Firm Ownership and Enterprise Risk Management Implementation: Evidence from the Nordic Region

Naciye Sekerci,Don Pagach

doi:10.3390/jrfm13090210

Abstract

The purpose of this paper is to investigate whether firm ownership characteristics can explain demand for Enterprise Risk Management (ERM) implementation. Specifically, we examine the relationship between the presence of large shareholders, multiple blockholders and a dual-class share structure, and ERM implementation. To our knowledge we provide the first evidence on the effect of multiple blockholders and dual-class share structures on the implementation of ERM. ERM best practices can be considered as governance tools, used to monitor managerial discretion in risk management, ultimately reducing the agency cost of risk management. Accordingly, we analyze the demand for ERM in certain governance (e.g., ownership) settings. We use quantitative methods in our study: survey and regressions (tobit and logit models). Ownership data is hand-collected while ERM data comes from a survey conducted in the Nordic region. We find that ERM is implemented less frequently in firms where there are multiple blockholders, and where large controlling owners hold dual-class shares. These findings indicate that there is less demand for ERM’s monitoring role in firms that are associated with high agency costs. Given the increasing use of dual-class share structures, we believe further examination of ownership characteristics and corporate risk management is warranted.

Highlights

As strategic, economic, and operational risks have increased, both regulators and market participants have increased demands that boards and management improve risk oversight (Securities and Exchange Commission 2010; Standard and Poor’s 2012; National Association of Corporate Directors 2018)
We examine the role that firm ownership characteristics have on internal demand for Enterprise Risk Management (ERM) implementation
The purpose of this paper is to investigate whether firm ownership can explain the internal demand for ERM implementation

Summary

Introduction

Economic, and operational risks have increased, both regulators and market participants have increased demands that boards and management improve risk oversight (Securities and Exchange Commission 2010; Standard and Poor’s 2012; National Association of Corporate Directors 2018). Anton (2018) suggests that there is a growing consensus among practitioners and academics that ERM represents the fundamental paradigm for managing the portfolio of risks confronting enterprises. In response enterprise risk management (ERM) is an increasingly prevalent management practice that is used to coordinate a holistic risk management process across the whole enterprise. Consistent with this view ERM implementation has steadily been increasing since 2000 driven by both external demands, such as those of regulatory agencies, and internal demands, such as boards’ desire for best risk management practices (Hernández-Madrigal et al 2020). An agency cost of risk management refers to any agency cost to shareholders resulting from the use of risk management tools to benefit managers’

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