Aon has released its latest Risk Maturity Index Insight Report and it reveals a direct link between profitability and advanced risk management practices.
The research, conducted alongside The Wharton School of the University of Pennsylvania, includes “ground-breaking findings about links between board’s oversight of risk, financial performance and the volatility of a company’s share price,” the insurer said in a statement.
Marcus Vaughan, regional lead of the Aon Risk Maturity Index for Australia said of the findings: “The evidence is clear: there is a direct positive correlation between advanced risk maturity, an organisation’s understanding of risk management practices, and enhanced financial performance when considering key metrics such as Return on Equity and Return on Assets. This in turn speaks directly to directors’ obligations to maximise shareholder value.”
Australia leads the way internationally when it comes to understanding and managing risk at the appropriate level, the report found.
“Looking at global participation in the Aon Risk Maturity Index, Australia is still leading the way on a per capita basis. This reflects an appetite for local organisations to understand their level of Risk Maturity, and establish robust plans to enhance it, often above and beyond what is required from a regulatory point of view,” Vaughan said.
The report found that companies with the highest rating on the risk maturity index, a 5.0, experienced share price volatility 34% lower than those with the lowest score available, a 1.0.
The highest rating also resulted in a 42% return on equity performance compared with a negative return of -23% for companies at the lowest end of the spectrum.
“Board oversight, particularly the assignment of risk responsibilities across board roles rather than solely within committees, has a positive effect on the maturity of risk management practices throughout the organisation. This oversight promotes a more consistent understanding of the top risks facing the organisation, greater insight into existing risk management activities and a stronger consensus and communication between the board and the management reporting team regarding risk management strategies,” Vaughan continued.
“Aon’s Risk Maturity Insight Report also shows that companies with more sophisticated risk-based forecasting and planning in place, exhibit lower levels of volatility in factors such as cash flow, earnings, sales and share prices. In other words, risk management translates into very real benefits for companies and their shareholders.”
Vaughan noted that the index is being used across “various levels” in an attempt to “identify any disconnects that may exist in the execution of risk management.”