Pat Donwa and Peter Okoeguale Ibadin

Department of Accounting, University of Benin, Benin City





Undoubtedly, the operating environment of the 21st century presents  companies with an unprecedented universe of risks within which to conduct business; and yet the creation and sustenance of shareholder value is crucial to the survival of companies especially in the face of the present-day challenges in the business world. It is against this background that this paper x-rays the creation of shareholder value through the management of risk. The risk component has always been a factor in the mix of business decision variables. The research looks at the emerging model of Enterprise Risk Management(ERM) in two leading accounting,professional firms and consulting firms as well as two other financial-services firms; all or severally in the area of internal audit, information risk, process re-engineering, out-sourcing and systems integration and corporate governance .It was found that risk management function was non-existent as a specialized risk management group within the organization. We recommend and support a new paradigm shift in organizational trend of maintaining a risk management function. This, it is believed, will help keep risk within limits (or downwards) in order to maintain upward movement in the shareholder value.

Keywords: Shareholder, risk, value, management



In today’s economy, a company’s success is invariably determined by its continued ability to adequately satisfy the market needs on one hand, and its stakeholders on the other hand (Hill, 1999). The continued ability of companies to sustain and increase operating capacity drives the need for further finance; and hence companies expand, have a wider stakeholders base and, of course, more responsibility (Higgins, 1995). Ping (2000), against the backdrop of the above submission, emphasizes the concept of shareholder value, which he describes in terms of measured share price. This, in itself, is a reflection of the market’s confidence in the company’s ability to generate future earnings.

Shareholder value is essentially the value attributable to the shareholders of a company. Tuller (1994) contends that the value of the shareholder relates to specific expected benefits of dividend flow, interest payments and capital gains; and such benefits are created when the change in market capitalization is higher than the change in net equity funds. Hill (1999) argues that shareholder value is inexplicably the driving force behind corporate successes and as such, the corporate organization wishing to fulfill or bring about value creation chain must manage the relevant value driving activities and the diverse risk facing these activities.

The earnings potentials of any corporate organization can be affected by the corporate organization exposure to business and financial risk and in consequence, affect the shareholders value. These, among other risk types, alter the variability of earnings due to the investment decision and financial leverage. Shareholder value, as measured by the share price and market confidence in the organization’s ability to generate future earnings, has been emphasized and occurred  in finance literature (Roylett,2001). The emphasis on the maximization of the value of equity holding without due regard to the management of fundamental risk profile in the context of business strategic planning process has been traced to the capital market’s unwillingness (or death of finance) to sustain corporate organization’s investment base (Hill, 1999).
Nigerian corporate organizations, as part of the global corporate world, appear to be at a cross road with respect to ways and means of creating shareholder value. The  consolidation in the banking industry,the merger and acquisition schemes, though intended to create and maintain shareholder value, cannot create the required synergy without sustained risk analysis and management. Pandey (2005) contends that analysis of risk in the context of building shareholder value is an important task of strategic management. He argues that an organization’s corporate goal is threatened where the total risk analysis, among others, is relegated. Elliot(2001)concludes that when risk is managed, the corporate organization invariably builds or at least protects shareholder value. 

To this end, this paper has the following research objectives:

  • to establish and understand current good practices of risk management and to see how the leading Nigerian corporate organizations can manage their critical risk factors to drive performance and improve shareholder value.
  • to establish and confirm that there is an inverse relationship between risk and shareholder value.

Literature review

Shareholder value has been discussed in much literature. Hill (1999) attributes shareholder value to the era of economic approach in the 1960s when competing theories of share price maximization and optimal capital structure were put forward. Tuller (1994), in attempting to find the determinants of shareholder value,argues that investors’ specific expected benefits as, dividend flows (free cash flows) interest payment and capital gains, reflect what value they attach to their investments. Booth (1998) defines “free cash flows” as the net income before interest and tax alter adjusting for non-cash items, changes in net working capital and subtracting capital expenditure. Ernest and Young (2001) stresses the technical approach to the shareholder value; they call it the “the static net present value of the existing business model, plus the value of future growth option, describing shareholder value as the sum of the value of what the company does now and the value of what the company could possibly do in the future.

 It is noted, in general terms that capital market efficiency reflects adequately  the shareholder value(Kennedy,2000). But this holds in quoted companies. Hill(1998) heightens the popularity of the shareholder value.His emphasis is on the systemic approach to corporate finance thinking and to recognize the competing goals and choices among the various stakeholders in the economic system. Ernest and Young(2001) however emphasize the need to inter-connect the various goals and link them with non-quantitative objectives of the firm. Tuller(1994) however offers different contexts of business values.Omolehinwa(2001) believes that the adoption of simplistic approach to determining the value of shareholder, and by extension, the value of the company, is in order.

Megginson(1997) and Isenmila(2002) in their submission define risk as the chance of financial loss; the variability of return associated with a given asset. Higgins (1995) emphasizes investment risks, noting that risk is concerned with the range of possible outcomes from an investment, the variability of possible outcomes/return.The ‘finance view’ of risk describes risk as the degree of uncertainty around an event occurring and the subsequent impact on an organization. Risk could also be linked to the achievement of corporate objective. IFAC and CIMA(2002) link risk to a series of uncertain future events which influence the achievements of the organisation strategic goals, be they finance or operational,distinguishing varieties of risks.

