Business strategy, enterprise risk management and organizational performance

This paper aims to identify the influence of business strategy on enterprise risk management (ERM) adoption and organizational performance (OP). In addition, the mediation effect of ERM on the relationship between business strategy and OP is assessed.

A cross-sectional analysis of primary data gathered from 174 public listed companies in Malaysian Bourse through survey was conducted.

Companies with cost leadership business strategy are more eager to implement ERM compared to companies with differentiation strategy. The results also indicate that ERM implementation has a significant positive impact on OP. Though ERM is a partial mediator of the relationship between cost leadership strategy and OP, it does not mediate the relationship between differentiation strategy and OP.

One of the limitations of this study was the small number of respondents, comprising only 174 public listed companies. In addition, the manifest variables adopted from previous studies may not be the best indicators to measure latent variables. Nonetheless, this study fills the gaps in ERM studies by determining the impact of different kinds of strategy on ERM adoption and investigating the mediating effect of ERM on the relationship between business strategy and OP.

Although the trend in Malaysia seems to move toward ERM adoption, evidence shows that it is not widely practiced among Malaysian firms. Directors of Malaysian companies can understand better the impact of enterprise business strategy on the adoption of risk management and how ERM influences OP. The results of this study also provide valuable insights for the corporate governance regulatory authorities.

This paper is among the few to assess the impact of firm’s strategy on ERM adoption and to determine the mediation effect of ERM on the relationship between business strategy and OP.