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International Journal of Civil Engineering and Technology (IJCIET) Volume 8, Issue 10, October 2017, pp. 184–196, Article ID: IJCIET_08_10_020

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A STUDY ON ENTERPRISE RISK

MANAGEMENT AND ORGANIZATIONAL

PERFORMANCE: DEVELOPER’S

PERSPECTIVE

Farah Salwati Ibrahim, Muneera Esa

School of Housing Building and Planning,

Universiti Sains Malaysia - 11800 Penang, Malaysia

ABSTRACT

The housing property sector is among those industries exposed to many predictable

and unpredictable risks that may have a great impact on the performance of the

organization. Enterprise Risk Management (ERM) has been identified as an organized

and systematic way of managing risk throughout an organization and recent research

results have shown ERM implementation has positive significance on the companies’

financial and non-financial performance. However, little research has been done to

measure the performance of ERM studies, especially in Malaysia which has made

potential users reluctant to use ERM. This paper presents a critical review of the

Enterprise Risk Management in the construction industry, with a special focus on the

performance of the organization in Malaysian housing property sector. The strengths

and weakness of the existing structures are investigated and it suggests a firm

groundwork for an in-depth future study to gain detail insights on how ERM actually

works in practise in Malaysian organizations to provide a better basis for decision-

making at strategic level, tactical and operational levels of potential risk profiles.

Key words: Construction Industry, Enterprise Risk Management, Organizational

Performance, Housing property.

Cite this Article: Farah Salwati Ibrahim and Muneera Esa, A Study on Enterprise Risk

Management and Organizational Performance: Developer’s Perspective, International

Journal of Civil Engineering and Technology, 8(10), 2017, pp. 184–196.

http://www.iaeme.com/IJCIET/issues.asp?JType=IJCIET&VType=8&IType=10

1. INTRODUCTION

The complexity associated with risks often involves dealing with considerable ambiguity on

physical, monetary, cultural and social dimensions. Additionally, the risks events have varying

consequences that extend well beyond the direct physical harm to financial or physical assets,

people or ecosystems that influences the way a social operates and people think [1]. Risk

management has long been associated with the engineering and finance industry, which is now

A Study on Enterprise Risk Management and Organizational Performance: Developer’s Perspective


a focus in almost every field which leads to a career in business. Those involved in the

construction industry are not immune to the trend.

In a high-hazard industry like construction, corporate crises and project disasters have

become accepted as in inherent part of our high tension workplaces which leaves effects

throughout the remaining course of a project. Each crisis in turn leads to subsequent crises

which lead to extreme pressures on the environmental degradation, fatal injuries, financial loss,

public pressure and government regulation from federal, state, county, and local governments

in the construction industry. There is a one crucial lesson to be learnt from this where in the

majority of cases, the stakeholders involved in these incidents did not have an effective risk

management system in place or did not implement it effectively [1]. Most studies concerning

failed projects demonstrated failure to implement a good risk management plan.

From housing property perspective, increasing unpredictability on the economic and

financial performance of the housing developers as well as the growing complexities of the

business environment, make risk management strategies become vital to them in order to

survive in the construction industry [2]. Risk management is becoming increasingly important

management tool that the Malaysian construction industry, including housing property sector,

cannot afford to be without [3]. However, the author also revealed the low level awareness

among the housing developers which indicates as an alarming issue in improving the industry

performance. Furthermore, it is notable that the risk management application still has a long

way to go in the Malaysian construction industry and these businesses are slowly accepting risk

management as a management tool in assisting their business [3].

Growing interconnectedness between economies and more complex trade and financial

relationships increase the number and types of risk to today’s firms’ framework and internal

control system. In response to that, many world’s leading corporations have reported adopting

enterprise approaches to Enterprise Risk Management [4]. For example, in Malaysia, gigantic

companies such as Khazanah Nasional Berhad, Telekom Malaysia Berhad and MMC

Corporation Berhad [5][6] have adopted ERM approach for determining the value of their

strategies for growth and profitability. According to the research by [7] into 199 of listed

company in Bursa Malaysia, the results shows that ERM framework in place is more common

among firms in the infrastructure, hotel, and technology sectors. Over the past few years,

numerous studies have reported on the effect of ERM to the organizational performance. A

number of researchers identified the effectiveness of ERM as a risk management approach that

improve organizational ability to reduce negative effects of market turbulence [8] [9] as a result,

lead to enhanced organization performance [10].

