A Study on Enterprise Risk Management and Business Performance

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.