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A theory of enterprise risk management

Jankensgård, Håkan LU (2019) In Corporate Governance (Bingley) 19(3). p.565-579
Abstract

Purpose: The purpose of this paper is to develop a theory of enterprise risk management (ERM). Design/methodology/approach: The method is to develop a theory for ERM based on identifying the general risk management problems that it is supposed to solve and to apply the principle of deduction based on these premises. Findings: ERM consists of risk governance, which is a set of mechanisms that deals with the agency problem of risk management and risk aggregation, which is a set of mechanisms that deals with the information problem of risk management. Research limitations/implications: The theory, by identifying the central role of the Board of Directors, encourages further research into the capabilities and incentives of directors as... (More)

Purpose: The purpose of this paper is to develop a theory of enterprise risk management (ERM). Design/methodology/approach: The method is to develop a theory for ERM based on identifying the general risk management problems that it is supposed to solve and to apply the principle of deduction based on these premises. Findings: ERM consists of risk governance, which is a set of mechanisms that deals with the agency problem of risk management and risk aggregation, which is a set of mechanisms that deals with the information problem of risk management. Research limitations/implications: The theory, by identifying the central role of the Board of Directors, encourages further research into the capabilities and incentives of directors as determinants of ERM adoption. It also encourages research into how ERM adoption depends on proxies for agency problems of risk management, such as a decentralized company structure. Practical implications: The theory encourages Boards of Directors to focus on understanding where the under and over management of risk are likely to be greatest, as opposed to the current practice of mapping a large number of risk factors. Originality/value: The theory complements existing theory on corporate risk management, which revolves around the role of external frictions, by focusing on internal frictions in the firm that prevent effective risk management. It is the first work to delineate ERM vis-a-vis existing risk theory.

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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Board of directors, Economic capital, Enterprise risk management, Risk governance
in
Corporate Governance (Bingley)
volume
19
issue
3
pages
565 - 579
publisher
Wiley-Blackwell
external identifiers
  • scopus:85062865414
ISSN
1472-0701
DOI
10.1108/CG-02-2018-0092
language
English
LU publication?
yes
id
9c5c5468-3e37-4d98-832d-67e9298edec5
date added to LUP
2019-03-21 13:31:35
date last changed
2019-11-20 05:39:52
@article{9c5c5468-3e37-4d98-832d-67e9298edec5,
  abstract     = {<p>Purpose: The purpose of this paper is to develop a theory of enterprise risk management (ERM). Design/methodology/approach: The method is to develop a theory for ERM based on identifying the general risk management problems that it is supposed to solve and to apply the principle of deduction based on these premises. Findings: ERM consists of risk governance, which is a set of mechanisms that deals with the agency problem of risk management and risk aggregation, which is a set of mechanisms that deals with the information problem of risk management. Research limitations/implications: The theory, by identifying the central role of the Board of Directors, encourages further research into the capabilities and incentives of directors as determinants of ERM adoption. It also encourages research into how ERM adoption depends on proxies for agency problems of risk management, such as a decentralized company structure. Practical implications: The theory encourages Boards of Directors to focus on understanding where the under and over management of risk are likely to be greatest, as opposed to the current practice of mapping a large number of risk factors. Originality/value: The theory complements existing theory on corporate risk management, which revolves around the role of external frictions, by focusing on internal frictions in the firm that prevent effective risk management. It is the first work to delineate ERM vis-a-vis existing risk theory.</p>},
  author       = {Jankensgård, Håkan},
  issn         = {1472-0701},
  language     = {eng},
  month        = {01},
  number       = {3},
  pages        = {565--579},
  publisher    = {Wiley-Blackwell},
  series       = {Corporate Governance (Bingley)},
  title        = {A theory of enterprise risk management},
  url          = {http://dx.doi.org/10.1108/CG-02-2018-0092},
  doi          = {10.1108/CG-02-2018-0092},
  volume       = {19},
  year         = {2019},
}