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Evaluating Enterprise Risk Management (ERM); Bahrain Financial Sectors as a Case

Study

Abstract

Enterprise Risk Management (ERM) is a process used by firms to manage risks

and seize opportunities related to the achievement of their objectives. ERM provides a

proactive

framework

for

risk

management,

which

typically

involves

identifying

particular

events

relevant

to

the

organization's

objectives,

assessing

them

and

magnitude of impact, determining a response strategy, and monitoring progress. This

research measures the awareness of Bahrain financial sector of ERM and if companies

maintain an effective ERM framework. The results show success since all companies

are aware of ERM and have an effective ERM framework in place.

Keywords: Enterprise Risk Management, Financial sectors, ERM framework

1. Introduction

1.1 Overview

The

pace

of

change

and

characteristics

of

the

new

economy

are

exposing

organizations to take risks more than ever before. Therefore mastering these risks can

be

a

real

source

of

opportunity

and

challenge

and

a

powerful

way

of

sustaining

a

competitive

edge.

Especially

for

companies

to

sustain

and

survive

in

the

long

run

where

companies

need

an

effective

&continuous

risk

management.

Risk

influences

every aspect of business as they say

Bahraini Companies face and managing them appropriately will enhance their ability

to

make

better

decisions,

deliver

company's

objectives

and

hence

subsequently

improve

performance.

It

is

also

important

to

note

that

risk

is

categorized

into:

financial,

operational,

strategic,

and

reputation

risk.

Enterprise

Risk

Management

is

any

significant

event

or

circumstance,

which

could

impact

the

achievement

of

business objectives, including strategic, operational, financial, and compliance risks.

ERM helps create a comprehensive approach to anticipating, identifying, prioritizing,

and managing material risks of the Company.

1.2 Research Objective

The objective of this research is to take a more strategic and consistent approach

to

managing

risk

across,

Bahrain's

financial

sector

through

the

introduction

of

an

Enterprise Risk Management (

the protection and the creation of value. When looking back at the corporate scandals

i.e.

Enron

&world

com,

financial

crisis

of

1997,

2009

misled

the

investors

and

resulted in investors loosing confident &dissatisfaction. The result of that crisis was

not limited to the country of origin. However it spread globally due to globalization.

Global marketplace = Increased risks

This means that global risks combined with rapidly evolving business conditions

are

prompting

financial

sector

to

turn

to

ERM.

It

is

very

important

for

Bahrain

Financial

sector

to

have

ERM.

Bahrain

does

international

business

with

other,

therefore it is effected by downturns and since no company can prevent an economic

downturn,

those

who

map

out

the

steps

they

would

take

to

respond

to

a

downturn

won't

find

themselves

taking

quick

decisions

which

will

ultimately

affect

the

firm

negatively.

1.3 Research Methodology

A questionnaire will be constructing and publish on Google document targeting

only Bahraini financial sector. SPSS application will be utilized to analyze results. In

addition, the questionnaire will measure how important of ERM factors to establish a

good ERM practice.

1.4 Research Challenges

The goal of any firm is to achieve its objectives and create value; therefore each

company

has

value

chain

which

is

divided

into

key

and

support

activities.

The

company

must

be

successful

in

each

and

every

process

in

order

to

deliver

a

good

result

and

achieve

competitive

advantage.

Each

of

the

processes

in

the

value

chain

might

result

in

more

than

five

risks.

If

firms

were

not

able

to

identify

and

put

appropriate

controls

then

all

firms

will

end

up

bankrupt,

in

crisis,

investor's

dissatisfaction, etc. This research focuses on the importance of addressing key risks

which

helps

and

organization

understand

accountability-who

owns

the

risks

and

whether

the

risks

are

being

properly

monitored.

Often,

because

companies

are

organized by function or geography and not by risk, the highest risks might not have

designated

risk

owners

or

risk

monitors.

Risk

Management

is

the

responsibility

of

each and every staff. This research will allocate one full section which will be called

where

it

will

mention

what

kind

of

risk

will

the

bank

face

of

proper

ERM framework was not in place.

2. Literature Review

When EJ Smith (1912) was asked if he has encountered any risks during his 40

years experience he said

ship

in

distress.

However

immediately

after

that

SS

Titanic

sank.

The

accident

demanded 1500 lives including that of Captain EJ Smith. This article highlights the

importance of our subject which is Enterprise risk Management if (EJ Smith, 1912)

though of some risks that could occur, then Titanic wouldn't have sunk. This article is

too

general

and

it

has

nothing

to

do

with

our

ERM

on

financial

sector

in

Bahrain,

however it could help us understand that there are risks in each and every business,

process,

task,

etc

we

do

in

our

life

and

ERM

should

be

considered

whether

it

is

a

financial or non financial sector, however for the purpose of specificity, the research

will

focus

only

on

the

financial

sector

in

Bahrain.