Given that ERM and organizational performance are important, many research studies have

discussed the positive relationship between ERM and organizational performance, [11] [12]

[13] [14]. However, there are also contradictory and inconclusive results from the previous

studies on the same relationship [15] [16] [17]. Things get worse when the scholars ability to

make accurate predictions about the potential relationship between ERM and organizational

performance is limited by available research in the housing property sector and in a most recent

study, the previous author has discovered that ERM implementation has positive significance

on the companies’ financial and non-financial performance in Malaysian housing developers

setting [2]. Nevertheless, it is noted that the study has a number of limitations, which suggests

a firm groundwork for an in-depth future study to gain detail insights on how ERM actually

works in practise in Malaysian organizations.

Hence, it is time to review our understanding of enterprise risk management and its impact

on the organizational performance and reflect how we can improve the performance of housing

property to deal with the increasing level of complexity, chaos and uncertainty in project

environments. In this paper, we start with a review of literature, first to understand the concept

Farah Salwati Ibrahim and Muneera Esa


of Enterprise Risk Management and organizational performance. Next, we discuss the potential

impact of ERM on the organizational performance. Then, we discuss the characteristic of an

appropriate framework of ERM to improve the organizational performance and to gain

competitive advantage. Finally, we came out with the finding and discussion from the data

collection that we have been conducted from the housing developers in Pahang, Malaysia. This

paper is part of a continuing study that forms the basis for research grant of one of the authors.

We conclude the paper by providing the recommendations for the ERM areas and groundwork

for a more in-depth future study of the directional links of the concepts.

2. THEORETICAL BACKGROUND

2.1. Enterprise Risk Management (ERM)

In the There are differing viewpoints for the definition of Enterprise Risk Management (ERM).

Enterprise-Wide Risk Management (EWRM), Holistic Risk Management (HRM), Integrated

Risk Management (IRM), Strategic Risk Management (SRM), Corporate Risk Management

(CRM) and Business Risk Management (BRM) are the examples of different terminologies

which are synonymous with ERM term [13][18]. A close look at one of the established

definitions of ERM serves as a starting point: “a process, effected by an entity’s board of

directors, management and other personnel applied in a strategy setting and across the

enterprise, designed to identify the potential events that may affect the entity and manage risk

to be within its risks appetite to provide reasonable assurance regarding the achievement of

entity objectives” [19]. This definition is used because it seemed fits to this study as it can be

applied to any type of industries including the construction industry. It is interesting to note the

key points arising from the definitions can be divided into two parts. Firstly, on the main role

of ERM that is to integrate and to coordinate all types of risks across the entire organization.

Secondly, users are able to determine their risk appetite as well as to identify any potential

events that may have an impact to an organization [20].

Turning to ERM evolution, the trends and emerging practises of ERM started back at 1940’s

where the initial focus of traditional risk management were on the pure risks where each risks

operates in silos and was unrelated to the others. This means, individual risk management

optimization within each of the business units of an organization meant by the company’s

overall risk management optimization [2]. Then, throughout the 1970’s, 1980’s and early

1990’s, the focus relies merely on the financial and hazard solutions. Transition towards holistic

yet integrated system emphasizes the need to move towards more appropriate approach which

causes for the emergence of ERM in late 1990’s. The ERM provided guidance towards a more

comprehensive and rigorous understanding of the impact of risk and increased awareness of

executive responsibility to shareholders [21].

The ERM implementation process started back in 1992 from the report established by

COSO. The COSO is a voluntary private sector organization dedicated to improving

organizational performance and governance through effective internal control, enterprise risk

management and fraud deterrence[19]. The ERM COSO framework well known as one of the

most widely recognized and applied risk management structure frameworks in the world [19].

The framework serve as guidelines for companies worldwide to enhance their internal control

framework through their standards such as Risk Framework in Australia and the British Risk

Management Standard [22]. Meanwhile in Malaysia, the implementation of ERM arose from

Bursa Malaysia listing requirements back in year 2009 where the requirements serve as the key

factor requiring the listed companies to have an appropriate system for risk management [15].

