An empirical investigation on the effect of perceived environmental uncertainty and business strategy on enterprise risk management implementation

Abstract

There has been considerable attention on Enterprise Risk Management (ERM) arising from the increased in risks in the current business environment. Despite the focus on ERM, however, the element that can help organizations manage their risks appropriately and improve their performance is not only the usage of ERM but more importantly how ERM process should be designed for different circumstances. Therefore, there is a need to study different designs of ERM process and their implications in different situations. This study aims to examine the impact of two main sources of risk for the organizations on the two components of ERM design process including interactiveness of event identification techniques and frequency of risk identification. More specifically, it examines how interactiveness of event identification techniques and frequency of risk identification are associated with the perceived environmental uncertainty (PEU) and the strategy that organizations choose. A model is advanced and tested using PLS path modeling and data were collected from a sample of 100 public listed companies (PLCs) in Malaysia. The results suggest that greater emphasis on more interactive methods in identifying events faced by the organizations is associated with businesses facing higher environmental uncertainty and the ones with prospector strategy. The results also revealed the existence of a positive association between PEU and frequency of risk identification. However the study found no evidence of a significant relationship between prospector strategy and frequency of risk identification.