The stark difference in profitability between companies with advanced risk management practices and those with less mature systems should sound a loud warning to boards and senior executives, according to Aon Risk Solutions (ARS) Australia, a business of Aon plc.

This warning comes on the heels of the release of the 2014 Aon Risk Maturity Index Insight Report, developed by Aon in conjunction with The Wharton School of the University of Pennsylvania, which includes ground-breaking findings about links between board’s oversight of risk, financial performance and the volatility of a company’s share price.

“The evidence is clear: there is a direct positive correlation between advanced risk maturity, an organisation’s understanding of risk management practices, and enhanced financial performance when considering key metrics such as Return on Equity and Return on Assets. This in turn speaks directly to directors’ obligations to maximise shareholder value,” said Marcus Vaughan, Regional Lead, Aon Risk Maturity Index.

As Mr Vaughan went on to explain, the latest Risk Maturity report for the first time also linked greater board oversight of risk management with higher profit – and lower volatility.

“Board oversight, particularly the assignment of risk responsibilities across board roles rather than solely within committees, has a positive effect on the maturity of risk management practices throughout the organisation. This oversight promotes a more consistent understanding of the top risks facing the organisation, greater insight into existing risk management activities and a stronger consensus and communication between the board and the management reporting team regarding risk management strategies.

The research is showing that getting oversight of Risk structured correctly at Board level, is having positive flow on effects for the organisation’s level of risk maturity, subsequently linked to enhanced financial performance.”

The report found that companies with a 5.0 Risk Maturity on the Index, the highest rating, experienced share price volatility 34% lower than those with the lowest Risk Maturity rating of 1.0. A 5.0 rating also resulted in a 42% return on equity performance compared with a negative return of -23% for companies with a 1.0 rating.

“Aon’s Risk Maturity Insight Report also shows that companies with more sophisticated risk-based forecasting and planning in place, exhibit lower levels of volatility in factors such as cash flow, earnings, sales and share prices. In other words, risk management translates into very real benefits for companies and their shareholders.”

The research based on the Risk Maturity Index has also highlighted how advanced risk maturity assists organisational resilience in real life global scenarios such as the Lehman default. Using findings from the Risk Maturity Index and the Bloomberg Scenario (modelling) Function, companies with the highest risk maturity during the Lehman collapse exhibited a stock price performance of -18% compared with -28% percent for those with a 1.0.

Australian organisations are leading the way when it comes to making the effort to understand and manage risk at the appropriate level.

“Looking at global participation in the Aon Risk Maturity Index, Australia is still leading the way on a per capita basis. This reflects an appetite for local organisations to understand their level of Risk Maturity, and establish robust plans to enhance it, often above and beyond what is required from a regulatory point of view.

“We’re also seeing more organisations use the index across various levels organisation including board, the executive and senior management to identify any disconnects that may exist in the execution of risk management”. “Gaining a line of sight on these ‘hot spots’ is empowering organisations to address some of the underlying cultural issues that may be inhibiting the organisation from achieving the risk management agenda endorsed by the board.” said Mr Vaughan

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