A Theory of Enterprise Risk Management

29 Pages Posted: 25 Mar 2016 Last revised: 8 Oct 2018

See all articles by Håkan Jankensgård

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: March 6, 2016

Abstract

In this paper I submit a theoretical analysis of Enterprise Risk Management (ERM). ERM is proposed as the solution adopted by the Board of Directors to solve two general risk management problems faced by firms. The first is the agency problem of corporate risk management, according to which agents have interests and behavioral biases that conflict with the best interests of the principal. The second is the information problem of corporate risk management, which is the problem of collecting information about risk centrally in the organization to support decision-making regarding the firm’s total risk-return profile (including the deployment of economic capital). ERM consists of risk governance and risk aggregation. These are sets of mechanisms that address the agency and information problems, respectively.

Keywords: Enterprise risk management, risk governance, risk aggregation

JEL Classification: G30

Suggested Citation

Jankensgård, Håkan, A Theory of Enterprise Risk Management (March 6, 2016). Available at SSRN: https://ssrn.com/abstract=2753106 or http://dx.doi.org/10.2139/ssrn.2753106

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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