Pandey (2005) distinguishes between systematic and unsystematic risk, but quick to note that this distinction is not in compartments. Systematic or unsystematic risk refers to the risk that cannot be diversified; it relates to uncertainty arising from changes; and such risk could be managed through the proper deployment and movement of interest rates, inflation rates, commodity prices, currency rates, among others (Elliot, 2001). Systematic or unsystematic risks are company’s specific risks caused by factors that may be attributable to the individual company.

On the other hand, Business risk is risk arising from the company’s operational characteristics such as cost structure, demand characteristics and industry competition and business cycle (Megginson,1997). Henderson (2001) describes financial risk as one that arises from direct result of the firm’s medium to long-term financial decision. Other risk areas are noted.According to Sohnke (2002), interest rate risk, commodity price risk and currency risk are components of financial risk even though they affect the company’s operations more and divorced from the financing structure.

Enterprise Risk Management - New Paradigm
Risks are no longer to be feared or avoided completely but they are to be managed and seen as critical element in strategizing. Isaac and Connell (2002) are of the opinion that companies that think in a ‘risk way’ be prepared to strategically manage risks to optimize value. Labarge (2003) argues that risk in itself is not bad. But what is bad is risk unmanaged misunderstood, mispriced or simply unintended (KPMG, Australia, 2001). Kloman (2000) submits that the emphasis in today’s investment world is what risks we are taken, and not how much risk is taken. In the past risks facing business were existing quantifiable risks that lend themselves to easy identification, quantification and assessment. Against this backgroung, IFAC (1999) supports an integrated Enterprise Risk Management (ERM) which aligns with the realization of the full spectrum of risk and the development of integrated ERM frameworks to help pursue business objectives with confidence.

Labarge (2003) submits that ERM emerged as an important business trend to align strategy, process, people, technology and knowledge with the purpose of evaluating and managing the uncertainties faced by the enterprise in order to create value. KPMG,Australia (2001) says the ERM is a Top-Down approach based on organizational structure, focused on new ways of managing and optimizing risks. Elliot (2001) regards ERM as a comprehensive integrated approach to addressing corporate risk. In the context of an enterprise’s risk appetite (an enterprise’s tolerance for risk), ERM is a move towards the optimization of risk, as against the traditional approach of mitigating risk by using controls to limit exposure to problem. Different companies against the backdrop of their different experiences may adopt variants to the ERM frameworks.

Methodology and data
The research attempts to achieve the objectives of establishing current good practice on managing key risk and to possibly link the proper management of risk to shareholder value. To this end, a cross-sectional survey was adopted based on the fact that we measured the opinions of the respondents to determine the impact of managing risk on the creation of shareholder value. We had a choice of judgmental sampling in drawing our sample, on grounds of our knowledge and analysis of the population.

The sample was made up of three (3) finance and leading risk management consultants firms; three (3) public and private companies; four(4) leading accounting and professional services firms as well as three (3) investment and assets management and mutual companies, making a sample of twelve(12). All these are into the areas of internal audit; information risk management; corporate governance; process re-engineering; outsourcing and systems integration

We elicited the responses from the aforementioned class of persons and institutions with the aid of questionnaires and personal and unstructured interview. The researcher personally interviewed  the management staff in each of the companies dedicated to the management of risk. The gathered data were analysed and processed using descriptive and non-parametric statistical tool of chi-square test of significance. The choice of chi-square test was informed by the nature of the formulated hypotheses that reflected the objectives and questions raised. Results obtained were at 5 % level of significance. This indicates a confidence level of 95%. Specifically, relationships between or among variables were specified.

Theoretical framework and model specification
            Risk management is built around the strategic direction of the business, risk portfolio, optimization and measuring and monitoring based on the established ERM.Risk management models tend towards how business organizations perceive risks and deal with them. The following, according to KPMG, Australia (2001), represent the evolving risk management:

  • From risk as individual hazards (iI) to risk in the context of business strategy (bS)
  • From risk identification assessment (iA)t to risk portfolio development(pD)
  • From focus on all risks (Ar) to focus on critical risks (cR)
  • From risk mitigation (rM)to risk optimization(rO)
  • From risk limit (Rl) to risk strategy (rS)
  • From risk with no owners (nO) to risk with responsibility(R)
  • From haphazard risk quantification (rQ) to risk monitoring and measurement (mM)
  • oT=unspecified ‘others’

  Emerging (ERM) model=Bs+Pd+cR+rO+rS+R+Mm+Ot

Analysis of data and discussion
Fifty questionnaires were administered to the respondents; out of which forty (40)         were returned; while twenty percent (20%) failed to return. This represents eighty percent (80%) response rate (see appendix one).

