Looking at Development Within the Global Financial Market

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Chapter 1 mark the genesis of this dissertation. The journey begins by taken a swift look at recent developments in the global financial market serving as catalyst in highlighting ERM in many organisations. This piece of study will centre on risk management activities in the banking sector and as Lam (2007) rightly said “banks cannot function effectively without sound risk management”. The banking industry now than ever before operate in more volatile financial market making risk management imperative to this sector.

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Background

The field of Enterprise Risk Management (henceforth ERM) is swiftly changing and evolving (Hoyt et al. 2010). The current debate on this issue has generated mixed opinions among academicians and researchers alike. Risk management has become a global issue with many organisations still finding it difficult to get a grip of the concept. Although risk management has over the years been a priority for many corporations, a series of catastrophic events that has marked the last decade has further raised the significant of risk management in many organisations. Many organisations were caught unprepared and the pitfalls of risk management activities in other organisations were also exposed. For instance the outbreak of Y2K millennium bug in 2000 which resulted in over one billion dollars in loss prevention (Coffin 2009), the collapsed of Northern Rock Bank in the UK, the defrauding of French Bank Societe for a sum of 4.9 billion Euros in 2007 by a rogue trader, the effect of the US subprime lending crisis, the collapsed of Barings Bank which was ones respected as the UK’s oldest merchant bank and had the Queen herself as one of its listing and the ongoing BP’s deepwater horizon oil spill to name but a few. Many blame the US mortgage lending crisis as the genesis of the global financial crisis the largest the world has ever witness since the Great Depression. All these development have resulted in increased risk profile and as a result increased in regulatory compliance on risk related issues. The risk environment has become more fragile now than ever before. Uncertainty is on the ascendency in today’s economy and as a result every organization is, to some extent, in the business of risk management. BoultonHYPERLINK “#bib4″A HYPERLINK “#bib4″et alHYPERLINK “#bib4”, (2000) argue that it is not possible to “create a business that doesn’t take risks”. A quotation from Stewart suitably summarizes the implication of risk in business: “Risk – let us get this straight up front – is good. The point of risk management isn’t to eliminate it; that would eliminate reward. The point is to manage it – that is, to choose where to place bets, and where to avoid betting altogether” (Stewart, 2000). With the increasingly multifaceted and fast-changing global business environment, many have postulated that ERM will alter and reform the way risk is view and managed by organisations. A study by the Harvard Business Review (2004), listed ERM as one of the twenty breakthrough ideas in 2004. Fox (2009) argue that current financial meltdown has highlighted enterprise risk management as a critical component that will determine a company’s overall health and long-term viability. However, others also believe that the concept is just a managerial fad and only feasible in theory but difficult putting it into practice (Davenport and Bradley, 2000). Despite the scepticism the concept continues to gain momentum and more and more companies are embarking on ERM initiatives. Ironically, the existing studies on ERM have all focused on risk management activities in financial institutions with the neglect of non-financial ones. This piece of research thus dives into the issue of ERM in a retail supermarket chain in the UK in an attempt to examine the relationship between the intended and what is actually implemented. The study will focus on emerging issues in ERM such as perceived benefits and drawbacks of ERM, risk management drivers, corporate governance issues and risk exposures.

Research Aim and Objectives

The business climate in the retail supermarket chains is a delicate one making risk management imperative to these organisations. This study will focus on the emerging issues in ERM with particular emphasis on the place of ERM in the modern organisations. The study will seek to find answers to the reasons behind managerial increased attention to ERM issues as well as the future of ERM amidst the current global financial crisis. The origin of this study will be based on a retail supermarket chain located in the UK. The researcher aims to focus on the following questions in the context of retail supermarket What is the business case for considering ERM? The aim of this research question is to look at diverse opinions put forward by risk management professionals in an attempt to convince organisations to adopt the risk management function. Further areas such as whether the business case for embarking on ERM justifiable and if so have these perceived values been enough to convinced organisations to continually advocate for it implementation would be critically assessed. What are the drives that motivate organisations to embark on ERM journey? Over here the focus will be on the increasing external regulatory compliance as well as internal pressures driving corporations to adopt ERM implementation. An in-depth analysis would be conducted as to whether the increased in both internal and external pressures have resulted in an increased complexity and the volume of risk management. Can ERM overcome the conflicting priorities in this current economic crisis and if so how can ERM be move forward? In a business environment characterised by multiple responsibilities and conflicting priorities, the question that easily comes into mind is how are risk managers managing risk? This research question seeks to find answers to the above scenario. The current global financial crisis has resulted in enormous pressure on many organisations especially in the banking industry. Job losses continue in all sectors forcing organisations to adopt cost cutting mechanisms. This poses the challenge of resource allocation. The researcher intends to find out from this research question how are organisations willing to channel their scare resources into ERM initiatives. The researcher will conclude by looking at areas where potential improvement could be made to safeguard the integrity and the reputation of the ERM function. What are the potential obstacles to a successful ERM implementation? ERM however easy it might seem to be represent a dynamic phenomenon and requires corporations to stay abreast with the changing trends in other to manage risk efficiently. Banks face enormous challenges in trying to manage risk. ERM drawbacks and hindrances would be the focus of this research question.

