Determinants and Value of Enterprise Risk Management: Empirical Evidence From the Literature

• DOI: http://doi.org/10.1111/rmir.12028
• Date: 01 March 2015
• Published date: 01 March 2015
• Author: Michael Martin,Nadine Gatzert

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2015, Vol.18, No. 1, 29-53

DOI: 10.1111/rmir.12028

DETERMINANTS AND VALUE OF ENTERPRISE RISK

MANAGEMENT:EMPIRICAL EVIDENCE FROM

THE LITERATURE

Nadine Gatzert

Michael Martin

ABSTRACT

The development of an enterprise risk management (ERM) program enables

companies to manage corporate risks in a holistic manner as opposed to the

silo-based perspective in traditional risk management frameworks. One main

question in this regard is what factors drive the implementation of an ERM

system in companies and whether ERM programs can actually create value

once implemented. This article addresses these questions by conducting a com-

parative assessment of empirical evidence from the literature regarding the

determinants of ERM and its value once implemented. In doing so we are able

to illustrate differences in model specifications and the underlying data. Our

literature study shows that particularly the company size and the level of in-

stitutional ownership are significantly positively related to the implementation

of ERM in most empirical studies and, furthermore, that ERM generally has a

(significant) positive impact on corporate value and performance (to a differ-

ent extent and depending on the focus of the studies). However, geographic

and/or industrial restrictions regarding the underlying data sets partly limit

the generalization of the empirical results.

INTRODUCTION

In recent years, enterprise risk management (ERM) has become increasingly relevant for

managing corporate risk. In contrast to traditional silo-based risk management, ERM

considers the company’s entire risk portfolio in an integrated and holistic manner. It

further constitutes a part of the overall business strategy and is intended to contribute to

protecting and enhancing shareholder value (see Meulbroek,2002; Hoyt and Liebenberg,

2011). The need and demand for ERM as a holistic and company-wide risk management

framework is a result of several changing internal and external factors in the corporate

The authors are at the Department of Insurance Economics and Risk Management,

Friedrich-Alexander University Erlangen-N¨

urnberg (FAU); phone: +49 (911) 5302 884; e-mail:

nadine.gatzert@fau.de, michael.martin@fau.de. The authors would like to thank Mary Weiss,

the editor of Risk Management and Insurance Review, and two anonymous referees for valuable

comments and suggestions on an earlier version of the paper. Financial support by the German

Research Foundation (DFG) is gratefully acknowledged.

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30 RISK MANAGEMENT AND INSURANCE REVIEW

environment, which involve a broader risk scope, a higher risk complexity, and in-

creasing interactions and dependencies between risk sources. Relevant external factors

include, for example, globalization, industry consolidation, and deregulation as well as

regulatory pressure (see, e.g., Pagach and Warr,2011). Furthermore, rating agencies have

started to incorporate companies’ internal (enterprise) risk management systems in their

rating processes (see Hoyt and Liebenberg, 2011).1In general, the internal factors can be

reduced to the objective of risk management, which is to enhance the firm’s shareholder

value (see Meulbroek, 2002). ERM is also driven by methodological and technological

progress including advanced methods of risk quantification and information technolo-

gies (see Jablonowski, 2001). Overall, an ERM system thus enables the board and senior

management to better monitor the company’s risk portfolio as a whole (see Beasley et al.,

2005).

The benefits and disadvantages of implementing ERM are comprehensively discussed

in the literature. The consideration of the company’s entire risk portfolio in a holistic

process is said to contribute to reduced earnings volatility, stock price volatility, and

external capital costs as well as a higher capital efficiency, where the consideration of

risk dependencies further allows companies to exploit synergy effects in the risk man-

agement process (see Liebenberg and Hoyt, 2003). However,the necessary financial and

human resources, as well as the required IT systems, constitute an obstacle for ERM (see

McShane et al., 2011). In addition, establishing a strong risk culture and the development

of adequate (compensation) incentive systems are needed for the successful implemen-

tation of ERM (see Rochette, 2009). Furthermore, as part of the global corporate strategy,

ERM shifts risk management to a more offensive function that also accounts for emerg-

ing and strategic opportunities and involves a better decision process with respect to

operational and strategic decisions in order to eventually increase shareholder value (see

Liebenberg and Hoyt, 2003; Rochette, 2009). Toensure the appropriate coordination and

functionality of the ERM system, a senior executive such as a chief risk officer (CRO) or

a committee of experts should therefore direct the risk management process. Despite the

growing importance of holistic risk management systems, however, ERM has only been

adopted by some companies.2Thus, questions arise as to why companies implement

an ERM framework while others do not, to what extent and in which way ERM system

actually impacts a firm’s performance, and whether it actually contributes to increasing

shareholder value, for instance.

In the literature, ERM frameworks and their implementation are widely discussed. For

instance, several authors descriptively study the stage of the ERM implementation based

on surveys, questionnaires, or interviews (see, e.g., Thiessen et al., 2001; Kleffner et al.,

2003; Beasley et al., 2009, 2010; Daud et al., 2010; Altuntas et al., 2011; Daud et al.,

2011; Yazid et al., 2011). Furthermore, there are quantitative studies that examine the

1Since 2008, Standard & Poor’s accounts for the level of ERM implementation in their rating

process of nonfinancial companies, at the same time also considering the risk management

culture, strategic risk management, and ERM resources (see Dreyer and Ingram, 2008); for

insurers, this has been so since 2005, for instance.

2According to a worldwide survey by Deloitte (2011),only 52 percent of companies in the financial

services industry had an ERM or a comparable system in 2010. By comparison with 2008, this

constitutes an increase of 16 percent.