of the difficulties to date for risk managers is that they have long been speaking in too much detail about such things as preventing insurable losses or keeping premiums down, while CFOs want the information boiled down into financial metrics.

A related struggle for corporate risk managers has been the battle to justify the value of what they do so that finance chiefs will be convinced of the need to spend money on risk management departments. Now, however, comes a new study that might help them. The study relates the quality of a corporate enterprise risk management (ERM) program to the value of a corporation as measured by Tobin’s Q, a ratio that measures market value based on replacement cost.

The study found that companies showing “mature risk management practices” may have valuations of up to 25 percent more as a result.

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Based on their findings, the authors reported that “firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and relationships across the entire enterprise and as a consequence enhanced value,” according to a RIMS press release.

The study’s authors, professors Mark Farrell of  Queen’s University Management School of Belfast  and Dr. Ronan Gallagher of the University of Edinburgh Business School used data compiled from RIMS’s Risk Maturity Model over the period from 2006 to 2011. The model uses a five-point scale to score a company’s risk management competency.

“Our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value, as measured by Tobin’s Q. We find a statistically significant positive relation to the magnitude of 25 percent,” according to the authors.

The aspect of ERM that has the biggest impact on a company’s value is “the level of top–down executive engagement and the resultant cascade of ERM culture throughout the firm,” they write.

The researchers’ data set encompassed publicly traded organizations from a variety of industries, with  nearly 50 percent of the data tabulated submitted by members of RIMS, which consists largely of risk managers from various kinds of organizations.

“One of the biggest challenges in implementing an enterprise risk management program is articulating the value that it brings,” says Carol Fox, RIMS director of strategic and enterprise practice. “This research makes that value link quite clear.”