ERM Analysis for Credit Ratings of Nonfinancial Companies: Stepping Up to New Criteria

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On November 15, 2007, the rating giant Standard & Poor’s (S&P)
formally unveiled a proposal to introduce in-depth ERM criteria
into their ratings of nonfinancial companies, making many of them
draw a sharp breath. Well, ERM has been around for many years,
so what’s special about the S&P’s announcement? Yes, it’s true
that ERM isn’t anything new in the corporate world; nonetheless,
the S&P’s announcement came as a wake-up call for many
enterprises, as it clearly implies that an enterprise with no ERM
framework or with discrepancies in its risk management capabilities
could find its credit ratings placed lower. As put by a senior
risk manager of a large enterprise, “This will put a spotlight on
firms that don’t have an ERM framework in place; and likely to
spur them on to change that.” Patterned on the approach already
used for sectors like finance, insurance and energy since 2004,
S&P’s announcement proposes to employ 100 or so different
factors to evaluate the quality of ERM operations in nonfinancial
institutions and then include that assessment in their final score.
Under the expanded framework, they will analyze a company’s
policies, infrastructure and methodologies (PIM) - focusing on a
firm’s overall risk-control practices and benchmarking the quality
of risk management.

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