Academic journal article Current Politics and Economics of South, Southeastern, and Central Asia

Could Enterprise Risk Management (Erm) Enhance Shareholders' Wealth?: The Lesson from Credit Crunch *

Academic journal article Current Politics and Economics of South, Southeastern, and Central Asia

Could Enterprise Risk Management (Erm) Enhance Shareholders' Wealth?: The Lesson from Credit Crunch *

Article excerpt

1. INTRODUCTION

Risk management is becoming a high priority for large companies especially those operating in various countries. Risk can be considered both at the macro or portfolio level, as well as at the micro or departmental level, and generally the term Enterprise Risk Management (ERM) has become a part of the business operation. As multinational enterprises have recognised the increasing array of risks faced by the organisations and the need to properly manage risk via the ERM, it is no surprise that the demand for risk management professionals has risen dramatically. In fact, it is mandatory for listed companies in the United States of America (USA) to implement the ERM (Siong, 2009). The Committee of the Sponsoring Organisations of the Treadway Commission (COSO) defines the ERM as:

-a process, affected 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"(COSO, 2004a, pg. 4).

A study found that the corporate executive's management had renewed its interest in risk management and developed a new profound interest in internal auditing (Beasley, Clune, and Hermanson, 2005). However, the ERM philosophy is still a work in progress that has yet to gain universal acceptance (Beasley, et al., 2005). The corporate scandals that emerged in the first half of this decade and at the end of 2008 have created more urgency and serious focus in the area of risk management, corporate governance and internal controls. Clearly, the volatility of the various financial markets, not to mention the complexities of business transactions and investment instruments that the competitive global economic have brought into existence, point to the need for a systematic approach to enhance corporate governance and oversight. Thus, the ERM may be one of the alternative management and governance tools that could help to solve the current crisis.

It is also important to note that the ERM philosophy was well accepted by various corporations which proved to serve as one of the elements that helped the organisations achieve their objectives. In spite of this development, research in the area of risk management that involves the enterprise widely is limited (IIARF, 2005; Kimbrough, 2006; Sarens, 2009).

2. PROBLEM STATEMENT

The corporate financial tsunami in 2002 that wiped out most of the highly respected business corporations had an escalating pressure placed on the management team to improve its governance including the ERM. Such corporate financial tsunami had returned to strike for the second time during the late 2008. This time the spillover effect was worse than that in 2002, in which it affected not only the developed countries but also the developing countries. The second round of the financial tsunami was mainly due to the sub prime crisis in the USA that led to a credit crisis, or termed as a credit crunch (ACCA, 2008).

All of the financial tsunami had directly put pressure on almost all corporations to improve their governance in which the ERM was among the critical governance mechanism. Proper implementation of the ERM may reduce the impact of these financial surprises (COSO, 2004b). The lesson from corporate failure provides a new perspective on the new world of the risks faced by organisations. With the increase in the velocity of competition, the undiversified nature of business as well as the increasing dependent on the outsourcing nature of the business world, a disaster in one part of the world may dramatically alter the business landscape of other corporations located in another part of the globe.

The shareholders from all over the world significantly suffered from these multiple financial tsunami. Some of these tsunami were mainly due to external factors while others were due to the greed of the management. …

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