Businesses with stronger risk management practices than their peers enjoy more stable financial performance over the long-term, including much lower earnings volatility, according to a global research report.
It found that companies with best practice property risk management programs produced earnings that are on average 40 per cent less volatile than companies with less advanced risk management practices.
Furthermore, businesses with strong physical risk management programs also produce earnings that fluctuate an average of 18 per cent, compared with an average earnings volatility of more than 30 per cent among companies with weak physical risk management practices.
“The key takeaway from this study is clear – good risk management practices have the potential to improve earnings stability, which is a key driver of shareholder value,” said Ruud Bosman, vice chair of FM Global, one of the world’s largest commercial property insurers, which commissioned the research.
“The best kind of physical risk management not only stops bad things from happening, but also has positive bottom line benefits,” he said.
The research, which compared the physical risk management practices of 520 large multinational companies with more than US$1 billion ($1.14 billion) in annual revenue over a period of three years, suggests there are negative consequences to cutting back on physical loss prevention resources.
While reductions in expenses are a critical necessity for many enterprises, the report found that such cutbacks may instigate potential earnings volatility to the detriment of shareholders.
“Companies that may be considering cutting back on property risk management resources would be well-advised to consider the potentially negative bottom-line implications of such a move,” said Deborah Pretty, principal at research firm Oxford Metrica, which conducted the research for FM Global.
The findings of the Risk/Earnings Ratio study are supported by FM Global’s own internal quantitative research, which has found that the average risk of property loss for companies with weak physical risk management practices is 20 times greater than for those with strong physical risk management practices.
Furthermore, companies with inferior practices were more than twice as likely to experience a property loss and related business disruption.
News