The effect of enterprise risk management implementation on the value of companies listed in the Nairobi Stock Exchange

Kisaka, Eric S.
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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.
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.
Enterprise Risk Management, Companies, Nairobi Stock Exchange