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IMPACT OF THE RISK ASSESSMENT TOOLS ON THE PERFORMANCE OF THE COMPANIES

The quality of risk management depends very much on the tools, analytical models, and resources available at the enterprise. This area was included in the research to find out how different risk and value measures and metrics are quantified, modeled, and used in the decision-making process during the creation and updating of the strategic planning and also the shaping of the overall ERM process. This study was based on approximately 100 companies in Poland operating in different businesses in several geographical markets, including international and global markets, and of different sizes. The criteria to diagnose the quality of risk management were:

• Type of methods used for the company valuation

• Application of discounted cash flow (DCF) analysis for project appraisal

• Utilization of Monte Carlo simulation

• Evaluation of investment projects supported with the real option method

• Assessment of the enterprise's default risk in both the short term and the long term

• Comparison of the dynamics in company value and its risk

• Estimation of the enterprise's losses due to risk realization

• Analysis study on the adequacy of the company's capital against the estimated risk

• Credit, market, and operational risk analysis

• Monitoring of the risk profile from different specific perspectives

• CRO functions and responsibilities

• Organizational and human resources dedicated to ERM

• Stage of the development of ERM within the enterprise

• Types of financial instruments and the scope of their applications to ERM

Based on these criteria, we evaluated the frequency and the quality of the practice of all issues related to the criteria. The evaluation led to our rating of the risk management quality in the enterprises. The rating was designed to be an integrated measure to differentiate the quality of risk management among the enterprises. This rating was related to the financial results to reveal the impact of ERM on company value. Proving a positive relationship between the rating of risk management and the enterprise value would provide a very attractive measure for the partial assessment of the risk management quality and the maturity of ERM.

Relationship between Net Income/Total Balance Ratio and Rating of ERM (Rating >9)

Exhibit 33.9 Relationship between Net Income/Total Balance Ratio and Rating of ERM (Rating >9)

Source: Author research, Z. Krysiak.

The relationship between the financial restilts and the rating of the risk management quality is displayed in Exhibit 33.9. The financial restilts are reflected by the ratio of net income to total balance. The regression in Exhibit 33.9 relates to the enterprises with high ratings equal to or over 9. We can draw the conclusion that high ratings showing good quality of risk management have a positive impact on the financial results. From the statistical point of view this correlation is not very strong, but as a practical matter it can be interpreted as positive. The improvement in the quality of risk management in the future can be observed in an increasing value of R2. The high deviations of the financial results for the enterprises with the same ratings mean that the tools, models, instruments, and other technical resources in the process of ERM are applied in various companies with different final effects.

In contrast, Exhibit 33.10 shows no relationship between financial results and the rating of risk management quality for the enterprises with ratings below 9. Additionally, Exhibit 33.10 shows that the deviations of the financial results for the

Relationship between Net Income/Total Balance Ratio and Rating of ERM (Rating <8)

Exhibit 33.10 Relationship between Net Income/Total Balance Ratio and Rating of ERM (Rating <8)

Source: Author research, Z. Krysiak.

Frequency Distribution of ERM Ratings for High Ratings >9

Exhibit 33.11 Frequency Distribution of ERM Ratings for High Ratings >9

Source: Author research, Z. Krysiak.

same ratings are very high, which indicates that low ratings reveal a low quality of risk management.

In Exhibit 33.11 we show the frequency distribution of ERM ratings equal to or over 9. Exhibit 33.11 also demonstrates that the enterprises are in different stages of ERM implementation. The progress in the implementation of ERM tools for the companies with high ratings is quite evenly spread out. There are about 21 percent of the companies in each group with ratings of 9, 11.25, and 13.5. The rating of 15.75 was assigned to 26 percent of the studied companies, and 11 percent received ratings over 15.75.

The study of the more detailed financial reports for the companies with the high ratings, which was performed for the five years preceding the case study, indicates that the financial results of different types (i.e., from profit and loss, balance sheet, and cash flow statements) reveal increasing trends and low volatility over time. The enterprises with high ratings show consistency between the goals stated in the strategy and the execution of the strategy. The companies operating in international markets, and those with foreign shareholders, usually achieved high ratings. Based on the outcomes shown in Exhibits 33.9 and 33.10, we can draw the very rough conclusion that the criteria used for the evaluation of the quality of risk management in this case study are useful to obtain a good diagnosis.

 
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