Beaumont's Bonus Column: Standard and Not-So-Poor--S&P Takes the Plunge
I would like to officially announce that it is about time they announced this. A year ago, I sat through a presentation by an S&P executive in which he explained how they had been weighing risk for financial institutions and that "soon" they would be rolling this practice out to the nonfinancial world (a world they call "corporate").
Shortly thereafter, articles to this effect ran in a couple of risk magazines, and a hullabaloo ensued. S&P did not like anyone announcing what it was going to do and felt the need to deny that it was going to do anything at all concerning ERM and "corporate."
But now that is all behind us as they have, finally and on their own terms, decided to publicly announce the role that ERM will play in ratings. So instead of dwelling over past disagreements, it is perhaps better to engage in some wild speculation over what this will mean.
Overall, I think that it will ensure that the role of risk managers will become "standard" but certainly not "poor." Looking at the effect of various regulations on the auditing profession, namely Sarbanes-Oxley, one can readily see that what gets measured gets managed.
Prior to SOX, control risks existed. I am certain that many were trying desperately to get senior management to do a better job of assessing their controls-based risks but without success. But once SOX rolled around, management suddenly came around and decided that it had to monitor its controls because ... well, because it had to.
A credit rating is a bit different. No regulatory authority is placing a gun to the head of businesses as it is with SOX. However, I imagine that in time the effect will be the same. What will likely happen is that many will ignore this development and plod merrily along. Then, a few companies teetering on the edge between two ratings will get pulled over the brink by their lack of ERM programs. The press will notice and soon other CFOs will notice as well.
No CFO drifts off to sleep at night by imagining idyllic scenes wherein he is describing a credit downgrade to an endless procession of analysts. In fact, I quite imagine that this type of scene causes them many restless nights. And so the grim specter of a downgrade will cause many to suddenly convert to ERM. They will put some budget aside to create such a program and put the right people in place ... or try to.
A month or so later, they will be having heated discussions with their corporate recruiters saying things like: "What do you mean an ERM specialist costs that much?!" and "Why in blazes can't you find someone who has actually implemented ERM?"
They will be making such utterances because there are not that many experienced ERM professionals roaming about. The lack of interest in implementing ERM has led many to conclude that it is not worth it. Of those who have attempted to get ERM going at their own company, very few were met with anything short of derision or perhaps mild and quickly fading interest. So they never actually implemented ERM beyond the concept phase.
The result is a very small pool of ERM talent in the nonfinancial "corporate" sector. And a small pool of talent in a world of sharply increasing demand can only mean one thing.
To those that have been putting off their education on ERM, you still have a bit of time. But you had better get up to speed quickly. One year from now, S&P will have completed a full cycle of ratings, and the rush will be on. And, boy, is it going to be fun!
is the risk management columnist for Risk & Insurance®. He manages risk for a leading financial company. This column was a complimentary excerpt from one of his latest "Risk Management Reports" newsletters, which he edits and publishes. For more information on how to subscribe to the full version of the newsletter, please visit www.riskreports.com/
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March 7, 2008
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