The board of authority that is responsible overseeing the implementation of appropriate system

to manage risks in Malaysia is Malaysian Code on Corporate Governance (MCGC).



The implementation processes lead us to the identification of COSO ERM framework

model, which used as a platform to build the ERM blueprint in most of the organizations. The

ERM integrated framework encompasses three-dimensional matrix which are: a) four vertical

columns representing the strategic objectives of enterprise risk, b) Eight horizontal rows

representing the ERM dimensions, c) multiple levels of an organization. The Table 1

summarized the components of ERM dimensions based on the [19].

Through the literature process on the extent of ERM implementation in practise, it was

found that most of the studies are based on the banking, insurance and financial institutions

[23]. The studies revealed the significance of ERM which makes management better as value

drivers and source of competitive advantage [2]. In Malaysia, many ERM articles have

appeared from financial industry and main board listed multinational companies in Malaysian

Bursa [2]. The key finding is that Malaysian companies have placed increasing importance on

the identification, understanding and management of risks [24]. However, academic research

on ERM from the property industry is still in its infancy.

Table 1 Descriptions on the ERM Framework Model

Strategic

Objectives of

enterprise risk

Consists of strategic, operations, reporting and compliance of an

organization

ERM

Dimensions

Components Descriptions

Internal environment

It is the most important component which reflects

how a company views and addresses risk. Consists

of an entity’s risk management philosophy,

operating style, risk appetite, the management

commitment to integrity, ethical values and

competence, organizational structure, methods of

assigning authority and responsibility and human

resource standards.

Objective setting

A component in the early stages of an ERM process

which connected at multiple levels which act as the

pre-conditions to effective event identification, risk

assessment and risk response.

Event identification

When it comes to event identification, its either

positive or negative event that lead to identification

of opportunities and threats. COSO and AICPA have

channelled numerous methods for evaluating the

process which provides implicit guidelines for an

organization.

Risk assessment

The process of risk evaluation involves the analysis

of risks profiles (likelihood and impact) through

quantitative and qualitative approach. The qualitative

method can be done by labelling the potential risk as

“high”, “medium” and “low”. Quantitatively, the

risks are measured by assigning numeric scores and

financial effects.

Risk response

A set of actions that consists of Risk Avoidance (A),

Risk Reduction (R), Risk Acceptance (A) and Risk

Sharing which mean to align risks with the entity’s

risk tolerance and risk appetite (Tillman, 2011)



Control activities

Actions taken to minimise risk which aligned to the

organizations’ policies and procedures in ensuring

the risk responses are carried out effectively.

Information and

communication

Process of information sharing across the

organization so that people can understand and agree

about what needs to be done and how it can be done

effectively in managing the risks.

Monitoring

According to COSO, the monitoring process can be

done in two ways as listed below:

On-going monitoring : normal, recurring operating

activities of an entity

Periodic internal and external audits, commissioned

external reviews and external programs and

management reviews.

(Source: Commission, 2004)

2.2. ERM and organizational performance

Before we look at the case for a potential relationship between ERM and organizational

performance, it is important to apprehend the concept of organizational performance in which

ERM has a significant practical implication on it. One of the well-known definitions, has

described organizational performance as organization’s ability to achieve its goal by using

resources in an efficient and effective way [25]. Researchers have modelled organizational

performance in many ways to determine how best to measure the concept. However, the

traditional performance measurement system which was based on the cost accounting has been

criticized for being insufficient to fully measure the organizational performance criteria [26].

Overcoming some of the shortcomings of the organizational traditional measurement system

has led to the development of Strategic Performance Measurement System (SPMS). The

Balance Scorecard (BSC) by [27] has been recognized as one the famous measurement systems

that offers a combination of both financial and non-financial measures. Figure1 depicts the

framework of Balanced Scorecard which provides a general grasp of strategic performance

measurement system and how financial and non-financial systems interact to contribute to a

successful organization.

Figure 1 Contents of Balance Score Card

(Source: Kaplan and Norton, 1992)

• How do we look to our stakeholdersfinancial

• How do our customers see uscustomers

• How we can continue to improve our process innovation and improvement

• What must we excel atinternal process



Drawing upon the general view on the contents of organizational performance

measurement, the following paragraphs provides some practical insights how the ERM traits

are practised and the effects of this practise on organizational performance.

