This issue is a reissuance of a prior issue of The Bulletin by the same title. The prior issue was based on Standard & Poor’s (S&P) November 2007 Request for Comment: Enterprise Risk Management Analysis for Credit Ratings of Nonfinancial Companies (RFC). After receiving comments from over 60 respondents, S&P released in May 2008 Enterprise Risk Management: Standard & Poor’s to Apply Enterprise Risk Analysis to Corporate Ratings. This reissued edition of The Bulletin has been updated to reflect the program outlined in the May 2008 release.
S&P continues its initiative to assess ERM quality of all companies it reviews. However, the agency will not move forward as aggressively as it previously proposed. The May 2008 release indicated that the agency decided to emphasize the two components (of its ERM framework) which are the most broadly comparable and critical of the four areas included in the original November 2007 proposal and RFC – risk management culture and strategic risk management. Beginning in the third quarter of 2008, S&P will incorporate these two components into its discussions with companies. The approach will primarily be one of information gathering for purposes of developing benchmarks. Scoring these areas is unlikely to begin until sometime in 2009. Incorporation of the risk controls and emerging risk preparation components is being deferred with some specific exceptions.
S&P plans to eventually score companies to benchmark its opinions on ERM quality as one proxy for its assessment of management. The firm’s purpose is to use the deterioration or improvement over time in a company’s ERM quality to gauge rating and outlook changes before the consequences of extreme adverse events manifest themselves in published financial reports. S&P expects that the value of ERM analysis “will be incremental in most cases, negligible in a few, and eye opening in some others.” In essence, S&P brings a creditor’s bias to evaluating a company’s ERM capabilities in a forward-looking manner, as evidenced by its comment that “a firm’s future ability to meet financial obligations in full and on time is more likely to be enhanced by strong ERM or diminished by weak or nonexistent ERM.” The message is that the rating agency appears to be tying its historical sensitivity to significant and volatile unexpected losses to the rated entity’s ability to understand such volatility and prudently manage these risks through the application of ERM.
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