Academic journal article Risk Management and Insurance Review

The Determinants of Enterprise Risk Management: Evidence from the Appointment of Chief Risk Officers

Academic journal article Risk Management and Insurance Review

The Determinants of Enterprise Risk Management: Evidence from the Appointment of Chief Risk Officers

Article excerpt


Enterprise risk management (ERM) has captured the attention of risk management professionals and academics worldwide. Unlike the traditional "silo-based" approach to corporate risk management, ERM enables firms to benefit from an integrated approach to managing risk that shifts the focus of the risk management function from primarily defensive to increasingly offensive and strategic. Despite the heightened interest in ERM, little empirical research has been conducted on the topic. This study provides an initial attempt at identifying the determinants of ERM adoption. We construct a sample of firms that have signaled their use of ERM by appointing a Chief Risk Officer (CRO) who is charged with the responsibility of implementing and managing the ERM program. We use a logistic regression framework to compare these firms to a size- and industry-matched control sample. While our results suggest a general absence of differences in the financial and ownership characteristics of sample and control firms, we find that firms with greater financial leverage are more likely to appoint a CRO. This finding is consistent with the hypothesis that firms appoint CROs to reduce information asymmetry regarding the firm's current and expected risk profile.


Enterprise risk management (ERM) has been the topic of increased media attention in recent years (see Figure 1).1 Many organizations have implemented ERM programs, consulting firms have established specialized ERM units, and universities have developed ERM-related courses and research centers. Unlike traditional risk management, where individual risk categories are separately managed in risk "silos," ERM enables firms to manage a wide array of risks in an integrated, holistic fashion. Proponents argue that ERM benefits firms by decreasing earnings and stock-price volatility, reducing external capital costs, increasing capital efficiency, and creating synergies between different risk management activities (Miccolis and Shah, 2000; Cumming and Hirtle, 2001; Lam, 2001; Meulbroek, 2002). More generally, ERM is said to promote increased risk management awareness that translates into better operational and strategic decision making. Despite the heightened interest in ERM by academics and practitioners and the abundance of survey evidence on the prevalence and characteristics of ERM programs (see, for example, Miccolis and Shah, 2000; Thiessen et al., 2001; CFO Research Services, 2002; Tillinghast-Towers Perrin, 2002), empirical evidence regarding the determinants of these programs is lacking.

A major obstacle to empirical ERM-related research is the difficulty in identifying firms that are indeed engaging in ERM. Firms typically do not disclose whether they are managing risks in an integrated manner. Much of their risk management disclosure and discussion relates to specific risks and, thus, researchers are unable to distinguish whether firms are managing these risks in a disaggregated or aggregated manner. Absent explicit disclosure of ERM implementation, researchers are forced to either rely on survey data or search for a signal of the existence of ERM programs. While survey evidence has been useful in answering many questions regarding ERM, the nature of our inquiry favors the use of publicly available data and, hence, the identification of an ERM signal. One such signal may come from the creation of a specialized managerial position, the Chief Risk Officer (CRO), which is responsible for ERM implementation and coordination.

The objective of this study is to explore the differences between a sample of firms that have announced the appointment of CROs and a closely matched control sample. Because CROs are generally appointed to implement and manage ERM programs, some of the differences observed are likely to be due to the differential value of ERM to the two groups of firms. Moreover, because there may be value to ERM implementation via a CRO as opposed to the use of ERM-related committees, some of the differences may be due to the differential value of the CRO position to the two firm groups. …

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