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Companies’ risk management practices can affect financial ratings

02 December 2008

A study of UK investment analysts and managers finds that, 75% of them, on average, would upgrade their rating of a company if it demonstrates strong risk management practices and would downgrade a company’s rating if there was insufficient information about its risk management policies.

Companies’ risk management practices can affect financial ratings
Companies’ risk management practices can affect financial ratings

The findings of the 2008 UK Business Risks & Ratings Study, commissioned by FM Global, one of the world’s largest business property insurers, are based on the responses of 100 buy- and sell-side investment analysts.

The study was conducted to determine how the risk management efforts of publicly traded companies influence the investment community’s analysis of those firms.

The study also revealed that 85% of investment analysts monitor the risk management strategies of the companies they evaluate at least annually and 60% believe that there is a direct correlation between a company's share price and a firm’s track record of dealing with risk management crises.

“Risk management needs to become a board-level issue given that most UK investment analysts monitor corporate risk management strategies and practices,” said Stefano Tranquillo, vice president, UK operations, FM Global. “Companies would be well-advised to ensure their risk management practices protect their operations and prevent loss, rather than trying to pick up the pieces and manage stakeholder concerns, should a damaging event occur.”

In fact, 97% of investment analysts indicate companies should, at least annually, reevaluate their risk management strategies and more than 81% believe that it is “equally important” or “more important” for a company to communicate its risk management efforts relative to providing information about other corporate strategies and initiatives.

“In reviewing the study findings, we also observed that most analysts believe a company that fails to effectively manage its risks will ultimately suffer financially,” added Tranquillo. “In today’s uncertain economy, it is even more prudent for companies to think twice before cutting back in the area of risk management and ensure their stakeholders are confident in their firms’ ability to manage risk.”

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