A Conceptual Framework for Enterprise Risk Management Performance Measure through Economic Value Added

By Shad, Muhammad Kashif; Lai, Fong-Woon | Global Business and Management Research: An International Journal, April 2015 | Go to article overview

A Conceptual Framework for Enterprise Risk Management Performance Measure through Economic Value Added


Shad, Muhammad Kashif, Lai, Fong-Woon, Global Business and Management Research: An International Journal


Abstract

Enterprise Risk Management (ERM) is an essential technique used to manage a myriad of risks in a holistic manner. The purpose of this study is to propose a conceptual framework for investigating the impact of ERM on the firm's value through Economic Value Added (EVA) performance measure. The research design for our study incorporates conclusive research. It covers the descriptive and cross sectional design. It focuses specifically on the objective performance measures of ERM through EVA measure approach. The study adopts an ERM implementation framework comprising three dimensions namely, structure, governance, and process which will be translated into fourteen implementation elements. The study estimates the positive effect of ERM using EVA as a measuring proxy for firm value. EVA computes company profit by incorporating cost of capital.

Keywords: Enterprise Risk Management, Firm value, Economic Value Added; EVA

1. Introduction

Nowadays risk management becomes a necessity instead of an option for an enterprises. The executives and Board of Directors of most of the companies have comprehended the importance of risk management and they have given the primary importance to implement it in their corporations. Risk management is the process of managing and thinking systematically about the risks faced by the organization. Traditionally, organizations manage risks using the silo approach (Beasley et al., 2005). According to the executives of many organizations, the 'silo" approach is not an effective way (Shenkir and Walker, 2005) to manage enterprise level risks. Therefore, researchers proposed a new methodology named Enterprise Risk Management (ERM) to manage the portfolio of risks (Nocco and Stulz, 2006; Lai and Azizan, 2010) and to improve the shareholders values.

1.1 ERM Definition

The Committee Of Sponsoring Organization Of The Treadway Commission (COSO), the leading expert in the field of ERM defined ERM as: "a process, effected by an entity's board of directors, management and other personnel, applied in a 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, and to provide reasonable assurance regarding the achievement of entity objectives" (COSO, 2004). Through ERM, all risks can be well understood and catogrized according to their impact and be managed effectively. All information obtained through managing the enterpise risks can help corporate executives to make correct and accurate decisions with regards to investments, capital utilization, performance evaluation, reward systems, employee training and evaluation.

1.2 Global ERM Standards

ERM frameworks and standards provide different approaches to identifying, analysing, responding, and monitoring internal and external threats to an organisation. Various regulatory frameworks globally contribute to the development and improvement of ERM. This includes International Organization for Standardization ISO 31000, COSO 2004, Federation of European Risk Management Associations (FERMA), the Sarbanes-Oxley act (SOX) in the US. Elimination of risk can be difficult. Nonetheless, managing risk is crucial and that can be made possible through frameworks mentioned. For example, ISO released set of principles and generic guidelines in 2009 on risk management. The designed principles can be applied to a public, private large or small organization to effectively manage their risks. According to Kevin Knight a Risk Management standards expert the principles and guidelines of ISO 31000 are concise, clear and flexible which assist corporation to manage their risk.

Whilst previously released standards like Australia-Newzealand standard 4360 (AS/NZS 4360) mostly focused on risk management process, ISO 31000 through its principles and guidelines focuses on the whole risk management system like its structure, implementation, maintainance and its improvement. …

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