The effect of enterprise risk management implementation on the value of companies listed in the Nairobi Stock Exchange
Date
2013-11-14
Authors
Kisaka, Eric S.
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Abstract
This study assesses the level of implementation of Enterprise Risk Management
(ERM) in companies listed in the Nairobi Stock Exchange. The study also seeks to
test the significance of factors affecting this level of ERM implementation and to
investigate whether the level of ERM implementation has a positive effect to the
value of companies as measured by Tobin's Q.
Data for this study was collected from a sample of 22 companies listed on the Nairobi
Stock Exchange (NSE) for the periods ended December 2009. A quantitative research
design was used and the key variables of interest were the level of ERM
implementation and the value of the companies (as measured by Tobin's Q).
The research findings show that most of the organizations sampled (82%) viewed
ERM implementation as a strategic business initiative as compared to a compliance
requirement. The study also found that 50% of the organizations sampled measured
the value of their ERM activities to the organization through its level of earnings
volatility reduction. Thirty six percent of the respondent companies did not have an
ERM framework in place but had a plan to introduce one in the short-term. However,
27% of the respondent companies had a well formulated ERM framework across the
business and it was fully implemented. Forty five percent of the respondents indicated
that ERM implementation in their companies was championed by a Chief Risk
Officer lRisk Champion while 36% indicated that this implementation is championed
by the head of internal Audit.
The study also finds that there is a significant relationship between the appointment of
a Chief Risk Officer and the level of Enterprise Risk Management Implementation in
companies. However, it does not find a significant relationship between the level of
ERM implementation and the following variables; industry of operation, level of board independence, size of the firm and growth rate of the firm
Lastly, consistent with prior research, this study finds a significant relationship
between a company's level or Enterprise risk Management Implementation On and the
company's value. The results of this study show that an increase in the level of ERM
implementation in companies had a positive contribution to the value of the
companies.
The limitations to this study included the subjective information that was collected to
determine the level of ERM implementation in the companies listed on the Nairobi
stock exchange. This subjectivity was partly reduced by interviewing the Chief Risk
Officer or in their absence, the Chief Internal Auditor of these companies since their
understanding of general risk management concepts and practices in their institutions
is considered to be at a higher level than the rest of the staff in the organization.
Other than that, the Nairobi Stock only has 47 companies listed. Only 22 of these
companies responded to the research questionnaire. The low response might result in
the findings being unique to the small sample only thus not representing the entire
population.
Description
A Research Thesis Submitted to the School of Management and Commerce in Partial Fulfillment of the Requirements for the Award of a Master in Commerce Degree.
Keywords
Enterprise Risk Management, Companies, Nairobi Stock Exchange