The Aon Risk Maturity Index Insight Report, November 2013 was developed by Aon plc in conjunction with the Wharton School of the University of Pennsylvania. The purpose of this study was to confirm the relationship between more mature risk management practices and stronger financial results. The study evaluated the relationship between the maturity of risk management and three financial performance criteria: stock price and volatility of stock price, return on equity, and resiliency.
The study defines the most mature risk management companies as companies that are very capable of identifying, measuring and monitoring risks across their organizations; process these risks dynamically and can easily adapt to change. These companies also align their risk management process with their strategic objectives efficiently and effectively. An average risk management process can identify, measure, manage, report and monitor major risks. These companies use policies and techniques to manage risk across the organization, but not consistently. Lastly, the companies that have the least mature risk management processes do not identify risk using a strategic lens and deploy risk mitigation in an ad hoc manner. These companies are more reactive than proactive.
The following are ten characteristics the study used to evaluate risk maturity:<.p>
- Board of Director’s understanding of the company’s strategic risks and how they relate to strategic decision-making
- A Chief Risk Officer who is responsible for the facilitation of the development of risk management
- Effective communication of risks throughout the company
- Risk culture throughout the organization
- Methods with which the company uses to identify existing and emerging risks
- Key stakeholders’ participation in the development and policy setting surrounding risk management
- Decision-making and governance processes that use operational and financial risk information
- Use of risk management insights to enhance long-term growth
- Use of analytical methods to understand the effects of risks and enhance shareholder value through risk management
- The change from risk aversion to risk management and how the company uses risk management to increase shareholder value
Risk Maturity and Stock Price
The study concluded that the firms with advance risk management process increased in stock price 18% while firms that have the lowest on the risk maturity scale experienced a stock price decline of 10% in the period from March 2012 to March 2013. In the same period, the most mature firms experienced 38% less stock volatility than the firms with the lowest risk maturity score.
Risk Maturity and Return on Equity
From March 2012 to March 2013, firms with the most mature risk management processes experienced a positive 37% return on equity performance, while the least mature firms experienced a negative 11% return on equity.
Risk Maturity and Firm Resiliency
In order to determine the relationship between risk maturity and firm resiliency, the study exposed their findings to a stress test based on the Bloomberg Scenario function. The study used three scenarios from the recent past: the Lehman default, the Greek Fiscal Crisis and the Japanese earthquake. The studied modeled how the securities would respond if these events were to happen today.
The Lehman Default: the firms with the most mature risk management processes would notice a decrease of 21% in their stock price. The firms that have the least mature risk management processes would experience a decrease of 30%.
The Greek Fiscal Crisis: the firms with the most mature risk management processes would notice a decrease of 11% in their stock price. The firms that have the least mature risk management processes would experience a decrease of 20%.
The Japanese Earthquake: the firms with the most mature risk management processes would notice a decrease of 0.3% in their stock price. The firms that have the least mature risk management processes would experience a decrease of 3.4%.
The Aon Risk Maturity Index Insight Report, November 2013 used ten risk management characteristics to help identify how mature a firm’s risk management process is. Then it used that information to find a correlation between risk maturity and financial performance. The study also found that as a company’s risk management process improves overtime, the firm becomes more resilient to external, inherent risks.