This

quote

also

shows

that

risks

always exist and it has nothing to do with the current environment or crisis. In another

article Ed O'Donnell, (2005) talked about the framework for ERM and he stated

guidelines establish objectives for event identification and suggest general procedures

for identifying events that represent business risks.

identifying the root cause of the risk however here in ERM it is about identifying the

root cause of the root cause. The Author is right as he mentioned that ERM task is to

identify the risks which can stop us from achieving our objectives. The author wants

companies to be proactive in identifying risks.

The project will also highlight the factors according to COSO framework and it

will also

highlight

what

type of

risks the company is

going to

face if it

didn't

have

ERM framework implemented. In Nocco, Brian W &Stulz, René

M article published

on

(2006)

He

state

That

ERM

adds

value

by

ensuring

that

all

material

risks

are

owned

and

risk

-

return

tradeoffs

carefully

evaluated,

by

operating

managers

and

employees throughout the firm.

value to the firm if it was effective and the action points were implemented correctly.

Also supports what (Ed O'Donnell, 2005) said in his article that ERM improves the

performance of the firms which will ultimately add value to the firm

support for the general argument that organizations will improve their performance by

employing the ERM concept

sector

organization

which

uses

ERM

within

strategic

control

process.

(Rao,

Ananth

2009)

uses

risk

identification,

risk

assessment,

value

at

risk

as

the

quantitative

risk

assessment techniques. Rao recommends the implementation of COSO (2004) which

focuses on the Internal controls, (Rao, Ananth 2009) research stated

demonstrates the prudence and practicality of the recommendations of COSO (2004)

framework

and

Turnbull

report

for

integrating

the

management

of

risk

and

organizational

performance

in

general

as

part

of

a

coherent

approach

to

corporate

governance.

going to focus on COSO frame work in financial institutions .this research will focus

on all supply chain areas not only strategic.(Please refer to Challenges section in this

research for more details). Arena, and Giovanni, (2010) stated that

form taken by firms' increasing efforts to organize uncertainty, which 'exploded' in the

1990s.

This

project

supports

Arena

and

Giovanni

article's

that

ERM

&Risk

Management are important and that is because uncertainty always exist, we agree with

this article somehow because all our plans are for the future and as we know the only

thing we are sure about the future is that many things might change in future so we are

not

certain .It

is

impossible

to

have

no

risk

however

by

preparing

ourselves

and

implementing ERM we can minimize it.

In the article above the researcher used longitudinal multiple case study however

we are going to build a questionnaire to test if companies are aware with the concept

of

ERM

and

they

are

implementing

effective

ERM

framework.

We

agree

with

the

researcher

as

there

is

a

strong

link

between

risk

management

&business

strategy

therefore

financial

institutions

should

maintain

Disaster

recovery

plan

and

business

continuity

plan

when

doing

their

business

strategy

which

ensures

backup

of

all

information and which reduces the safety hazards such us fire (Umbrella insurance).

He also

used the longitudinal multiple case study

to

make

readers understand more

about ERM process. Mark S. Beasley, Richard Clune, and Dana R. Hermanson,(2005)

stated

that

is

little

research

on

factors

associated

with

the

implementation

of

ERM.

Research

is

needed

to

provide

insights

as

to

why

some

organizations

are

responding to changing risk profiles by embracing ERM and others are not.

Beasley,

Richard

Clune,

and

Dana

R.

Hermanson

2005)

and

it

focuses

on

US,

however

as

a

result

of

our

research

and

discussions

with

our

managers

we

were

informed that Bahraini corporations and specifically financial sector are aware of the

ERM concept. It came to our attention that Central Bank of Bahrain force institutions

to have independent auditors, however ERM is still grey area to many banks. We also

noticed

that

now

ERM

factors

are

clearly

defined,

and

frameworks

have

been

established.

The following article supports the idea that if a company has established good

risk management process then this will help it reduce the risk and therefore the cost of

having consultants to check compliance against the Central Bank. We are going to test

if

banks

in

Bahrain

maintain

a

compliance

checklist

against

CBB

rulebook

and

if

there is adequate monitoring and follow up with this checklist .This will be tested as

part

of

our

questionnaire.

