Risk Management systems are used by nearly every company nowadays, also because of increasing regulatory requirements like the Sarbanes Oxley Act from 2002 or Solvency II from 2016. These frameworks call for an integrated perspective on firms' risk portfolios. Enterprise Risk Management (ERM) is a risk management system that considers risk on the entity level and is, therefore, an alternative to traditional, silo-based risk management approaches. This literature review compares the results of 25 empirical studies concerning the value-creating potential of ERM and whether companies might benefit from the implementation.
Table of Contents
1 Introduction
2 Methodology
3 Literature Review
3.1 Definition of ERM and differentiation from traditional risk management approaches
3.2 Research streams
3.3 Determinants of ERM implementation
3.4 Enterprise Risk Management and value creation
3.5 Comparison of the results with a prior literature review
4 Conclusion
Research Objectives and Core Themes
This paper aims to investigate the implementation of Enterprise Risk Management (ERM) and its impact on corporate value creation. By conducting a systematic review of 25 empirical studies published between 2011 and 2020, the research examines the determinants that drive firms to adopt ERM systems and evaluates whether these systems yield measurable financial benefits for the implementing organizations.
- The differentiation between traditional silo-based risk management and holistic Enterprise Risk Management.
- Key organizational determinants and characteristics that influence the likelihood of ERM adoption.
- Empirical evidence regarding the relationship between ERM implementation and corporate value/performance metrics.
- A longitudinal comparison of current findings with prior literature to identify evolving research trends.
Excerpt from the Book
3.1 Definition of ERM and differentiation from traditional risk management approaches
There are several frameworks that provide an overview of the key aspects of an Enterprise risk management framework. COSO (2004, p. 2), the Committee of Sponsoring Organizations of the Treadway Commission, for instance, defined the ERM approach as:
“a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”
Thus, ERM can be described as a holistic and company-wide risk management framework, which considers the impact of individual risks on the entire enterprise and hence aims to enable a portfolio view of risk by embedding risk considerations into the core of a company’s strategy (see e.g., COSO, 2017, p. 6). ERM aggregates the risks across the entire firm and aims to uncover interdependencies between risks which enables a more thorough assessment of the firm’s entire portfolio risk and can lead to improved strategic and operative decision-making processes (see Hoyt & Liebenberg, 2011, pp. 795–798; Miccolis & Shah, 2000, p. 4). This can increase shareholder value, because the entire portfolio risk should be less than the sum of the individual risks, if they are not entirely correlated and especially if there are natural hedges (see McShane et al., 2011, pp. 644-645).
Summary of Chapters
1 Introduction: Introduces the relevance of risk management in the context of recent global challenges and outlines the scope of examining 25 empirical papers regarding ERM implementation and value creation.
2 Methodology: Details the systematic search process using the Scopus database to identify relevant empirical literature, including specific keywords and filtration criteria used for the study selection.
3 Literature Review: Provides a comprehensive definition of ERM, categorizes current research streams, and synthesizes empirical evidence on the drivers of implementation and the resulting financial impacts.
3.1 Definition of ERM and differentiation from traditional risk management approaches: Explains the conceptual transition from fragmented "risk-silos" to an integrated, firm-wide approach intended to enhance shareholder value.
3.2 Research streams: Outlines the broader academic discourse surrounding ERM, including frameworks, implementation status, and the interrelation between ERM and corporate strategy.
3.3 Determinants of ERM implementation: Analyzes specific organizational factors, such as firm size, financial leverage, and management structures, that influence the adoption of ERM systems.
3.4 Enterprise Risk Management and value creation: Reviews empirical data from 25 studies to evaluate the relationship between ERM adoption and performance indicators like Tobin's Q, ROE, and ROA.
3.5 Comparison of the results with a prior literature review: Benchmarks the collected findings against earlier literature reviews to highlight commonalities and identify shifts in research patterns over time.
4 Conclusion: Summarizes the study’s findings, acknowledging the generally positive impact of ERM on value while noting the limitations in comparability due to diverse methodologies and industry contexts.
Keywords
Enterprise Risk Management, ERM, Risk Management, Value Creation, Shareholder Value, Firm Performance, Corporate Governance, Determinants, Implementation, Tobin’s Q, Empirical Study, Literature Review, Risk Appetite, Financial Leverage, Firm Size.
Frequently Asked Questions
What is the core subject of this seminar paper?
The paper examines the transition from traditional, siloed risk management to holistic Enterprise Risk Management (ERM) and evaluates its efficacy in creating shareholder value.
What are the primary research themes covered?
The work focuses on two main areas: the organizational determinants that make ERM implementation more likely, and the empirical evidence linking ERM to improved company performance.
What is the main research question?
The primary goal is to determine whether ERM implementation leads to actual value creation for firms by synthesizing results from 25 empirical papers published between 2011 and 2020.
Which methodology was applied in this research?
The author utilized a systematic literature review approach, gathering empirical papers via the Scopus database using specific search queries for "determinants" and "value creation" to ensure a structured analysis.
What is discussed in the main body of the work?
The main body defines ERM, distinguishes it from traditional approaches, categorizes research streams, analyzes implementation determinants (like firm size and managerial structure), and reviews empirical findings on financial performance.
Which keywords best characterize this work?
Key terms include Enterprise Risk Management, Value Creation, Corporate Governance, Empirical Evidence, Tobin’s Q, and Risk Management Implementation.
How does the paper account for mixed results regarding ERM and firm value?
The author notes that while 19 of the 25 studies find a positive relationship, results vary due to different sample sizes, industries, and the use of various metrics like Tobin’s Q or ROA, suggesting that implementation effects are not uniform across all contexts.
Why is the insurance and banking sector a focal point in the literature?
The paper highlights that these industries face higher regulatory pressure and complexity, making them frequent targets for ERM research because they require more mature risk management systems to function effectively.
- Arbeit zitieren
- Reka Müller (Autor:in), 2021, From Traditional Risk Management Approaches to Enterprise Risk Management, München, GRIN Verlag, https://www.grin.com/document/1007524
