Ernst & Young

November 07, 2005 19:01 ET

Investors Shun Companies that Cannot Demonstrate Successful Risk Management; But are Willing to Pay a Premium for Those That Can, Says a New Global Survey by Ernst & Young

LONDON--(CCNMatthews - Nov 7, 2005) -

Nearly two-thirds of global investors will apply a penalty towards a potential investment target if they consider risk management to be insufficient, while almost half have de-invested for this reason, according to a new survey released today by leading professional services provider Ernst & Young.

The survey, based on interviews with over 130 major global investors representing organizations which manage funds running into trillions of dollars, found investors are demanding that companies be more transparent regarding their approach to risk management. 82 per cent of investors are willing to pay a premium if they see evidence of good risk management, but many admit that they are currently making decisions based on incomplete risk information.

"The overwhelming response from investors is that they want to engage with companies on the subject of risk, and that they will avoid those unwilling to do so," Tom McGrath, Global Managing Partner Client Service and Accounts at Ernst & Young, said. "We are seeing a shift in attitude by many in the business community, which has resulted in a growing appreciation of risk and opportunity as two sides of the same coin."

The Ernst & Young survey identifies the key principles that underpin good risk management as effective systems and controls, transparency, communication, accountability and ownership of risk issues at a senior level within the company. Nearly half of investors want to see CEOs and the wider board taking ownership of risk management, compared to just 16 per cent who consider it the responsibility of a specialized risk function, and 15 per cent who believe the CFO is ultimately responsible. Significantly, investors also pointed to the need for risk to be understood right across the organization.

"Risk management has become part of the essential fabric of the corporate governance structure and new regulation means company leaders are now more personally accountable if things go wrong, " McGrath said. "They must be able to demonstrate that they are making well founded investment, business and strategic decisions, paying attention not just to financial performance, but also to risk management performance. They also need a clear communication strategy to ensure they are giving investors the information they want in the most effective way. The message from investors is more information, more dialogue and more face-to-face contact."

Key findings from the survey include:

-- 61% of investors identified instances where they have not made an investment because they considered a company's risk management to be insufficient

-- 48% revealed they had de-invested in companies where risk management performance was insufficient

-- 82% of major investors would pay a premium for a company that successfully demonstrates good risk management

-- 69% of investors rank transparency as the top priority when making investment decisions, ahead of the business model and track record of the company

-- Investors believe reliable risk management results in fewer negative surprises, greater financial stability and opportunity for profitability

-- Board level ownership, understanding and communication of risk issues are considered the keys to risk management success

-- Investors say compliance risk is the top priority, ahead of competitive, regulatory and reputational risk

About the Ernst & Young Risk Survey.

To gain insight and contribute to the continuing debate around risk, Ernst & Young has initiated a series of research surveys exploring attitudes to risk and management. The survey captures the thinking of over 130 major investors, in 16 countries. Over a third of respondents personally manage funds worth over $1bn. The survey is the first of a series of surveys Ernst &Young is running on the subject of risk in 2005 and 2006.

About Ernst & Young

Ernst & Young, a global leader in professional services, is committed to restoring the public's trust in professional services firms and in the quality of financial reporting. Its 106,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/perspectives. Ernst & Young refers to all the members of the global Ernst & Young organization.

This press release has been issued by EYGM Limited, a member of the global Ernst & Young organization.

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