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Does enterprise risk management influence market value – A long-term perspective

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Abstract

This article explores if and how Enterprise Risk Management (ERM) influences market values of large US non-financial companies in the period from 2003 to 2012. This is the first empirical study that brings evidence on the effect of ERM on the value of non-financial companies and that explores not only the market reaction to the ERM announcement, but also the investors’ perception of long-term ERM usage. Our research shows evidence that ERM has a positive effect on the market value for a short period of time following the announcement of ERM implementation. After 2.67 years, the market premium for ERM companies fades away, so a company does not have a higher market value just because it has ERM. Our results indicate that ERM does not contribute to a company’s market value in the long term.

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Acknowledgements

The authors would like to thank the University of Zagreb for its financial support granted to the research project ‘Impact of Enterprise Risk Management on the company’s financial performance in a period of global financial crisis’. They are highly indebted to USC Marshall School of Business, University of Southern California, especially to Professor Duke Bristow, for the help provided in using the databases needed for the research. Thanks are extended to delegates of the 13th INFINITI Conference in Ljubljana for valuable suggestions. They appreciate all the help that they received from the people listed above, and the authors accept responsibility for any errors remaining in the article.

Author information

Authors and Affiliations

  1. Faculty of Economics and Business, University of Zagreb, J.F.Kennedy 6 sq, Zagreb, 10000, Croatia

    Danijela Miloš Sprčić & Marina Mešin Žagar

  2. USC Marshall School of Business, University of Southern California, 3670 Trousdale Pkwy, Los Angeles, 90089, CA, USA

    Marina Mešin Žagar

  3. Faculty of Business, Sohar University, P.O. Box: 44, P. Code 311, Sohar, Sultanate of Oman

    Željko Šević

  4. Faculty of Economics, University of Ljubljana, Kardeljeva ploščad 17, Ljubljana, 1000, Slovenia

    Mojca Marc

Authors
  1. Danijela Miloš Sprčić
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  2. Marina Mešin Žagar
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  3. Željko Šević
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  4. Mojca Marc
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Corresponding author

Correspondence to Mojca Marc.

Appendices

Appendix A

Table A1

Table A1 Sample structure by ERM implementation year
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Table A2

Table A2 Pairwise correlations between variables employed in regression models
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Table A3

Table A3 Robustness check estimations
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Appendix B

Examples of ERM and non-ERM companies

ERM company: WASTE MANAGEMENT INC (WM)

When searching in the CapIQ for key terms in STAPLES’ filings matches for the term ‘ERM’ or ‘enterprise risk management’ were available for the filing period 2010–2013.

(Form: Proxy Statement, Schedule 14A; Filing date: 29 March 2010, p. 5)

‘The Company also initiated an enterprise risk management process several years ago, which is coordinated by the Company’s Internal Audit department, under the supervision of the Company’s Chief Financial Officer. This process initially involved the identification of the Company’s programs and processes related to risk management, and the individuals responsible for them. Included was a self-assessment survey completed by senior personnel requesting information regarding perceived risks to the Company, with follow-up interviews with members of senior management to review any gaps between their and their direct reports’ responses. The information gathered was tailored to coordinate with the Company’s strategic planning process such that the risks could be categorized in a manner that identified the specific Company strategies that may be jeopardized and plans could be developed to address the risks to those strategies. The Company then conducted an open-ended survey aligned with the objectives of the Company’s strategic goals with several individuals with broad risk management and/or risk oversight responsibilities. Included in the survey was the identification of the top concerns, assessment of their risk impact and probability, and identification of the responsible risk owner. Finally, a condensed survey of top risks was completed by approximately 200 senior personnel to validate the risks and the risk rankings.

The results of these efforts were reported to the Board of Directors, which is responsible for the design of the risk management process. Since its implementation, regular updates are given to the Board of Directors on all Company risks. In addition, the Audit Committee is responsible for ensuring that an effective risk assessment process is in place, and quarterly reports are made to the Audit Committee on all financial and compliance risks in accordance with New York Stock Exchange requirements’.

We searched Waste Management’s fillings before 2010, and found no such wording as the before mentioned, that is, no evidence of ERM although the 2010 filing state ‘The Company also initiated an enterprise risk management process several years ago’. Therefore, we put 2010 as the first ERM year for WASTE MANAGEMENT INC.

Non-ERM company: LSI CORP (LSI)

Comment: when searching the CapIQ database in non-ERM companies’ fillings there were no hits on the key words: enterprise risk management, ERM, strategic risk management, integrated risk management, Chief Risk Officer, risk committee and so on; the only hits were when searching ‘risk management’. It can be seen from the fillings’ clip that different corporate risks are managed ‘in silos’, without considering and analyzing their aggregate impact on the company’s goals. There is a lack of communication and cooperation between managers responsible for different risk categories, what makes the integration of risks hard to achieve.

When searching in the CapIQ for key terms in LSI CORP’s filings no matches for the term ‘ERM’ or ‘enterprise risk management’ were available. No matches were also found for the wording ‘risk oversight’. However, CapIQ showed some results for the term ‘risk management in the period 2003–2012’, but the information in those filings shows a traditional risk management approach.

(Form: Proxy Statement, Schedule 14A; Filing date: Mar-30-2012, p. 9)

‘Risk management’

‘Our management is responsible for identifying the risks we face in our business and determining what steps, if any, we should take to mitigate those risks. Our Audit Committee discusses with management the process by which management evaluates these risks. It also discusses with management the financial risks we face. Twice a year, management presents to the full Board a list of the main risks faced by the business and management’s efforts and plans to mitigate the potential impact of those risks. Several times a year, management also provides a detailed analysis of one specific risk and management’s actions to mitigate the potential impact of that risk’.

On the basis of the information in the available filings and the description of the risk management processes, we decided that LSI CORP follows a traditional risk management approach.

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Miloš Sprčić, D., Mešin Žagar, M., Šević, Ž. et al. Does enterprise risk management influence market value – A long-term perspective. Risk Manag 18, 65–88 (2016). https://doi.org/10.1057/rm.2016.3

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