Standard

&Poor's

Ratings

Services(

2005

)

HP

Compliance

Suite

for

Financial

Institutions

is

a

collection

of

HP

products,

market

offerings, and services that help financial services firms reduce the cost of achieving

regulatory

compliance,

improve

risk

management

capabilities,

and

also

reduce

the

cost

of

sustaining

compliance.

This

paper

explains

how

with

the

Enterprise

Risk

Management

component

of

its

compliance

suite,

HP

can

help

organizations

Craig

Faris (2010) states

it can be a stimulating wake-up call.

call

for

many

financial

institutions

which

didn't

give

risk

management

attention;

in

our introduction we mentioned briefly that because of the financial crisis and scandals

(i.e.

Enron

&Worldcom)

Bahrain's

financial

sector

need

to

establish

and

implement

ERM framework. In another article for Walker, Paul L and Shenkir, William G

. (2008)

his

article

highlights

Enterprise

Risk

Management

(ERM)

practices

that

improve

a

company's

ability

to

manage

risks

effectively.

authors

argue

that

ERM

allows

companies to proactively manage risk, clarify the organization's risk philosophy, and

develop

a

risk

strategy.

Further,

the

article

discusses

how

the

ERM

process

forces

companies to consider those events that might stand in the way of achieving corporate

goals. Then companies can assess these risks and develop strategic plans. Discussion

of contingency plans, measuring effectiveness, and communications strategies is also

presented.

Referring

to

Paul,

shenkir

&William

(2008)

article

we

mentioned

that

Bahrain financial sector need to establish &implement ERM framework, this article

highlights

one

way

to

start

implementing

ERM

which

is

establishing

good

internal

controls which we will also consider it one of the ERM factors in later stages of this

article

explains

how

we

can

implement

ERM.

We

strongly

agree

with

Walker as ERM is trying to imagine what could happen to the company in the worst

scenario therefore the company should establish Internal controls for each and every

department

and

those

controls

should

be

communicated

to

all

employees

&implemented. As we said we agree with the author when he said that

companies to proactively manage risk

Cokins, Gary

(2010) stated that

notes

that the four types of

alternative risk

categorization are market and price risk, credit risk and operational risk

talks

about

risk

categorization .We

disagree

somehow

with

the

researcher

when

he

categorized risks into Market, Price, credit &Operational. As we would classify them

to:

Strategic,

financial,

Operational

&Reputation.

He

could

have

done

better

job

by

listing price and credit under financial. In another article for Richard &Donald

, (2010) said in his article

management

(ERM)

principles

on

firms'

long-term

performance

by

examining

how

financial, asset and market characteristics change around the time of ERM adoption.

Overall, our results fail to find support for the proposition that ERM is value creating,

although further study is called for.

to support that ERM is value creating, we mentioned earlier that implementing ERM

does

not

only

mitigate

the

risks,

however

it

also

adds

value .During

our

detailed

testing

in

Bahrain

financial

sector

we

are

either

going

to

agree

with

this

article

or

disagree.

McAliney,

Peter

J

(2009)

said

readers

the

operational

considerations

to

implement

this

program

within

their

organization

to

enhance

performance

improvement.

At

the

individual

initiative

level,

readers

will

recognize

elements used in developing retrospective return on investments (ROIs) for learning

programs.

ERM concept with the line executive as all employees in the company must be aware

of what possible risk might take place to better appreciate the internal controls which

will

be

established

by

the

Management

in

later

stages.

We

are

going

to

test

how

whether financial sector in Bahrain have well established internal controls while doing

their business. If Management doesn't communicate such issues with employees then

they won't understand the reason for policies &procedure changes, etc. We also agree

that by performing good and effective ERM the ROI's will improve as we believe that

ERM adds value to all business processes. In another SHABUDIN, Ebrahim, DREW,

John O. &PEROTTI, William L. (2007), said that

just about mitigation but also about optimization.

us

in

writing

the

project

as

they

segregated

risk

into

other

classification

which

is

quantitative

&qualitative

risk.

We

might

need

to

through

light

on

the

difference

between quantitative &qualitative as part of the introduction. We also agree with the

researcher when he mentioned that it is not about mitigation but optimization however

we would also like to add that ERM is also about

While Ohio State University, (2006) stated that

management creates value for shareholders

creating value, and as we learnt in our finance courses that the goal of any firm is to

increase

the

value

of

stockholders.

This

article

also

draws

attention

on

the

risk

appetite

which

we

will

explain

later

as

one

of

the

ERM

factors.

David

L.

Olson,

(2010),

stated

that

paper

demonstrates

support

to

risk

management

through

validation of predictive scorecards for a large bank. The bank developed a model to