Companies which apply the most risk management practices can earn three times as much as those with the lowest application of the practices, or risk maturity, according to research published by Ernst & Young.
In a report published last week, the consultants found that financial performance was highly correlated with the level of integration and coordination across risk, control and compliance functions.
Turning Risk Into Results: how leading companies use risk management to fuel better performance defined risk maturity by the number of risk management practices applied by companies. It found that the earnings before interest, taxes, depreciation and amortisation for the top 20% most risk mature companies were three times more than for the bottom 20%.
According to Ernst & Young, in the past company executives may not have perceived risk management as strategic to their enterprise. They may also have lacked sufficient confidence in their ability to identify and address the risks that could impact on the financial performance or viability of their company.
However, the company said this was no longer an option. Gerard Gallagher, advisory lead partner for markets at E&Y, said: 'Making a move from being risk-averse to risk-ready may require a significant shift. Ultimately risk management is about changing the culture of the business. It is about changing the lens through which leaders view the decisions they make.'
The study was based on 576 interviews with companies from 16 countries and information from 2,750 analyst and company reports. It identified the leading risk management practices that differentiated companies various maturity levels and organised them into specific risk components.
It found that, while most companies perform the basic elements of risk management, top performers do more, and certain risk practices were consistently present in the top performers.
These included: an enhanced risk strategy; embedded risk management; optimised risk management functions; improved controls and processes; and, enabling risk management and communicating risk coverage.
Mr Gallagher added: 'Companies that succeed in turning risk into results will create competitive advantage through more efficient deployment of scarce resources, better decision making and reduced exposure to negative events. Now is the time for senior business executives to begin applying a broad "risk lens" to the business.'
