Benefits of Formal ERM Implementation and the Role of Risk Awareness

Abstract

Corporate scandals and failures suggest that frameworks, formal processes and standards for risk management are often not enough to ensure that organizations reliably manage their risks to meet their strategic objectives. A company also needs to make sure that these formal risk management processes are known, used, and followed by all employees, which is at the center of a company’s risk culture. As part of risk culture, risk awareness is seen as a unique asset in an ERM system contributing to a firm’s successful performance. This study examines the role of risk awareness, which represents a critical part of risk culture, in the relationship of formal ERM implementation and a company’s performance. Most prior studies on ERM and performance or value use archival data and do not integrate the notion of risk cultural elements. This investigation is based on survey data obtained from 118 risk management leaders in non-financial companies. This study finds a positive association between formal ERM implementation and performance, mediated by the effect of risk awareness. The results suggest that risk awareness is strengthened by formal ERM implementation, and that risk awareness is vital for a firm’s performance advantage by ensuring that formal ERM processes do ultimately work. This research contributes to research on strategic ERM and risk culture by addressing the role of risk awareness in a formal ERM system. Furthermore, this empirical investigation takes a novel approach to measure the level of formal ERM implementation by developing a composite score based on risk management practices and processes.