A large number of publications have demonstrated and proved how much impact ERM to

date has on organizational performance. For example, [8] revealed that ERM eventually led to

superior financial performance such retained earnings, return on assets and growth on market

value. The results also in line with [14] who found ERM implementation significantly has an

impact on the organizational financial and non-financial aspects. Adding to the literature, in

2012, the authors [28] investigated the impact of ERM implementation on organizational

performance (financial and non-financial). Moreover, the ERM implementation has a

significant positive impact on organization performance and business strategy [7]. The findings

clearly showed that ERM enhances the management of the organization, for example, through

better informed decision making and increased accountability. However, limited availability of

publications in Malaysia may hinder the ability to draw strong conclusion on the relationship

between the ERM and organizational performance due to the contradictory results from the

previous studies on the same relationship [15][16].

From the point of view of ERM implementation in the construction industry, this industry

is constantly exposed to a lot of complexity and risks, thus, the integration of the risks are

important to ensure the risks are properly managed and the corporate objectives are succeed.

Due to that, ERM is used to change the focus of the risk management function from primarily

defensive to increasingly offensive and strategic at the same time to offers a new approach to

enhance the project risk management in the construction industry as the construction industry

is seen as prime candidates for ERM adoption [29]. This is due to the fact that the construction

industry is known as a knowledge intensive industry [30].

There are growing numbers of studies focusing in investigating the influences of ERM

factors on the construction organization performance. For example, [29] have identified a list

of drivers for and obstacles to ERM implementation in construction firms which provides an

affective ‘frame of reference’ in the subject area. In the same token, [31] also investigated the

critical drivers for and hindrances to ERM implementation and compared the factors between

large and small-medium for Chinese construction firms in Singapore. The findings have proved

that the ERM giving the most substantial influence over improving the decision making at the

top management level and the “insufficient resources” is the most significant hindrances. Both

of these studies shows that ERM is significant to trace and treat the unpredictable risks which

can be occurred in the construction firms either in positive or negative way which can give

impact to the organizational performance. Thus the final section of this paper discusses

challenges and opportunities associated with conducting research on ERM and organizational

performance in Malaysian housing industry and some potential fruitful directions for the future.

A vast body of organizational performance knowledge has developed in recent decades and

the only way organizations can be driven to achieve excellence is by an eye on competition and

world best practice in all aspects of the business [32]. Recently more and more organizations

are recognizing that translating corporate strategies into actions requires strategic management.

Previous chapters have demonstrated the importance of ERM as a significant strategy tool in

achieving positive growth in organizational performance. However, current findings also reveal

that there is not enough research in housing perspective and there is a need to welcome more

research in local setting. There are few conceptual and empirical studies discuss ERM where

researchers include ERM as dimension in relation to organizational performance. However, it

is worth to note that much of the discussions in this subject is tied to a general description rather

than its internal characteristics in order to support management practice in local housing

companies. The present proposed study addresses these issues by focusing on the ERM and



performance of organizational housing developers as well as the link between them. The

following research questions guided this research:

1. What is the risk management structure currently available in Malaysian housing

developers’?

2. What is the relationship between Enterprise Risk Management (ERM) and risk

management structure of a housing developer’s organization?

3. How does the implementation of Enterprise Risk Management (ERM) in risk

management structure enhance an organizational performance?

In addressing the key research questions identified above, it was important to adopt an

appropriate research approach, which would enable appropriate data collection, analysis and

interpretation of the findings for the benefit of practitioners and researchers. Subsequently, as

in all researches, the study commenced with an extensive literature review to help provide a

thorough understanding of the developments in the methodologies used for measuring the

cognitive styles and project success including the construction management discipline. A

multiple case study involving housing developer companies have been carried out to investigate

further on this issue.

A conceptual framework is used to outline relationship variables in this study. The model

is not typically used for explaining complicated process, but it does assist by simplifying the

process and making it more understandable [33]. The model (Figure 3) is adopted from [2]

where the variables represented by ERM measures consist of event, monitoring, controls, risk

assessment, objective, risk response, internal environment and information and communication.