Significant of the proposed Study

The financial crisis has exposed the shortcomings of risk management in many organisations. Thus a study of ERM would be vital addition to the existing risk management literature on the topic considering the fact that ERM is still an emerging concept in many organisations. The study will also serve as a source of research reference for risk management professionals, students, policy makers, and researchers and A  provide an initial foundation for more advanced research about ERM and support the empirical evidence on ERM.

1.4 Outline of the dissertation

A brief introduction is given which summarize the aims and the objectives of the study. The research is divided into six main sections. Chapter 1 will set the tone by briefly introduce what the research intend to achieve. This chapter will also highlight the concept of ERM as risk management function as well as outlining the various research questions. The ensuing chapter deals with a review of the extensive literature on the subject. The chapter will detailed the emergence of ERM and how the trends have change over the years. Specific risk exposures, issues that are considered as best practices in ERM implementation, the business case for embarking on ERM, corporate governance issues, challenges to ERM execution will all form a focal part of this chapter. Chapter three will revolve around research methodology and looks at the choice of research method used. Explanation concerning the uses of quantitative research method in the form of questionnaire and the case study method for the purposes of data collection and analysis is elaborated. Outline of research procedures and issues related to ethics would be dealt with in this section and the processes involved in negotiating assess with the organisation will form the climax of this chapter. Chapter four details the finding of this study. Over here findings related to Company’s risk exposures, the perceive value of ERM to the organisation, expected challenges, areas where improvement is needed and the burning issue of corporate governance and it implication to risk management forms the concluding part of this chapter. Finally, chapter five presents discussion and conclusion of this research in accordance with what was established in the existing literature review. Research implications couple with challenges and limitations will form the climax of this chapter

1.5 Summary

This chapter has highlighted the increasing need for risk management in organisations. The chapter enumerated some recent corporate scandals helping to elevate ERM on organisation’s strategic agenda. The chapter argued that as uncertainty continues to abound in today’s business environment, the profile of ERM will continue to occupy an important place on corporate strategic table. The chapter listed the research questions and elaborated on what the researcher intend to achieve in relation to each research question.

Chapter 2: Review of Literature

2.1 Introduction

The important of risk management has vastly increased in the past decade according to Wu and Olson, 2010). Risk will always form part of the way organisations do business. ERM as a tool for managing risk has emerged as the new frontier for managing the portfolio of risk faced by many companies. This chapter will detail the review of extensive literature on the subject of ERM. Various variables will be explored. The survival of the 21st century organisation will mainly depend on how holistic risk is viewed and managed. A review of current trend and status of ERM will mark the beginning of this chapter. The section that follows will take a critical look at the contrasting views and opinions on the extent of ERM adoption by organisations. Thereafter, account of the various risk exposures faced by the financial institutions will be presented together with issues that are considered as best practices in ERM implementation. The chapter will also elaborate on the main driving force behind corporate increased adoption of ERM with specific emphasis on corporate governance issues. The researcher then presents an account of the business case for implementing ERM initiatives, and concludes the chapter with the expected drawbacks, and how ERM can be moved forward amidst the current global financial crisis.

