Is enterprise risk management a value added activity?

Abstract

Enterprise risk management (ERM) programs are advocated as the solution for the failures and\nweaknesses of the traditional silo-based risk management in creating and protecting stakeholders’\nvalue. ERM encompasses activities and strategies which enable the company to systematically\nidentify, measure, reduce or exploit, as well as to control and monitor the exposure to various\ntypes of corporate risks – strategic, fi nancial, operational, reporting as well as compliance risks.\nBy considering the interactive effects of different risk events, ERM offers a balance between\nthe dual nature of risk – ensuring effective protection from threats and seizing the opportunities.\nThis paper explores the association between ERM and a set of fundamental value determinants\nof S&P 500 non-fi nancial companies over the period from 2003 to 2012. Contrary to arguments\nfound in the existing ERM literature, ERM companies did not experience a positive effect on most\nof the value drivers. We fi nd that ERM is associated with lower expected growth rates within one\nto two years after the ERM adoption, indicating that ERM could even have a negative effect on\nthe company’s fundamental value. On the other hand, the study showed that ERM is associated\nwith higher free cash fl ows after six years of its use. Our research thus found indicative evidence\nthat ERM produces some positive effects over a longer term, as well as some negative immediate\neffects, which could be explained with the increased risk aversion of ERM companies. However,\nsince the tested models are explorative in nature, more theoretical and empirical research is needed\nto establish how ERM really works within a company.

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