TITLE:
A Study on Enterprise Risk Management and Business Performance
AUTHORS:
Linshan Li
KEYWORDS:
Enterprise Risk Management, Risk Committee, Financial Performance
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.7 No.1,
March
30,
2018
ABSTRACT: The value
proposition of enterprise risk management (ERM) has always been called into question
as companies struggle to justify the time and effort an ERM requires. The global
economic crisis in 2008 and 2009 provides an excellent opportunity to examine the
effects of ERM. In this study, we will analyze the abilities of the 12 sample companies
to preserve and create value in the face of myriad uncertainties. Our analysis mainly
focuses on financial indicators which were collected from annual reports and online disclosures.
While looking into the risk committee
(RC) and audit committee (AC)’s existence, components, and operating guidelines,
we first notice that among the 12 companies, 5 companies have separate Board RCs, 4 exercise ERM oversight
simply through AC, and 3 do
not have any Board ERM oversight at all. In general, our analysis of profitability,
liquidity, and share price shows that
Board oversight of ERM is associated with superior performance. We attempt to explain
the few exceptions found in the study and find that these are associated with general
industry performance and strategies
adopted by the respective companies. Through a qualitative exploration of RC characteristics,
desirable features regarding RC composition, committee meeting frequency pattern, number of
board positions and Board’s
oversight on committee provide some suggestions on what actually makes an RCtick. Closer examination of these
elements revealed plausible connections between the qualitative aspects of the RC
and the performance of the outliers in the quantitative study. Next we explore why
companies organize their ERM in the way they did and then found an association between
ERM oversight by Board and company size and operation structure. We hypothesise
that as a business expands in complexity, a more sophisticated risk management framework
is needed particularly at the highest level of the organization. However this study
itself does not provide enough evidence to arrive at any absolute conclusion that ERM indeed led to a company’s performance. In part, our small
sampling size is insufficient to represent the wider community. Business results
can vary heavily relating to business model complexities, industry and ERM operating effectiveness. Future studies may create more
value if industry benchmarking and longer periods are taken into considerations.