The Valuation Implications of Enterprise Risk Management Maturity

Abstract

Enterprise Risk Management (ERM) is the discipline by which enterprises monitor, analyze, and control risks from across the enterprise, with the goal of identifying underlying correlations and thus optimizing the risk‐taking behavior in a portfolio context. This study analyzes the valuation implications of ERM Maturity. We use data from the industry leading Risk and Insurance Management Society Risk Maturity Model over the period from 2006 to 2011, which scores firms on a five‐point maturity scale. Our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value, as measured by Tobin's Q. We find a statistically significant positive relation to the magnitude of 25 percent. Upon decomposition of the maturity score, we find that the most important aspects of ERM from a valuation perspective relate to the level of top–down executive engagement and the resultant cascade of ERM culture throughout the firm. Firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and correlations across the entire enterprise and as a consequence enhanced value when undertaking the ERM maturity journey ceteris paribus.

Could Enterprise Risk Management (ERM) Create, Protect and Enhance Shareholders’ Wealth Among Malaysian Listed Issuers

“…Nevertheless, the implementation of ERM within an organization involves a combination of both advising and control functions. Evidently, overall results supported the hypothesized relationships and further substantiated recent studies on the significance of ERM in enhancing shareholders' wealth [25,27,28,[31][32][33]. Specifically, the following ERM attributes reported significant positive impacts on shareholder's wealth-objective setting, event identification, risk response, control activities, information and communication and monitoring.…”

“…It is possible that, over the years, ERM implementation has reached maturity, as recent studies have started to reveal more consistent sets of results on the impact of ERM on organizations. Study [20] suggested that firms demonstrated progressively higher value as the ERM matured. Further, study [21] suggested that the use of a dedicated risk manager is capable of improving the firm's operating performance and emphasized that the existence of a direct reporting line from the risk manager to the board or CEO could lead to superior firm value.…”

“…At the later stage, the focus inevitably shifts to the implementation of the ERM. Studies have revealed that mature firms demonstrate superior ERM implementation then less mature companies [27,31,32]. Finally, firms in different industries may be subject to different types and frequencies of risk; the varying level of risk thus served as one of the control variables.…”

“…As the ERM is mandated for all listed companies in Malaysia, for the purpose of developing a comprehensive panoply of ERM tools, large firms may utilize greater financial resources than a small firm [27,[31][32][33]. Total revenue was used as proxy for firm size.…”

Risk Management Standards in Global Markets

“…According to this view, risk management is strictly connected to both strategy setting and operations management and must be continuously carried out at all organizational levels [3], so that should create a risk management culture throughout the firm [4].…”