2.2 Current state and trends in ERM

Since the mid-1990s, enterprise risk management has emerged as a concept and as a management function within corporations (Dickenson, 2001). Early adopters of ERM recognized that changes in technology, globalization, and corporate financing were increasing the complexity and volume of risks. They also began to realize that traditional approaches were no longer effective way to identify, assess, and respond to the growing array of risks across a complex enterprise (Rao, 2007). Dickenson (2001) argue that these could be attributed largely to a number of high-profile company failures and preventable large losses, resulting in the scope of corporate governance been widened to embrace the risks that a company takes. Wu and Olson (2010) added that recent traumatic events such as the 9/11 and other business scandals may have contributed to a change in focus in the way risk is managed by many organisations. For instance recent recall of nearly 5.2 million vehicles by the Toyota Motor Corporation, and the scandal of Enron and WorldCom go a long way to substantiate why ERM has increased in popularity. The underlying premise of ERM is that every entity exists to provide value for its stakeholders. All entities face uncertainty and the challenges for management is to determine how much uncertainty to accept as it strives to grow stakeholder value. Uncertainty however, presents both risk and opportunity, with the potential to erode or enhance value creation. The concept has gain momentum over the last decades as Stroh (2005) rightly put it ERM is quickly becoming the new minimum standard, and it may be the key to survival for many companies. Research into ERM practices amongst corporations across the globe looks more promising with significant recent research emerging in the academic literatures. For example Walker et al. (2003) accounted for ERM efforts at five large companies. A study on ERM practices by Canadian risk and insurance management companies conducted by Kleffner et al. (2003). Lynch-Bell (2002) reported results of a survey of 52 companies with respect to risk management practices. Beasley et al. (2005) reported survey results of 123 organisations, with the following variables found positively related to ERM implementation: presence of a chief risk officer, board independence, top management support, presence of a Big Four auditor, entity size, and the industries of banking, education, and insurance and a study by Lam (2010) and his colleagues on ERM practices amongst banks in Asia.

Defining Enterprise Risk Management

Even though the components that make up the discipline of ERM are well-known, the concept itself is quite new and still evolving. As ERM continues to evolve, appropriate definition can be quite influential. ERM definition should be easy to communicate and remember whilst providing the flexibility to accommodate legitimate differences in approach among institutions, as well as any shifting nuance as the discipline develops in the years ahead. However, despite the increasing hype about ERM in recent times, still enterprise risk management remains a rather elusive and under-specified concept. Negus (2010) argues that establishing a consistent and commonly applied risk nomenclature poses one of the greatest challenges to the success of any ERM initiative. There has been inconsistency in ERM definition or methodologies in the last few decades although organisations have standardized on the definition outlined in COSO’s Enterprise Risk Management-Integrated Framework, published in 2004. The framework defined ERM as “a process, affected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives”. Although this definition has widely been accepted in the academic and management circles, there are equally alternative definitions offered by different risk management professionals and writers alike. For instance the Casualty Actuarial Society (CAS, 2003) defined ERM “as a discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organizations’ short- and long-term value to its stakeholders,” while Deloach (2000, p.5) defined ERM as:”A structured and disciplined approach: it aligns strategy, processes, people, technology and knowledge with the purpose of evaluating and managing the uncertainties the enterprises faces as it creates value.” Digging below the surface of the loosely defined ERM practices, there are clear indication of variations existing in the specific theoretical and uses of risk management in individual organizations. There are indications that ERM definition is gradually becoming organization specific. Ai (2006) suggested that creating a clear, firm-tailored explanation is a vital precursor to the firm executing a successful ERM framework. A survey conducted by Towers Perrin in 2006 of US organisations concluded that one of the major obstacles hindering ERM practice in many companies was lack of clear-cut understanding of the concept. Nevertheless, the various definitions outlined above indicate that ERM is strategic and enable firms to manage risk more holistically and in aggregate form. It also offers comprehensive approach of risk management by looking at a portfolio view of risks.

2.3 The Extent of ERM Adoption by Organisations

A research by KPMG (2010) argued that the current global financial crisis has hammered home a painful but clear reminder that risk is invasive and its potential consequences can never be fully predicted. The impact of risk is not only felt by organisations but it can also have far-reaching consequences sometimes affecting society at large. According to Stroh (2005) ERM is quickly becoming the new minimum standard, and it may be the key to survival for many companies. The implication of this is that risk management is no “longer a good-to-have but a must-have” by corporations seeking to survive in this perilous business operating environment. Whilst numerous studies exist on how companies are embracing ERM initiatives across the globe, other studies indicate otherwise. A series of research conducted by the KPMG (2002, 2006, and 2010) found that in 2002 only 4% of survey respondent reported of having implemented ERM in their organisation. This figure rose to 35% in the 2006 survey representing an increase of 31% in adoption rate. The 2010 survey reported of 51% adoption rate by banks in Asia with further 78% implementing ERM or planning to do so. Further studies continue to reveal positive ERM adoption rate. For instance a survey by Tillinghast Towers Perrin (2004) on Insurance Executives Worldwide reveals a positive outcome of ERM adoption by corporations. In some cases too ERM adoption has been fuelled by company specific characteristics such as the presence of risk manager, Chief Risk Officer, Board of Directors, entity size, and board independency (Liebenberg and Hoyt, 2005). Beasley et al (2005) contended that entities in the banking, education, and insurance industries are more likely to embrace ERM initiatives. The Conference Board and Mercer Oliver Wyman (2005) conducted an ERM survey among 271 executives at global companies with over US $1 billion in sales. The survey found that 91% of the respondents were either positively disposed toward or have adopted ERM. In contrast, there are quite a number of researches that tend to refute some of the established facts about organisational adoption of ERM. Global Insurance survey conducted by Tower-Perrin (2008) established that there is significant difficulty amongst companies in embedding ERM. This view was shared by Beasley et al (2005) in their study which concluded that ERM processes are less developed in the US comparative to their international counterparts. Yazid et al (2008) found that ERM practices amongst main Board listed companies in Malaysia Bourse are still at early stage. Ironically, research on ERM adoption has centred on organisations in Europe, the North American, U.S.A., and Asia with little or no evidence about ERM practices in the African continent. Notwithstanding the above arguments, research so far has not been conclusive as to why some organisations embrace ERM whilst others do not

2.4 Risk Faced by the Financial Institutions

2.5 ERM Best Practices

2.6 Enterprise Risk Management Drivers

2.7 The Business Case for ERM

2.7 The Business Case for Enterprise Risk Management

The international business climate has sent a clear message that no industry is immune from insufficient risk management. Added to this is the fact that with the recent increase in fraud and crime activities couple with rising inflation and operational coast, ERM has become a nightmare that can determine an organisation’s fate. This raises one question that all risk management practitioners are trying to find answers to. Why should corporations embark on ERM journey? Risk management professionals have sort to develop a strong business case that urges all businesses to adopt an ERM programme regardless of their level of sophistication in risk management. Additionally, empirical research and industry surveys have indicated that there are clear business benefits for adopting an ERM programme (Lam, 2007). Although ERM is relatively a new concept, it benefits has well been documented in the academic books and journals. Hoyt (2008) argue that ERM enable firms to manage a wide array of risks in an integrated, enterprise-wide fashion. Stroh (2005) contented that ERM provides firms with a significant source of competitive advantage. ERM capabilities can help management achieve the entity’s performance and profitability targets and prevent loss of resources. It can help to ensure effective reporting and compliance with laws and regulations, as well as avoiding damage to the entity’s reputation and associated consequences. Economic Intelligence Unit Survey (2007) reported that protecting and enhancing corporate reputation was cited by 50% of survey respondents as the most effective risk management outcome. Furthermore, 41 percent say ERM assists them in ensuring regulatory compliance and efficient capital and resources allocation. Survey respondents also highlighted “loss avoidance”38%, increasing shareholder value” 32% and “reduced earnings volatility” 26% as some of the other benefits. A survey by Cheng and Wu (2005) at Institutional Shareholder Services (ISS) examined the correlation between the ISS’ Corporate Governance Quotient ratings and 16 financial performance metrics for more than 5,200 U.S. companies in the 2002-2004 period. They found that companies with better corporate governance have lower risk, better profitability, and higher valuation. McKinsey and Company (2000) surveyed over 200 institutional investors in 22 different countries with a combined US$3.25 trillion in assets under management. They found that the large majority of investors were willing to pay a premium for companies with effective corporate governance practices. For example, in the U.S. 84% of investors were willing to pay an average premium of 18.3%. A survey by the MetricStream (2008) presented ERM benefits in qualitative and quantitative format in the form of tabulation which can be seen below:

