Michael K. McShane

Does Enterprise Risk Management Increase Firm Value

Enterprise risk management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its effectiveness. The scant research on the relationship between ERM and firm performance has offered mixed findings and has been limited by the lack of a suitable proxy for the degree of ERM implementation. Using Standard and Poor’s newly available risk management rating, the authors find evidence of a positive relationship between increasing levels of TRM capability and firm value but no additional increase in value for firms achieving a higher ERM rating. Considering these results, the authors suggest directions for future research.

Applying a Systems Model to Enterprise Risk Management

Abstract: Enterprise risk management (ERM) has emerged as the new paradigm in risk management with the goal of holistically managing all risks facing an enterprise. Yet organizations still manage risks in a piece-meal fashion and struggle to effectively implement ERM and manage complex strategic risks. This article proposes a solution to this problem: ERM implementation using a system dynamics approach, which enables integrating risks in a causal modeling environment that includes feedback and delays. The methodology is then described using the ISO 31000 Risk Management Standard and illustrated using an example.

System of systems perspective on risk: towards a unified concept

Many systems and projects that concern systems engineers, engineering managers, and business managers today can be defined as system of systems (SoS), which are described as ambiguous, uncertain and dynamic, among others. In addition to the traditional view on risk identification, analysis and management, the concept of risk should be considered with respect to these systems of systems. The purpose of this paper is to analyse both fundamental concepts and recent publications in system of systems, business and engineering management, as well as risk analysis, modelling, and management for the purpose of better describing the concept of risk with respect to system of systems. The ultimate goal is to provide engineering and business managers the necessary perspective on the concept of risk and its management for the next generation of systems – including various descriptions of risk and discussion of the relevance of properties of system of systems to sustainable management of risks in engineered systems. To achieve a truly sustainable management of risk, there has to be a change in paradigm from a traditional description of risk to that of a more holistic perspective.

Early Mover Advantages: Evidence from the Long‐Term Care Insurance Market

Researchers frequently question whether financial firms benefit by developing new products because barriers to entry common to other industries generally do not exist. Studies of early mover advantages for new financial products provide mixed evidence at best. We find evidence of early mover advantages in the relatively young market for long‐term care insurance (LTCI) using data that allow broad testing of financial performance. Product differentiation, individual lines exposure, firm size, and traditional health insurance experience also affect financial performance.

Risk Allocation Across the Enterprise: Evidence from the Insurance Industry

Financial researchers initially regarded hedging activities as a means to reduce total firm risk, which often is defined in terms of cash flow volatility. More recently, researchers have focused on the strategic allocation of risk. Direct tests of risk allocation have been problematic, however, because hedging data are rarely available and, when available, are specific only to a single operation of the firm, such as bank lending. In this study, we exploit unique data from the insurance industry that allows us to observe hedging proxies for both investment and insurance underwriting risks and test the risk allocation hypothesis developed in the finance literature. We also conduct separate examinations of life-health and property-casualty insurers, which reveal differences in the risks and hedging activities of these two types of insurers.

Investigating Interbank Contagion with Agent-Based Modeling and Functional Dependency Network Analysis (FDNA)

Functional Dependency Network Analysis (FDNA) is a tool developed by engineer management researchers for developing systems that are more resilient and less prone to catastrophic failure. Considering financial networks as a system-of-systems, we introduce FDNA for analyzing non-engineering systems. This paper applies FDNA to the financial system to investigate not only what causes contagion but also how it spreads through a financial network, specifically to understand how the failure of one bank affects others in the system. A simple agent-based model of interbank lending will be presented and FDNA will be applied to it. A main goal of the paper is to promote application of a new tool from systems engineering to financial networks.

Delayed-bang approach towards more sustainable critical infrastructure risk management

This article describes the Delayed Bang Approach for determining the value of risk management alternatives in critical infrastructure security. The discussion includes (1) the need for sustainable risk management (2) the importance of time valuation in evaluating competing loss prevention and loss reduction alternatives, (3) the convergence of deterministic engineering economics, survivability analysis , and probabilistic analysis, and (4) hypothetical examples of the Delayed-Bang Approach and significance towards more sustainable risk management.

Enterprise risk management: history and a design science proposal

This paper aims to investigate the evolution of enterprise risk management (ERM) out of fragmented disciplinary perspectives to provide a foundation for promoting interdisciplinary research and proposes a design science approach for more effective ERM implementation in organizations.,This conceptual paper synthesizes ERM research and practice from multiple disciplines.,Corporate risk management concepts were born in academic finance and developed further in the finance subset known as risk management and insurance. With the advent of ERM, efforts must broaden beyond applying statistical models to quantifiable risks. Other disciplines have expanded ERM research by embracing techniques to investigate risk management practices to produce knowledge that integrates practice and theory. ERM is promoted as integrated risk management, yet silos still remain in both practice and research.,This study provides a foundation and a proposal for moving ERM past academic and organizational silos, which is necessary to achieve the ERM philosophy and increase organizational resilience. Understanding the evolution and fragmented nature of ERM research and practice provides a foundation for interdisciplinary cooperation necessary to achieve the holistic ERM philosophy. A next frontier is effective ERM implementation. This paper argues for an organizational design science approach for mitigating the resistance to change that confounds effective implementation of ERM in organizations facing an increasingly uncertain environment and outlines future research for applying the approach to implementing the ISO 31000 risk management process.