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The findings reveal that companies with high risk quality have low cash flow volatility, a core value driver. Additionally, the study concludes that risk quality is a strategic issue and a key characteristic of a value-creating firm, as well as an essential aspect of effective corporate governance procedures.

“These findings provide evidence for what is intuitively understood by corporate executives but, to-date, has not been demonstrated quantitatively - that improving risk quality is a key driver of sustained shareholder value,” said Dr. Deborah Pretty, principal, Oxford Metrica.

‘Risk Mark’ - a benchmarking system created by commercial and industrial property insurer FM Global for evaluating a firm’s risk quality and relative probability for loss compared with that of thousands of other firms in various industries - provided Oxford Metrica with a robust data source for the research. It is the first time data of this kind has been available for research.

The premise of the study is that a company need not experience a disruption to its business to demonstrate the value of investing in risk quality. Furthermore, it indicates that diligently following property risk improvement procedures is a characteristic of value-creating firms.

“Investment in improving risk quality to minimise the probability and severity of losses is fundamental to good corporate governance,” said Ruud Bosman, executive vice president, FM Global. “To sustain shareholder confidence and value, it is critical to strike the optimal balance between risk and reward by fully understanding the underlying risks to one’s business.

“The ‘Improving Risk Quality to Drive Value’ study should spark a more informed discussion among companies’ boards of directors and its officers regarding the returns shareholders may expect from a firm’s investment in sound risk management,” Bosman added.

In order to evaluate the risk management investment decision in a shareholder value framework, the research first defines what is meant by ‘value’ and identifies core drivers. Second, the metrics of risk and value used in the study are defined, and third, the relationship between risk quality and financial performance is demonstrated and measured. Finally, the study portfolio is analysed in a broader context to establish the generalisability of results.

In the context of the study, risk quality is defined in terms of property risk management. It is driven by the core operational activities of a business, the physical location of those activities and how they are managed and protected.

Click here to download a free executive summary of the study results.