Academic journal article Asian Social Science

The Impact of Enterprise Risk Management on Firm Performance: Evidence from Malaysia

Academic journal article Asian Social Science

The Impact of Enterprise Risk Management on Firm Performance: Evidence from Malaysia

Article excerpt

Abstract

This study examined the implementation of Enterprise Risk Management (ERM) on firm performance of Public Listed Companies (PLCs) on main market in Bursa Malaysia based on COSO (2004) ERM Integrated Framework. In addition, this study also investigated the moderating role of Board of Directors' (BODs) monitoring, firm complexity and firm size of the implementation of ERM on firm performance. Questionnaire survey was adopted as the research methodology for this study. Total of 103 questionnaires were successfully collected through mail questionnaire from PLCs. The data was analyzed by using Partial Least Squares and Structural Equation Modeling Tool (Smart-PLS 2.0 M3). Based on the analysis, implementation of ERM was found to have significant influence on firm performance. In addition, monitoring by BODs, firm size and firm complexity were found to significantly influence the relationship between ERM implementation to firm performance. The findings from this study enable organizations to better understand the status of their ERM implementation and assist them in identifying areas of improvement with regards to the processes within each ERM elements. It also contributes to the literature on the importance of good governance within ERM framework in organizations.

Keywords: enterprise risk management, board of directors' monitoring, firm size, firm complexity, firm performance

1. Introduction

In the recent years, a shift of trend has been observed on how the organizations view and manage risks (Lai et al., 2010) as a fundamental concern of any organisation. Instead of the traditional risk management method which is based on the silo approach, organizations now treat risk management from a holistic perspective which commonly known as enterprise risk management (ERM) (Gordon et al., 2009). The instability in the international financial, currency and commodity markets, and uncertainties on the direction of monetary policy in some dominant economies have caused substantial risk facing emerging economies like Malaysia. During the economic and financial crisis attacked in 2007/08, a number of PLCs fell under the PN-status in Bursa. As indicated in Bursa Malaysia, after the revamp of the Malaysian Stock Exchange in August 2009, the ACE Market replaced the MESDAQ Market and the Main and Second Boards unified into Main Market trying to allow more efficient access to capital and investments, however, there are still sixteen companies under PN17 (as of 11 June 2012).

The impact of corporate governance on firm performance has gained a considerable attention by researchers in recent years (Shukeri et al., 2012). The financial scandals in the US economy such as the collapse of Worldcom and Enron have increased the attention of a lot parties in Malaysia. As in Malaysian Code on Corporate Governance (Revised, 2007), several principles and practices of good governance have been identified which has included the duties and responsibilities of BODs in influencing a firm's performance i.e. to review and to adopt strategic plan of the firm and make the firm's internal control system is adequate and practicing integrity.

The management needs to recognize the opportunity to allow the firm to progress further while mitigating the risk which may affect the firm's profit. For companies which are still practicing tradition risk management approach fail as they are not able to sustain the performance due to the complexity and fast changing business environment (Nocco & Stulz, 2006). As a result, the traditional risk management model has been replaced by an enterprise-wide view of risk rapidly, as BODs and top management of the firm have begun to focus on the ERM function (Robinson, 2002). The difference between ERM and traditional ways of managing risks is in how the entity centralizes comprehensive risk management structure and processes at strategic level as an extension of its control system. ERM is a comprehensive and integrated approach that calls for high-level oversight of the firm entire risk portfolio aligned with the strategic objectives of the firm, instead of having many different individual managers to oversee specific risks in isolation (Banham, 2004). …

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