A STRATEGIC FRAMEWORK FOR VALUE ENHANCING ENTERPRISE RISK MANAGEMENT

Enterprise risk management (ERM) is a new management concept fast ascending the corporate agenda
globally. Its relevancy and popularity as a management technique are abetted by the changing business
practices and burgeoning regulatory requirements on risk management. The shift in paradigm in
heightened risk awareness in the wake of several high profile and deep impact corporate governance
scandal and financial mismanagement cases as well as increased terrorist threat on the physical assets
of firms has compelled firms to be more pro-active in addressing risk issues.
ERM is defined as the process of identifying and analyzing risk from an integrated, company-wide
perspective. It is a structured and disciplined approach in aligning strategy, processes, people,
technology and knowledge with a purpose of evaluating and managing the uncertainties the enterprise
faces as it creates value. It focuses risk management function from primarily defensive to increasingly
offensive and strategic in nature.
However, the neo-classical finance theory (NCFT) postulates that firm-specific risk is irrelevant and that
only the covariance of the firm’s asset returns to the market portfolio which is measured by the beta in
the capital asset pricing model (CAPM) matters. This suggests that implementation of ERM will not
enhance the firm’s value. This notion is in stark contrast to the phenomena of increased acceptance of
ERM by industry practitioners.
As such, we propose a ERM framework to theorize a model capturing the causal relationships of the risk
that strategically associated with firms’ business performance and cost of capital. We highlight the
notion of managing firms’ unsystematic (specific) risk via an enterprise risk management framework that
leads to the enhancement of shareholders’ value. The mechanism through which firms’ value
enhancement takes place is by developing a strategic conceptualization of risk premium.