A review of an article by Philip Bromiley, Michael McShane, Anil Nair and Elzotbek Rustambekov on Enterprise Risk Management (ERM).

1. Enterprise Risk Management:
Review, Critique and Research Directions
By Philip Bromiley, Michael McShane, Anil Nair
and Elzotbek Rustambekov
Citation
Bromiley, P., et al, Enterprise Risk Management: Review, Critique and Research
Directions, Long Range Planning (2014), http://dx.doi.org/10.1016/j.lrp.2014.07.005
Article Review

2. Universiti Teknologi Malaysia
International Business School
Student
Kevin Koo Seng Kiat
20th
December 2014

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4. Enterprise risk management (ERM) is mostly
discussed in accounting and finance journals,
but not management journals.
ERM is an important opportunity of research
for management scholars.
Overview

5. What is ERM?

6. Enterprise risk management (ERM) is “the integrated
management of all risks an organization faces, which
inherently requires alignment of risk management
with corporate governance and strategy.”
What is ERM?

8. 1. Overly focused on mathematical models – useless
outside finance and accounting.
2. Discussion of ERM has not factored in recent
developments in field of risk management, strategy
management, organizational change and other
topics.
Problems with Existing Research

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11. Problems with Existing Research
3. Many articles describe “what ERM is” but not
“how to implement ERM”. Fail to describe “how to
get there”.

12. 4. Inability to bring silos together.
5. Impact of corporate culture on ERM
implementation and practices not well discussed.
Problems with Existing Research

13. Definition problems

14. No agreed definition
Some major divisions
1. Independent of Firm's
objectives vs. In terms of Firm's
Performance
2. Source of value creation vs.
problem to be mitigated

15. Historically...
… different functions of a firm
handled different parts of risk,
with their own approach / emphasis.
For example
Finance → currency / interest
Insurance → Natural disasters / liability
Operations → Quality / safety

18. Over time, however...
… the emphasis shifted toward integration of
different types of risks.
● Merging of insurance
and financial risk
approaches.

20. Emerging Consensus on ERM
1. Managing risk of portfolio is more efficient than
managing risk of individual units.
2. ERM includes not only traditional risks, but also
strategic risks e.g. product obsolescence,
competitor actions.
3. Risk is not just a problem. It can be a a source of
value. If the firm can manage the risk, it has
competitive advantage.

21. Empirical findings of ERM Research
1. More leveraged firms tend to use CRO (Chief Risk
Officer), indicating higher risk management efforts.

22. Empirical findings of ERM Research
2. ERM implementation related to presence of CRO.
3. Hiring a CRO may get positive or negative market
reactions, e.g. CRO appointment causes firm value to
rise.
4. ERM and firm's value relationship dependent on
ERM implementation matching firm-specific factors.

23. Empirical findings: Problems
1. Problem of Endogeneity = ERM implementation is
not random.
E.g. High performing firms will implement ERM.
This will cause positive relation finding.
Methodological errors render it difficult to draw
conclusions about ERM effectiveness.

24. Empirical findings: Problems
2. Studies fail to address inter-firm differences in
implementing ERM.
3. Core practitioner concepts are not investigated in
studies, e.g. “risk cultures”, “risk appetite”, “risk
management team structure”.

26. Management Research & ERM

27. Management Research & ERM
1. Management research could lead ERM research
along a different path than research based on
accounting and finance methods, which are based on
“optimal conditions”.
2. ERM measurement through accounting methods
or stock-based performance is inadequate if the
company has objectives beyond accounting / stock
returns. Management researchers could address the
issue of corporate goals and ERM.

28. Management Research & ERM
A Different Path

29. Management Research & ERM
3. Concepts of risk vary greatly across parts of the
organization and across organizations. Management
scholars could use qualitative and survey approaches
to understand how managers conceive risk.
4. Management scholars could research managerial
perceptions of risk to explain managerial behaviour.

30. Management Research & ERM
5. Management scholars could research selection and
promotion of managers; how such processes affect
managers' confidence; and how managers assess risk.
6. Management scholars could also research risk
judgments and preferences of managers as
individuals and as groups.
7. Management scholars could integrate aspects of
managerial time horizon into assessing managerial
risk-taking.

31. Management Research & ERM
The Hawthorne experiments are an example of
successful management research

32. Management Research & ERM
8. Management scholars could study “risk culture”
and “risk appetite”; how firms aggregate smaller
risks in assessing risks.
9. Implementation of ERM is a form of organizational
change, which accounting and financial research
rarely explores. However management research has
often studied change in organizations.

33. Management Research & ERM
10. ERM literature assumes that strategic ERM
decisions occur in the strategic planning process.
However, strategy scholars find that strategic
decisions tend to occur outside of the process.
Management scholars can research this difference
empirically.
11. Management scholars should focus on
effectiveness of ERM measures.

35. Conclusions
1. There is a lack of empirical evidence to prove
effectiveness of ERM as claimed by ERM advocates.
2. ERM is a new domain for management
scholarship.

36. Thank you