The day of reckoning is near. Somewhere around March 2, Standard & Poor's expects to start evaluating nonfinancial companies' enterprise risk management (ERM) programs, and then factoring their assessments into credit ratings. The goal is to anticipate a crisis before it makes headlines, says Steven J. Dreyer, S&P primary credit analyst. Some companies already have expressed concern about how S&P analysts can judge and score such amorphous information.
Dreyer answers: By analyzing the risk management culture and governance and risk controls, emerging risk preparation and strategic risk management through on-site observation, a series of questions, discussions with officials, tests and benchmarking against peers. The procedure will add a day to each rating, says Dreyer.
Not surprisingly, many finance executives get prickly just thinking about judgment day. In an attempt to calm those fears, and welcoming suggestions from the companies themselves, S&P is asking for comment on the plan's recently published framework. Questions and observations are due Feb. 1. The ERM analysis could proceed as soon as the following month, or be revised and delayed–and, though it is highly unlikely, cancelled.
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S&P already evaluates companies' ERM strategy, but on a much less formal basis, as does Moody's. S&P also has an ongoing ERM analysis plan for financial and energy companies. If the proposed, formal analysis plans go forward, the rating agency will assign scores to a company's ERM capabilities in four categories: weak, adequate, strong and excellent. "Companies with superior ERM should have less volatility in earnings and cash flow, and will optimize the risk/return relationship," says Dreyer.
Consulting company Towers Perrin, for one, wants to see the plan implemented as part of growing recognition of the importance or risk/reward measurement. "Things are about to change, and the implications are significant," says Prakash Shimpi, Tower Perrin's ERM practice director. "Companies that take a progressive approach to ERM will be rewarded, and those that lag behind will be at a disadvantage."
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