3rd INTERNATIONAL CONFERENCE ON BUSINESS AND 1702 ECONOMIC RESEARCH ( 3rd ICBER 2012 ) PROCEEDING 12 - 13 MARCH 2012. GOLDEN FLOWER HOTEL, BANDUNG, INDONESIA ISBN: 978-967-5705-05-2. WEBSITE: www.internationalconference.com.my
RISK MANAGEMENT, PERFORMANCE MEASUREMENT AND ORGANIZATIONAL PERFORMANCE: A CONCEPTUAL FRAMEWORK Siti Zaleha Abdul Rasid, Nargess Mottaghi Golshan, Wan Khairuzzaman Wan Ismail & Fauziah Sheikh Ahmad International Business School Universiti Teknologi Malaysia szaleha@ibs.utm.my ABSTRACT In the aftermath of recent global financial crisis and corporate failures, entity stakeholders are demanding greater oversight of key risks facing the enterprise to ensure that stakeholder value is preserved and enhanced. One response to these growing expectations is the emergence of a new paradigm known as “Enterprise Risk Management” or “ERM” as an internal control system. At the same time, organizations have been implementing Performance Measurement System (PMS) as one of management control systems vital for corporate success. Considering the importance of these two control systems, the possibility of incorporating ERM into the existing PMSs needs to be explored. It is expected that risk management will complement PMS by identifying and mitigating risks in achieving strategic objectives. Empirical evidence regarding this link is still lacking, therefore, this paper investigates the linkage between risk management and PMSs. In addition, it also discusses the impacts of these two systems on organizational performance. Finally, a conceptual model for integrating risk management and performance measurement is proposed. Field of Research: Enterprise risk management, performance measurement, organizational performance
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1. Introduction Identification and management of risk has become an integral part of a sound management and governance framework. In recent years, corporate failures, such as the collapse of Enron and World Com have increased the need for effective risk management. Merely recording history of performance measures is insufficient. Risk management and performance measurement should be linked together to enable enterprise to define and guide its overall risk profile, as well as to shape its strategic direction. IBM’s CFO study of 2007 revealed that effective organizations proactively manage risks for closing performance gaps (Rogers, Lukens, Lin, & Jon, 2007). Therefore, executing strategy aggressively that lacks control and balance may have disastrous effects on organizational performance. Although there is a growing body of literature that examines the effect of enterprise risk management (ERM) on organizational performance as well as the effect of performance measurement system (PMS) on organizational performance, studies on how linking ERM and PMS can enhance the organizational performance is still lacking. While PMSs strictly focus on value