Critical review of literature on enterprise risk management and the cost of capital: The value creation perspective

Enterprise risk management (ERM) encompasses the spectrum of identifying and analyzing risk from
an integrated, company-wide perspective in a structured and disciplined approach in aligning strategy,
processes, people, technology and knowledge with a purpose of evaluating and managing the
uncertainties facing the enterprise as it creates value. ERM essentially lays concern for managing the
firm’s idiosyncratic risks apart from the systematic risks. However, the neo-classical finance theory
(NCFT) postulates that managing the firm’s idiosyncratic risks is irrelevant. ERM implementation
framework embraces the active management of the firm’s three classes of unsystematic risk, namely
tactical risk, strategic risk and normative risk. This paper aims to provide a critical review of literature
on the notion of managing firms’ unsystematic (specific) risk via an ERM implementation framework
that leads to the enhancement of shareholders’ value. The mechanism through which the firms’ value
enhancement is supposed to take place is theorized by a strategic conceptualization of risk premium
model.