A roundup of topics International Treasurer is investigating.
Last week’s meeting of The NeuGroup’s Corporate ERM peer group highlighted a host of developments in the world of nonfinancial enterprise risk management. And, in a sign that corporate ERM, while still a young field, is one that’s maturing quickly, one of the top considerations was how to benchmark a company’s success in managing its risks.
The discussion took at least two tacks. First, the group mulled various ways to benchmark ERM initiatives to determine if they are living up to their billing by giving a better handle on a corporate’s risk position. But a more contentious idea was whether a corporate should actually put some sort of number on its overall risk appetite—something that a benchmarking exercise would seem to presuppose.
Supporters of the idea raised pegging it to such factors as volatility of earnings per share or operating income. A quantitative measure of risk appetite could prove useful in making intelligent insurance and hedging choices. But other members of the group found the whole idea too nebulous. A company, unlike a financial portfolio, has so many moving parts that such a reductive analysis would be of little tangible value.
And it could cause problems. For example, a quantitative approach to measuring risk appetite could have significant legal and reporting implications. While such measures of risk for non-financial companies might be extremely helpful in strategy discussions, they could also, as one member worried, “open Pandora’s Box.”