Meanwhile, the organizational performance variables focus on the financials and non-financial

measures.

Figure 3: Conceptual Framework

Source: Adopted from Siti (2014)



3. RESEARCH DESIGN AND METHODOLOGY

In getting an accurate and comprehensive data for this study, it was design as a qualitative

research by using case study as a strategy of the research and semi-structured interview as a

research technique which the respondents are housing developers in Pahang, Malaysia. Initially,

the researchers has proposed 20 companies in Pahang to participate in this study, unfortunately,

only five companies welcomed the researchers and willing to be interviewed toward the risk

management structure (RMS) and ERM. In conducting a systematic interview, an interview

schedule has been prepared with four important sections which section A is important in gather

respondent’s profile to figure out the respondent’s experience and their latest projects, section

B is to know respondent’s risk awareness and understanding towards risks and risk management

structure (RMS), then section C is to investigate the elements of ERM that being practice by

the respondent’s companies, finally section D is the main component of this study in

investigated the impact of ERM in organization performance based on COSO framework. Then

all the data has been gathered, classified and analyze using content analysis by assigning codes

which may be in numbers and words to specify the same words or characteristics within the

respondent’s interview transcripts.

4. RESULTS AND ANALYSIS OF FINDINGS

After all the relevant data have been gathered and analyzed, this study has found that all five

respondents are categories under established and experiences housing developers companies

because all of them have more than 5 years experiences in developing housing projects which

80% of them have 6 to 10 years and 20% have 16 to 20 years experiences. Moreover, in term

of respondent’s experience in managing risk in their organization, most of the respondents have

familiar with the risks and aware about the effect if the risk unmanaged properly from the start

of their company but the way they manage the risks are different based on their previous

experience in the construction field. The data obtained from the interviews are indicates as an

accurate data because most of them have lots experience in housing development project and

familiar in handling variety of construction risks either on-site or off-site development project.

According to the risk awareness and understanding, 75% of the respondents aware about

the existence of risk in their organization and have considered risk as an important or a priority

element that needs to be manage in an organization to ensure the organization achieve their

objectives and mission. In their opinion, improper in managing the risk will bring the

organization a huge impact not only into their project but it also will affect the stabilization of

the organization performance especially in financial, profitability, staff, asset and so on. In

relation to this, 25% of respondent’s indicates that they always improve their knowledge on risk

management by contribute their staff into seminar; workshop and other events that might help

them improve their risk management skill into their organization performance internally and

externally.

According to the application of RMS by the housing developers in Pahang, 4 out of 5

respondents used project risk management process as their tools in order to manage the expected

and unexpected risk that will occur in their organization as early as possible to ensure the risk

will not give negative impact to the organization performance. The process includes the

sequences of identifying the potential risk, analyzing the potential risk probability and

seriousness, response to the risk according to the previous project and brainstorming from the

project parties, monitoring and controlling the process regularly to mitigate the risks that have

potential to occur in their organization. Furthermore, in term of ERM, the respondents did not

have specific units/departments or person in-charge in handling the risk management in their

organization, most of them organized their potential risk together during the RMS process.



In context of the impact of ERM in organizational performance, the COSO framework is

use as a model which consist 8 dimensions of risk components such as internal environment,

objective setting, event identification, risk assessment, risk response, control activities,

information and communication also monitoring. Through the conducted interview, the finding

of the study has shown that;

(i) Firstly, 3 out of 5 organizations response that the internal environment did not give high

impact to the organizational performance in terms of financial and non-financial aspect because

for them their organizational structure, human behavior, assignment of authority &

responsibility, integrity and ethical of their companies is in high performances and in a good

condition. While 2 of respondents agreed that the internal environment will give impact to the

organizational performance in term of non-financial such as employees resign, employee’s

behavior, corporate culture and so on.

(ii) Secondly, the objective setting, the results indicates that 4 out of 5 respondents have agreed

that the objective setting is align with the ERM objective that derived from COSO definition

which the ERM process will help the company meet its objective and it is one of the first steps

in ERM process and as a precondition to such components or dimensions as risk assessment,

risk response and others. This objective setting that aligns with the organization mission will

give good impact to the organizational performance in term of financial.

