Corporate Reputational Risk and Enterprise Risk Management: An Analysis from the Perspectives of Various Stakeholders

In this paper we examine the effect of Enterprise Risk Management (ERM) adoption on a firm's corporate reputation. ERM may impact corporate reputation in a variety of ways. First, ERM is a management process that enables a firm to holistically manage all risks. This creates a process in which individual risks, including reputation risk, are identified, assessed, and managed in a unified manner so that the firm value is maximized. Second, ERM encourages disclosure of risks, so that stakeholders can better understand which risks a firm is accepting and which it is avoiding. This greater disclosure is generally viewed positively by outside stakeholders because it allows them to better manage their own risk profiles. Finally, ERM provides a strategic response to a reputation damaging event. From our examination of a range of reputation proxies, we find evidence that implementation of a ERM program may enhance corporate reputation, although not in the short-term. In addition, we find evidence that ERM adoption tends to occur during a period in which various reputation measures tend to be decreasing. This suggests that firms may be implementing ERM as a response to a decline in corporate fortunes. However, our results suggest that following ERM adoption this decline in reputational measures is somewhat reduced and in some cases reversed.