Table of Contents
2 Literature review
2.1 Enterprise Risk Management (ERM)
2.1.1 Strategic Risk
2.2 Agency Theory and ERM
2.2.1 Organizational Culture and ERM
3 Findings and Conclusions
4 Recommendations and Implementation
Changes in technology, global competition, and a volatile environment have led to organisations becoming increasingly conscious of the necessity for more effective risk management practices such as Enterprise Risk Management (ERM) (Andersen, 2009). Several authors recommend the adoption of ERM by organisations in order to manage risk holistically and to create value. However, even though several organisations have accepted the benefits of ERM and are actively implementing it, there are several companies that are failing to adopt or implement it effectively. Furthermore, organisations like Countrywide Mortgage, which was seen in 2007 as a renowned example of effective ERM implementation in its operation almost become bankrupt in 2008. (Bromiley et al, 2015). Some organisations currently utilising high level Traditional Risk Management (TRM) experience large increases in value with no subsequent increase with the introduction of ERM. This coupled with the considerable financial investment required for a culture change that ERM requires suggests that simply implementing ERM may not address risks strategically. Factors such as organisational culture and the characteristics of individuals involved in implementing ERM are significant factors that can affect its success or failure.
List of figures
Figure 1. Lego’s 4 step approach
Figure 2. Organic-Mechanistic culture model
It has been suggested that organisations can control their risks strategically by concentrating their Enterprise Risk Management (ERM) on strategic risks that are crucial to the survival of the company. The Lego group has been said to be a good example of how organisations can achieve this by utilising ERM and a four step approach (Please see figure 1.) (Fraser, Simkins, & Narvaez, 2014). However, barriers exist to effective implementation of ERM which is the first step in Lego’s risk management strategy.
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Figure 1. Lego’s 4 step approach. Taken from (Fraser et al., 2014)
Changes in technology, global competition, and a volatile environment have led to organisations becoming increasingly conscious of the necessity for more effective risk management practices (Andersen, 2009). It is widely believed that failure to strategically manage risks resulted in the financial crisis of 2008. This resulted in regulators demanding that senior executives in organisations dedicate their efforts towards the adoption of Enterprise Risk Management (ERM) (Ahmad, Ng, & McManus, 2014). Dornberger, Oberlehner, & Zadrazil, (2014) also highlight the shift from Traditional Risk Management (TRM) to Enterprise Risk Management (ERM) as a response to the financial crisis of 2008 with more of a focus on better corporate governance (Dabari & Saidin, 2015).
ERM is said to be a structured method of aligning an organisations strategies, employees, methods of operation, knowledge and technology, with the aim of calculating and controlling uncertainty and risks it faces. (Manab, Kassim, & Hussin, 2010). Effective ERM is said to increase support from stakeholders and increase a firm’s competitive advantage. However previous studies argue that several organisations do not understand the concept and highlight a failure of effective implementation among organisations (Desender, 2007; Cormican, 2014). The adoption of ERM by organisations and governments has also been said to be minimal with some authors believing this is partly due to a lack of clear direction in terms of how to implement it (Beasley, Branson, & Hancock, 2015). Cormican, (2014) also add that there is a lack of research and evidence in this area and a lack of guidance for senior management with regards to how to implement ERM effectively (Cormican, 2014).
Success of ERM is said to also be reliant on an organizational culture, where individuals in the organization share identical values and operate in a similar manner to produce expected outcomes. However implementation of ERM and facilitating a culture change within an organisation involves considerable financial investment (Eckles, Hoyt, & Miller, 2014). Misaligned organisational cultures are said to be one of the barriers preventing effective implementation of ERM in organisations. (Muralidhar, 2010). Dornberger et al., (2014) also argue that despite organisations adopting ERM, the characteristics and motives of the people implementing it are a significant factor affecting its success or failure. ERM is said to be an approach that is influenced by the type of employees within an organisation, including senior management, the board of directors and employees. (COSO, 2004). ERM also requires considerable financial backing and commitment from the board of directors and senior management (Manab and Kassim, 2012). Having individuals in senior management positions who operate in their own self-interests, could be detrimental to implementation of ERM (Jensen & Meckling, 1976). In order for ERM to be effective, organisations also need to have an experienced Chief Risk Officer (CRO) (Dornberger et al., 2014). Dobs, (2008) found that some of the organisations that suffered from the financial crisis of 2008 had no appointed CRO).
2 Literature review
2.1 Enterprise Risk Management (ERM)
Enterprise Risk Management (ERM) was established initially to manage risks in financial institutions and was subsequently used in other, industries and in government. The objectives of ERM are the complete incorporation of all of a company’s risks across all departments to assist in executing the organisations strategy (Schiller & Prpich, 2014). (Nocco, 2006; Bromiley et al, 2015) suggested that companies that employed Enterprise Risk Management (ERM) would enjoy long term benefits over companies that managed risks individually and one at a time. He further went on to say that ERM helps companies create added value by allowing senior managers to evaluate and manage the potential benefits associated with increased risk for the company as a whole. ERM is said to allow companies to have access to required resources needed to operate in line with its business strategy.