Professional Documents
Culture Documents
Table of Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Accentuating the Upside, Smoothing the Downside . . . . . . . . . . 2
The Relationship between Risk Management
and Stock Price Performance and Volatility . . . . . . . . . . . . . . . . . . . . . . . . . 2
Enhanced Risk Management and Superior Financial Performance . . . . . . . 4
Risk Management and Organizational Resiliency . . . . . . . . . . . . . . . . . . . . 6
Executive Summary
The Aon Risk Maturity Index was designed to
60 %
Perf 13
Perf 14
50 %
Performance %
40 %
30 %
20 %
10 %
0%
1.5
2.5
3.5
4.5
-10 %
-20 %
60 %
Vol12
Vol13
Vol 14
50 %
Volatility %
40 %
30 %
20 %
10 %
0%
1
1.5
2.5
3.5
4.5
Although organizations that are not publicly listed cannot measure their performance via stock price
volatility, the overall finding that risk management supports and stabilizes financial
performance is significant for these firms as well, to the extent that they operate
under similar performance expectations as publicly-traded companies.
50 %
ROE 14
Return on Equity %
40 %
30 %
20 %
10 %
0%
1.5
2.5
3.5
4.5
-10 %
-20 %
-30 %
50 %
ROA 14
Return on Assets %
40 %
30 %
20 %
10 %
0%
1
1.5
2.5
3.5
4.5
-10 %
-20 %
-30 %
0%
1.5
2.5
3.5
4.5
-5 %
Model
All Model Factors are
implicitly shocked based on
historical factor returns from
9/15/2008 to 10/14/2008
Findings
Organizations with the
highest Risk Maturity
Rating of 5.0 (Advanced)
as a group exhibited a
stock price performance
of -18%. This represents a
+36% enhanced stock price
performance compared to
organizations with the lowest Risk Maturity Rating of
1.0 (Initial) that as a group
exhibited a negative stock
price performance of -28%
-10 %
-15 %
-20 %
-25 %
-30 %
0%
1.5
2.5
3.5
4.5
5
Model
All Model Factors are
implicitly shocked based on
historical factor returns from
4/26/2010 to 6/8/2010
-5%
-10%
-15%
-20%
-25%
Findings
Organizations with the
highest Risk Maturity
Rating of 5.0 (Advanced)
as a group exhibited a
stock price performance
of -10%. This represents a
+54% enhanced stock price
performance compared to
organizations with the lowest Risk Maturity Rating of
1.0 (Initial) that as a group
exhibited a negative stock
price performance of -22%
1.5
2.5
3.5
4.5
-0.5%
Model
All Model Factors are
implicitly shocked based on
historical factor returns from
3/10/2011 to 3/15/2011
Findings
Organizations with the
highest Risk Maturity
Rating of 5.0 (Advanced)
as a group exhibited a
stock price performance of
-0.3%. This represents a
+90% enhanced stock price
performance compared to
organizations with the lowest Risk Maturity Rating of
1.0 (Initial) that as a group
exhibited a negative stock
price performance of -3.1%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
-3.5%
-4.0%
New for 2014, as a proxy for the recent 2014 Russian/Ukraine crisis, our researchers
looked back and subjected the data to stress test for the 2008 Russian/Georgia Crisis
event. The analysis once again confirmed a direct relationship between Risk Maturity and
organizational resiliency as judged by the relative resilience of an organizations stock
price in immediate aftermath of this event. Graph 8 below presents these findings.
1.5
2.5
3.5
4.5
-5.0%
-10%
Model
All Model Factors are
implicitly shocked based on
historical factor returns from
8/7/2008 to 10/06/2008
Findings
Organizations with the
highest Risk Maturity
Rating of 5.0 (Advanced)
as a group exhibited a
stock price performance
of -16%. This represents a
+53% enhanced stock price
performance compared to
organizations with the lowest Risk Maturity Rating of
1.0 (Initial) that as a group
exhibited a negative stock
price performance of -34%
-15%
-20%
-25%
-30%
-35%
-40%
This research supports the conclusion that risk management policies are most
beneficial when facing an actual or expected threat; in this case, that strong risk
management contributes to higher returns even during significant market events.
