Enterprise Risk Management for Nonfinancial Companies: From Risk Control and Compliance to Creating Shareholder Value

Abstract

Abstract : In the current environment of global competition, the question of how much, and in what way, the enterprise risk management (ERM) function contributes to the creation of shareholder value will only increase in importance and urgency. Since ERM is a conscious management process, it requires the development of a clear and specific understanding of whether, and how, current and new activities of the ERM function can create shareholder value. Since risk transfer is usually done at a fair price, to create shareholder value a company has to take on the right risks, retain and manage them. To achieve all that, it has to build and apply the following key risk management capabilities: the development and update of a risk-tested strategy, strategic flexibility, operational flexibility, financial flexibility, and full risk incorporation in performance management and new investments selection. We argue that the ongoing optimal application of those capabilities—so that over time they create net earnings rather than net loses while reducing the likelihood of bankruptcy— represents the risk management activities, which can create shareholder value. We also briefly illustrate how these optimal applications can be carried out in practice.