The Role of Risk Culture in Enterprise Risk Management Implementation

Abstract

Enterprise Risk Management (ERM) and risk culture academics and practitioners have argued that they are inherently related without empirical evidence. They continue to advocate for their implementation by firms to face the dynamic business environment with certainty. The lack of empirical evidence to underpin this relationship partly contributes to their fragmented implementation and the lack of proper attention to risk culture in ERM implementation. The challenge in measuring these two abstract concepts contributes to their dichotomous measures in the literature, with most studies concentrated in the developed economies. The study objective is to provide a comprehensive measurement of the two constructs and empirically determine their relationship in the less-researched context of Africa. The study results empirically confirm risk culture and ERM to have a significant positive relationship. A firm's size and financial leverage were found to be significant determinants for ERM implementation, whereas capital opacity, financial slack, and board composition are not. Organizational leaders are advised by the study not to treat risk culture and ERM as substitutes but as complements. A sound risk culture provides a solid base for ERM implementation. Risk culture should be managed and developed in full alignment with the risk appetite and the ERM framework to improve organizational performance. These shall enable the promotion of a risk-aware culture and ingraining risk-related measures into performance management that help drive the organization forward. The constructs measures presented in the study can be used by academics and risk practitioners to determine the level of risk culture and ERM implementation in organizations.

Organizational resilience as a key property of enterprise risk management in response to novel and severe crisis events

“…More generally, a supportive company culture to ERM represents a critical success factor and an important foundation for any effective risk management system: openness, transparent communication, trust, cross‐functional collaboration, and learning are identified as key properties of an ERM‐supportive culture (Kimbrough & Componation, 2009; Saeidi et al, 2021). Another specific study on this topic of culture and risk management yielded similar and consistent results: “The study results empirically confirm risk culture and ERM to have a significant relationship” (Santigie Kanu, 2020).…”

“…The analysis of past crises has led to the conclusion that risk culture and leadership have been important drivers of explaining shortcomings in such risk management systems (Ingram et al, 2014; Naik & Prasad, 2021; Santigie Kanu, 2020; Selamat & Ibrahim, 2018): “Weaknesses in risk culture are often considered a root cause of the global financial crisis, headline risks, and compliance events. A financial institution's risk culture plays an important role in influencing the actions and decisions taken by individuals” (Financial Stability Board [FSB], 2014).…”

The Relationship between Respondents’ Characteristics and Their Perceptions of Enterprise Risk Management. Results of a Survey

“…The adoption and implementation of ERM practices has attracted considerable research attention with scholars seeking to unravel the complexities of why some organizations embrace ERM while others do not. Previous studies show that successful ERM adoption and implementation depends on several factors, such as the presence or absence of a strong risk culture in the company (Ching et al, 2020;Ingram, Underwood & Thompson, 2014;Kanu, 2020), the support and cooperation of top management (Miloš Sprčić, Kožul & Pecina, 2017;Sax & Torp, 2015), as well as technical factors, and a limited understanding of ERM frameworks which is often related to the voluntary and unregulated nature of risk management practices in context small and medium-sized enterprises, (Belas et al, 2023;Ferreira de Araújo Lima, Crema & Verbano, 2020;Henschel, 2010). Although effective ERM implementation has several prerequisites, ERM positively influences firm performance.…”

Understanding Risk Culture in the Context of a Sustainable Project: A Preliminary Study

“…It gained popularity due to a series of financial crises caused, among other things, by the inappropriate and often unethical behavior of managers [46]. Nowadays, the term also appears in works in management and quality sciences, especially in discussions of building an organization's resilience to crises [47], corporate strategy implementation [48], digital business transformation [49,50] and risk management [51,52]. In addition, it appears in analyses of factors shaping investment decisions and company performance [53] and in considerations of ethical principles for a selected profession [46].…”