Wharton analyzed
responses from close to
700
organizations from around
the world.
3%
2%
1%
0%
-1 %
-2 %
-3 %
Analysis is based on work by Christopher Ittner and Jeremy Michaels of The Wharton School
Firm volatility as reflected in cash flows, earnings, sales and stock price
10
Median RBFP
High RBFP
50 %
Forecast Error
Median RBFP
Forecast Bias
High RBFP
Forecast Width
30 %
10 %
-10 %
-30 %
-50 %
Analysis is based on work by Christopher Ittner and Jeremy Michaels of The Wharton School
Forecast Error: absolute value of actual earnings per share less managements forecast, as a percentage of price at the beginning of the quarter
Forecast Bias: similarly defined as error, except we do not take the absolute value of the forecast error
Forecast Width: the upper bound of the forecast range minus the lower bound, as a percentage of beginning of period price
Graph 11: Estimated Percentage Difference from Average Earnings Forecast Error
Low Volatility
50 %
Low RBFP
Median RBFP
30 %
10 %
-10 %
High RBFP
High Volatility
-30 %
-50 %
Analysis is based on work by Christopher Ittner and Jeremy Michaels of The Wharton School
Firm volatility as reflected in cash flows, earnings, sales and stock price
11
Damage to
Reputation/Brand
Regulatory/
Legislative Changes
Failure to Attract/
Retain Top Talent
Business
Interruption
Political Risks/
Uncertainties
Economic
Slowdown
Regulatory/
Legislative Changes
Business Interruption
12
Damage to
Reputation/Brand
Failure to Attract/
Retain Top Talent
22.0%
20.1%
20%
15.0%
14.1%
15%
11.2%
9.3%
10%
5%
0%
4.3%
3.4%
0.6%
1.5
2.5
3.5
4.5
Initial
Initial to
Basic
Basic
Basic to
Defined
Defined
Defined to
Operational
Operational
Operational
to Advanced
Advanced
25+
Industries
Continents
10
Languages
13
1
Board-level understanding of and commitment to risk management
1
as a critical factor for decision making and for driving value
1
A senior-level executive who drives and facilitates key risk management
2
processes and development
1
3
1
A risk culture that encourages full engagement and accountability
4
at all levels of the organization
1
Identification of existing and emerging risks using internal
5
and external data and information
1
Participation of key stakeholders in risk management strategy
6
development and policy setting
1
Formal collection and incorporation of operational and financial
7
risk information into decision making and governance processes
1
Integration of risk management insights into human capital
8
processes to drive sustainable business performance
1
Use of sophisticated quantification methods to understand risk
9
and demonstrate added value through risk management
10
1 A move from focusing on risk avoidance and mitigation to leveraging
risk and risk management options that extract value
14
Concluding Remarks
The growth and evolution of the Aon Risk Maturity Index has enabled the
tool to become an industry-leading, global database on risk management
practices. Results from the Index have yielded valuable findings around the
correlation of advanced risk management practices and financial performance,
as well as practical insights to assist in the development of a mature risk
management framework in support of sustainable, stable financial results.
Aon will continue its research with The Wharton School to identify
key risk management practices and processes that contribute to
improved financial performance as well as a deeper understanding
of industry-specific best practices in risk management.
1.5
3
2.5
3.5
4.5
15
16
Johnny Galway
Research Analyst
Aon Centre for Innovation &
Analytics
johnny.galway@aon.ie
Rudolph Koenig
AGRC Marketing Lead US
Aon Global Risk Consulting
rudolph.koenig@aon.com
William Zhang
Enterprise Risk Management
Analyst
Aon Global Risk Consulting
william.zhang@aon.com
About Aon
Aon plc (NYSE:AON) is the leading global provider
of risk management, insurance and reinsurance
brokerage, and human resources solutions and
outsourcing services. Through its more than 66,000
colleagues worldwide, Aon unites to empower
results for clients in over 120 countries via innovative
and effective risk and people solutions and through
industry-leading global resources and technical
expertise. Aon has been named repeatedly as the
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manager, and best employee benefits consulting
firm by multiple industry sources. Visit aon.com
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