Sources MetricStream (2007)

Lam (2003) and AON Survey (2007) added that ERM increased organisational effectiveness, better risk reporting, and improved business performance. Organisations that have adopted ERM approach to risk management have also experienced increased in share-holder value and reduction in losses and earning volatility (Lam, 2000). Nacco and Stulz (2006) added that ERM act as a value creation by facilitating organisations to quantify and manage the risk-return trade-off that faces the entire corporation. For example a survey conducted by the Conference Board among 271 risk management executives reported that 86 percent of organisations said ERM has enabled them to make better-informed decisions, 83 percent said it has provided them with greater management consensus whilst 79 percent said it has increased management accountability ( as quoted in Olson and Wu, 2008). Cumming and Hirtle (2001), Hoyt et al (2008) and Lam (2001) in their research concluded that ERM benefits firms by decreasing earnings and stock-price volatility, reducing external capital costs, increasing capital efficiency and creating synergies between different risk management activities. It also promotes increased risk awareness which facilitate better operational and strategic decision making. Bowling and Rieger (2005) added that ERM can provide a solid foundation upon which companies can enhance corporate governance and deliver greater shareholder value

2.8 Challenges to ERM Implementation

2.9 ERM in the Next Century

Chapter 3: Research Methodology

4.1. Research methods and techniques selected

Quantitative research method in the form of a cross-sectional survey was employed for the purposes of data collection. This took the form of postal questionnaires. The survey was intended to ascertain the state of ERM implementation in one of the biggest retail supermarket chain in the UK. Since the supermarket chain has branches all over the country, in order the get a fair representation of survey respondents, a non-probability purposive sample was used as stipulated by (Cohen et al. 2000 p.113). The research questionnaire sort to answer the following questions: What is the business case for considering ERM? What are the drives that motivate organisations to embark on ERM journey? Can ERM overcome the conflicting priorities in this current economic crisis and if so how can ERM be move forward? What are the potential obstacles to a successful ERM implementation? A  The questionnaire provided the opportunity of haven conversation with risk management personnel via telephone, and email correspondence.

4.2. Justification of research methods and techniques

Quantitative survey research method was employed as the most effective method for data collection. The HCU (1999) defined a survey as a systematic method of collecting data from a sample of population of interest such that the results are representative of the population within a certain degree of error. This data collection method according to Owens (2002) is unique in that it offers the opportunity to obtain information not available from other sources. It also ensures probability sampling making it possible to obtain data from unbiased representation of population of interest. The method is relatively inexpensive. Cohen et al (2000) in their book detailed that a survey gather information cost-effectively and efficiently from the population permitting generalisations to be made about given factors. Standardization of questions associated with this method makes it possible to collect the same information from every respondent. In terms of data analysis, survey data can be used to complement existing data from secondary sources as argued by Owen (2002). Notwithstanding the above benefits, the limitation of this data collection method must also be acknowledged. Pinsonneault and Kraemer (1993) asserted that survey often focus on single-method designs in instances where multiple methods are needed. The study further noted that the technique is also characterised by unsystematic and often insufficient sampling procedures couple with low response rates, weak linkages between units of analysis and respondents, and overdependence on cross-sectional surveys. A postal questionnaire was used as a mode of survey administration. This was very useful considering the cost involve and the limited resources available for the research. More so, administering the questionnaire was not problematic and made it possible to reach large and busy populations. It must also be admitted that data collection period was slower as obtaining cooperation was difficult.

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3.3. Research Procedures

3.4. Ethical Considerations

The concerned of both the well-being of research participants and with the future use of the outcome of this research was given careful considerations. The researcher set strict standard consulted and complied with relevant code of conduct so that data produced is fair and unbiased. Participants were assured of complete anonymity and confidentiality. Respondents’ privacy was also protected by avoiding using individual names. Informed consent was sort from research participants and enough information provided about the nature, and the benefits of the research and how data gathered would be used. Assurance was made regarding full adherence to data protection act. All sources have been rightly acknowledged unless otherwise stated. Overall, the research was conducted in a manner which upholds the integrity of the research enterprise and does not diminish the potential of conducting research in the future.

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Looking at development within the Global Financial Market. (2017, Jun 26). Retrieved November 26, 2022 , from
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