Nearly two-thirds of global investors will apply a penalty towards a potential investment target if they consider risk management to be insufficient, while almost half have de-invested for this reason, according to a new survey released today by global audit and business advisory firm Ernst & Young.

The survey, based on interviews with over 130 major global investors representing organisations which manage funds running into trillions of dollars, found investors are demanding that companies be more transparent regarding their approach to risk management. 82% of investors conceded that they are willing to pay a premium if they see evidence of good risk management, but many admit that they are currently making decisions based on incomplete risk information.

Jonathan Blackmore, partner at Ernst & Young’s Business Risk and Advisory Services, said although the research was not conducted in South Africa, the findings of the study are consistent with our experience and relevant to South Africa.

“The overwhelming response from investors is that they want to engage with companies on the subject of risk, and that they will avoid those unwilling to do so,” says Blackmore. “We are seeing a shift in attitude by many in the business community, which has resulted in a growing appreciation of risk and opportunity as two sides of the same coin.”

The Ernst & Young survey identifies the key principles that underpin good risk management as effective systems and controls, transparency, communication, accountability and ownership of risk issues at a senior level within the company. Nearly half of investors want to see CEOs and the wider board taking ownership of risk management, compared to just 16% who consider it the responsibility of a specialised risk function, and 15% who believe the CFO is ultimately responsible. Significantly, investors also pointed to the need for risk to be understood right across the organisation.

“Risk management has become part of the essential fabric of the corporate governance structure and company leaders are now more personally accountable if things go wrong,” Blackmore adds.

“They must be able to demonstrate that they are making well founded investment, business and strategic decisions, paying attention not just to financial performance, but also to risk management performance. They also need a clear communication strategy to ensure they are giving investors the information they want in the most effective way. The message from investors is more information, more dialogue and more face-to-face contact.”

Key findings from the survey include: