General Overview to Enterprise Risk Management With Its Key Components and Determinants From the Management Perspectives

General Overview to Enterprise Risk Management With Its Key Components and Determinants From the Management Perspectives

H. Ebru Oydag (Yeditepe University, Turkey) and Ozlem Senvar (Department of Industrial Engineering, Marmara University, Turkey)
DOI: 10.4018/978-1-7998-1033-9.ch013

Abstract

Enterprise Risk Management (ERM) is a comprehensive and holistic approach to risk management, requiring the determination, assessment and management of risks in an integrated and systematic manner. ERM has been considered as a financial, and accounting-based tool used to assess and manage the risks an organisation faces and to meet the compliance requirements of creditors, rating agencies, regulators and stock exchanges. Although ERM is widely examined by internal audit and finance scholars, ERM researches from management and strategy perspectives are limited in the literature. The purpose of this chapter is to provide a comprehensive overview of ERM including ERM concepts and definition of the risks and categorisation of risks surrounding the organisations. Moreover, the chapter handles how the risk management evolved into ERM. The distinguishing components of ERM (pillars) and the leading factors and motivation for ERM adoption (determinants) are presented.
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From Risk Management To Enterprise Risk Management

The term risk management came into use in the early 1950s, but no article on risk management was, then, issued in the Journal of Risk and Insurance (JRI), or in its previous titles before 1956. Insurance Institute of America made efforts for the promotion of risk management in the 1960s (Crockford, 1982). First risk management thoughts came from Robert Mehr and Bob Hedges, who mentioned the topic in Risk Management and the Business Enterprise in 1963, and they suggested a process for managing risks: “Identify loss exposures, measure those exposures, evaluate possible responses, choose one, and monitor the results” (Mehr & Hedges, 1963). They also provided a general approach to handling risks: “risk assumption, risk transfer, and risk reduction” (Lam, 2017). In the 1970s, both academic and practitioner interest increased for risk management. Management Centre Europe introduced risk management subject in their annual insurance conference in 1971 (Crockford, 1982). The two areas of risk management under focus were insurance risks and financial risks. In the 1970s, financial risk management started as a formal system, and financial derivatives products began to be developed to manage interest rate and foreign exchange risks (Dickinson, 2001).

Fisher Black and Myron Scholes introduced Black–Scholes Model of Option pricing in 1973. This is a revolutionary model of option pricing, and also the most widely used one, which brought the Nobel prize to Black and Scholes in 1997 (Henderson, 2014).

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