May 25 2012
Trying to minimise damage from unforeseen events is nothing new to businesses, but a first-of-a-kind risk-management study suggests companies still have lessons to learn.
In the first three months of the year, 68 companies trading on the Standard & Poor’s 500 index reported earnings that were more than 5% below analyst expectations based on company guidance, according to the study, released Thursday by Connecticut consulting firm ValueBridge Advisors. Risks inherent to a company’s business model were responsible for almost half (49%) of the earnings surprises.
“These significant earnings gaps … beg for action,” said Brian Barnier, principal analyst at ValueBridge. “This action must be different from what companies are doing today.”
Being able to link cause and effect can help businesses better manage performance-driven risks and prevent earnings surprises that disappoint investors, Barnier said. Knowing why earnings fall short also makes it easier to seize growth opportunities.
The study also found that:
About 18% of the earnings surprises were primarily weather related. In the study, weather is considered a strategic risk, although a company whose operations were damaged in a local flood might classify it as an operational risk, Barnier said.
About 33% of the earnings surprises were primarily caused by operational risks, such as equipment breakdown or fraud. About 3% of the operational risks were information technology related.
About 11% of the earnings surprises were one-time events, such as acquisitions and legal costs.
Market risks, such as hedging errors, accounted for 2.5% of the earnings surprises.
Credit risks, such as customers failing to repay debts or events related to bank loans, made up 3% of the earnings surprises.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.