ERM Maturing in Australia and New Zealand

Standard & Poor’s conducted an enterprise risk management (ERM) survey of Australian and New Zealand companies to determine if this region was embracing the new ERM strategy.  The outcome of the survey, authored by Jeanette Ward, showed an overwhelming majority of companies had implemented an ERM approach to risk management.  Most companies believed that there is still room for improvement in their risk management programs.

Strengths and Weaknesses

The survey sought to determine where the strengths and weaknesses in the companies ERM approach were.  The following is a brief list of their results:

Strengths:

• 76% of companies said that the board had the primary risk oversight responsibility
• 84%  of companies strongly agreed that there was a clear ownership and responsibility of risk

• 66% had a formal process of dealing with risk that effectively aligned risk management with the overall corporate strategy

Weaknesses:

• Only 34% believed that their risk appetite was clearly articulated
• 26% believed that there was a clear alignment between risk accountability and performance incentives

• 39% believed that their company did a good job of educating people and employees on risk

Reasons for ERM Implementation

Standard & Poor’s also examined the reason behind the implementation of an ERM approach.  They asked management what emphasis was placed on various risk management incentives.  They found that the heaviest emphasis for risk management was risk mitigation with close to 100% of participants agreeing.  On the opposite end of the scale, very few respondents cited ERM as a source of competitive advantage as a key value driver. 

Industry ERM

Finally, Standard & Poor’s ascertained the industries with the strongest embedded ERM strategy as well as the ones with the more silo-based risk management strategies.  The strongest ERM strategy was found to be in the materials and property and construction industries.  The industry with the most silo-based risk management practice were companies in the media and entertainment industry as well as retail and consumer products.

Researchers believe that this difference in industry is attributable to several things.  First, the safety and operating risk associated with that industry’s line of business.  Safety risk is very high for mining and construction companies; therefore, these companies are more likely to have stronger ERM based risk management policy.  Second, the volatility of cash flow strongly impacts the acceptance and implementation of ERM.  The more volatile the cash flow, the more embedded ERM approach a company has, generally.

Overall, Australia and New Zealand companies are leaders in the area of ERM implementation.  An overwhelming majority of companies believe that ERM is the best risk management policy and have actively used this strategy.  There is still a lot of work to be done in improving ERM, but it is well on its way to optimizing performance and managing uncertainty for these companies.