(iii) Thirdly, the event identification, which is important to figure out the potential risk that will

occur could be a threat or opportunity to the organization/project. The identified event might

be enhance, prevent, reduce or accelerate or delay the achievement of the organization

objectives. In ERM issues, the event identification can be obtained from employees’

capabilities, fraudulent activities, natural disaster, capability of assets, market conditions and

real estate value which all these can give impact to the organization performance in term of

financial and non-financial aspect.

(iv) Fourthly, the risk assessment, 3 out of 5 respondents has used risk assessment in evaluating

the identified events to assess whether it is an opportunity or a threat to their organization before

they started to develop their mitigation plan using the selected risks that give a good result in

the evaluation. This risk assessment will give effect to the organization financial if the

assessment is incorrect.

(v) Fifthly, the COSO component is risk response which discussing on how the organization

response to the risks that have been evaluated. In this stage, the strategy options will be

consolidated and the best solution will be select. Most of the respondents have indicates that

this components may give impact to the organizational performance in term of financial which

means it will affect the organizational profitability income if the selection of their responses is

wrong.

(vi) Sixthly, the control activities which has been reveal that all respondents agreed that all

activities must be control tightly time to time starting from the project start till end of the project

to make sure all mitigation plan goes well without having unexpected event that may give

impact to the organizational financial.

(vii) Seventh, in term of information and communication components, a clear information and

good communication between the management and their staff is important in delivering a good

action and decision. Hence, all respondents indicates that it is important to an organization to

give a clear information to their staff about the organization objective, goal, target and so on to

enhance the staff’s understanding and also to deliver an accurate information to the project

parties. This component will affect the non-financial aspect of organizational performance.



(viii) Lastly, the monitoring component, all activities are always being monitor carefully to

ensure the risk is properly managed. This component will give huge impact if the project

progress is mistreated.

To make a clear picture on the impact of ERM in organizational performance, this study

has summarized it into figure 4 which the ERM has divided into two main affected elements

like financial and non-financial aspect.

Figure 4 The impact of ERM in organization performance.

5. CONCLUSIONS

Recognizing the process of ERM and how it can be done effectively that can make a significant

difference in an organization performance are of paramount importance. This could be due to

the fact that effective risk management provides a better basis for decision-making at strategic

level, tactical and operational levels by providing a robust, logical, systematic and transparent

auditable process that uses best available experience to provide a clear understanding of

potential risk profiles and options for dealing with them (Loosemore et al., 2006). This research

will contributes to the body of knowledge on risk management by highlighting issues related to

the implications of Enterprise Risk Management (ERM) which was identified as a factor that

has a significant impact on the success of an organisation. A contribution to practitioners is the

empirical data that helps guide risk management approaches within housing developers towards

achieving the strategic objectives which will contribute to the success of projects and the

organization.

From the data collection and analysis, this study has found that the ERM is significant to be

applied in an organization to enhance the organization performance either in financial aspect or

non- financial aspect. However, the financial aspect gives most influences in ERM

implementation which can affect the organization profitability and stabilization. According to

the objective of this study, the implementation of ERM in Malaysia housing developer

organization is still in moderate stage because not all the respondents using a proper risk

management for their organization in managing their potential risk but the way they manage

the risk is look like the same pattern of RMS. In term of ERM, this words, is still new for most

of the respondents but they have an idea about it and actually familiar with that but not in a

proper way. Overall, this study can be concluded that the implementation of ERM and RMS

give good impact to the organization performance in term of financial and non-financial aspect

and at the same time it helps the organization to maintain their good performance by identifying

and mitigate the potential risk earlier to develop a successful organization and project.

This study also aims to highlight possible ways to foster the implementation of ERM

through training programmes so the Malaysian housing developers able to move construction

economy progress by being enablers for businesses by creating the knowledge-based decision



support system for ERM (KBDSS-ERM) for Malaysia construction firms. The system is

essential because it helps in assessing the ERM maturity and provides actions plans for

improving ERM implementation based on the assessment results.

ACKNOWLEDGEMENTS

The authors this research was supported by Short Term Grant, School of Housing Building and

Planning, Universiti Sains Malaysia (304/PPBGN/6313294).

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