Ratings Analysts Speak on ERM: Process First, Then Risk

Ratings Analysts Speak on ERM: Process First, Then Risk | Risk & Insurance | Reports are beginning to come back from the first wave of S&P ratings discussions in which credit analysts are specifically including ERM as part of their meetings with nonfinancial firms. Here's what the analysts are saying.

By B.G. YOVOVICH, who has written for national trade publications for more than 20 years

"Our analysts, who have been out in the field meeting with companies, are starting to get an idea of the range of (ERM) behaviors across companies," said Stephen Dreyer, who is managing director of corporate ratings at Standard & Poor's and who oversees the agency's ERM initiatives.

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"We have a ways to go yet before we get anything near a valid sample to use for our subsequent steps, but we are starting to talk with the analysts about what they have been seeing," he said.

For example, early indications suggest that the importance of S&P's ERM evaluations could vary significantly by industry sector, which could have implications for how S&P ends up applying its ERM evaluations.

"We will look at the range of maturity and sophistication of companies across a particular sector, and if we do not see much differentiation there, then we will be less likely to place a lot of weight on it (as a ratings factor)," said Dreyer. "Conversely, if we see some real differences in (ERM) maturity and in behavior of companies that we think might provide competitive advantages or pose disadvantages, then it is much more likely that it will have an impact on credit ratings."

A REVOLUTION?

The early meetings also are providing evidence that companies have a high level of interest in ERM.

"From what I can tell, most companies do not have chief risk officers, and they do not necessarily have a risk committee on the board, but all the companies are thinking about it (ERM) and have structures in place--sometimes informal--to address risk," said Dreyer. "I think that we are witnessing a revolution in this concept."

In this first wave of ERM discussions, the S&P analysts are tending to focus "more about the process than about the risks," said Dreyer. "We want to understand what structures or what organization is in place and try to get a handle on how well that is working."

One common approach that S&P analysts are taking in these first sessions is to ask: "'How did your company respond to fill-in-the-blank,' and then ask about a specific issue that the company has encountered," said Dreyer. "The question might be about how they responded to the credit crunch and to the lack of liquidity and lack of bank loan availability that might have been funding the company's growth. Or it could be about a natural disaster or a disruption to the supply chain."

Other possibilities could include an acquisition or a divestiture, an expansion into a new business line, closing down a market, or moving into a new country or region.

"We are not trying to dig up skeletons, but to get some insight into what a company might have learned from these events," said Dreyer. "Our aim is to walk through large, important decisions that the company has made or may be considering."

The ultimate goal, said Dreyer, is to get a sense for their strategic thought process and how much risk and alternative scenarios played in the decision-making.

"Are the decisions made opportunistically, or are they made more thoughtfully--the later being indicative of a risk-oriented culture," Dreyer said.

March 3, 2009

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