Analysis of Questions 8-12 indicates that 50% of the respondents believe that risk is a very critical factor in shareholder value but with 5% saying that risk is unrelated to building shareholder value. However, 44.7% of the respondents agree that risk is critical. Operational risk was seen by respondent as most critical(with an average rating of 2.13;followed by political and regulatory risk(2.21);brand/reputation risk; commercial risk and technology risk in that order with average rating of 3.21;3.51 and 3.95 respectively.76.9% support the value-creation ability of ERM:17.9% are indifferent while 5.2% failed to agree that ERM drive shareholder value. On the effectiveness of managing risk in the value-creation of shareholder,82.5% of the respondents affirm that management of some risk types could boost the value of the company;10% decline while 7.5% disagree completely.94.9% of the respondents agreed that it is good practice to have a Business Continuity Plan in the event of a business failure;5.1% remain indifferent while no respondents disagreed.

Analyses of Questions 13-18 indicate that 66.7% of the sampled respondents support the implementation of internal control system in order to reduce cost, 17.9% was indifferent and 15.4% disagreed.70% agreed that a risk management committee be introduced, and coordinated by a relationship manager and the chief risk officer; 7.5% disagreed and 22.5% became indifferent. While key risk issues be tackled at corporate strategy level, according to 47.4% of the respondents, 26.3% were indifferent and disagreed respectively. Uniformity of risk terminology of risk was suggested by 72.5% of the respondents;10% were against it and 17.5% indifferent.66.7% agreed that key risk disclosure in the annual report and account was absolutely necessary to improve or increase the investors’ confidence in the company’s ability to manage risk;20.5% were indifferent and 12.8% disagreed.By extention,65.8% believe that such inclusion will boost the company’s reputation;23.7% are indifferent and 10.5% disagreed .

Analysis of Questions19-22 shows that cost of capital will be reduced (29.8%); 35.1% believe that such cost will not reduce; while 35.1% were indifferent. 70% are of the opinion that share prices are influenced more by the future-growth perception of the investors;30% however believe that quarterly results and earnings determine it.63.2% believe that share prices react to losses from risks that can be managed; while 15.8% were indifferent and 21% disagreed. 95% believe that optimal management of capital structure risk mitigates the threat of foreclosure and insolvency by the creditors while 5% were indifferent

Statement of hypotheses and testing
H1:       There is significant relationship between the Enterprise Risk Strategy adopted and                 how well risks are managed.

H2:       There is a relationship between Enterprise-wide Risk Management Strategy and         the probability of financial failure

H3:       There is significant relationship between Enterprise Risk Management practice          and the shareholder value.

Hypothesis 1.Applying the chi-square at 95% confidence interval, or at 5% level of significance at v(earlier defined) degrees of freedom, the hypothesis is accepted that there is significant relationship between the Enterprise Risk Strategy adopted and how well risks are managed.(The Χ2 CAL(22.1) is > than Χ2 critical value(9.488)
Hypothesis 2. Applying the chi-square at 95% confidence interval, or at 5% level of significance at v (as earlier defined) degrees of freedom, the hypothesis is accepted that there is significant relationship of the Enterprise Risk Strategy on the probability of financial failure (The Χ2 CAL (28.2 is> than Χ2 critical value (9.488)

Hypothesis 3. Applying the chi-square at 95% confidence interval, or at 5% level of significance at v (as earlier defined) degrees of freedom, the hypothesis is accepted that there is significant relationship of the Enterprise Risk Management practices enhance the value of a business failure (The Χ2 CAL (55.55 is> than Χ2 critical value (9.488)

Summary of findings
Some major findings are highlighted in the following.

  • There is significant relationship between the Enterprise Risk Strategy adopted and how well risks are managed.
  • There is a significant impact of Enterprise-wide Risk Management Strategy on the probability of financial failure
  • There is a significant relationship between Enterprise Risk Management practice and the shareholder value of the business
    • Against the background of the above findings, opinions sampled suggest that key risk issues be pushed and tackled at the corporate strategy level. This is in accordance with the emerging organizational principle that the Enterprise-wide Risk, the reputation risk be centralized while the Process-level Risks be decentralized (KPMG, Australia, 2001).
    • Respondents (70%) believe that the risk management function be specialized under a risk management group within the organization; and chief risk officer at the helm maintains such specialized function.
    • Respondents (67%) believe that key risk disclosures improve the company reputation.
    • Operational risk is seen to be the most critical to shareholder value in Nigeria.
    • Respondents (74%) opine that future expected growth drives share values.

Concluding remarks
So far an attempt has been made to address the dare risks in an integrated approach, using an ERM, in order to build shareholder value. Risks are no longer to be feared or avoided completely but they are to be managed and seen as critical element in strategizing.Risk are to be better managed when key risks areas are identified and systematically incorporated into the overall strategic direction of the company.This is where ERM  strategy comes on stream;and found to reduce the probability of financial failure, ultimately culminating into creating value for the shareholder
The organization, therefore, has a onerous task to establish what the shareholder can value, identify the risk areas, determine the preferred treatment to the risk areas and finally communicate the risk treatment to shareholders.It is however suggested for the purpose of future research to expand the research base to include organizations without share prices as well as issues of relative responsiveness of shareholder value to business risk and financial risk.Such expansion will incorporate organizations,though unquoted on the market,will give a wholistic picture of how to deal with risk,using the ERM approach




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