Sample Thesis or Dissertationnn

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L.
Gavan
UNIVERSITY OF THE EAST GRADUATE SCHOOL
ENTERPRISE RISK MANAGEMENT PRACTICE: IMPACT ON FINANCIAL PERFORMANCE OF TOP MULTINATIONAL COMPANIES IN THE PHILIPPINES
A Dissertation Presented to the Faculty of the Graduate School University of the East, Manila
In Partial Fulfillment of the Requirements For the Degree of Doctor of Business Administration
RAMON LEO L. GAVAN November 26, 2011
University of the East

GRADUATE SCHOOL
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan
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APPROVAL SHEET University of the East

This dissertation entitled
GRADUATE SCHOOL
ENTERPRISE RISK MANAGEMENT PRACTICE: IMPACT ON FINANCIAL PERFORMANCE OF TOP MULTINATIONAL COMPANIES IN THE PHILIPPINES
presented orally and submitted by RAMON LEO L. GAVAN has been approved and accepted in partial fulfillment of the requirements for the degree of Doctor of Business Administration.
(Sgd.) REYNALDO D. BANZON, DBA
Adviser
PANEL OF EXAMINERS
Approved by the Graduate Research Committee on Oral Examination with a grade of Highly Satisfactory on November 26, 2011.
(Sgd.) VIRGILIO V. SALENTES, DBA
Chairman
(Sgd.) ROBERTO F. VILLARROEL, DBA
(Sgd.) MICHELLE H. CONCEPCION, DBA
Critic/ Member
Member
(Sgd.) MELITO A. BACCAY, D.Eng.
(Sgd.) ROBERTO P. GABIOLA, Ph.D.
Member
Member
Accepted and approved in partial fulfillment of the requirements for the Degree of DOCTOR OF BUSINESS ADMINISTRATION major in FINANCIAL MANAGEMENT.
(Sgd.) AVELINA A. DE LA REA, Ph.D.
Dean
GRADUATE SCHOOL, UE 2219 C.M. Recto Avenue, Sampaloc, Manila Tel. Nos.: (63-2) 735-5471 loc. 358/ 374 Telefax: (63-2) 735-8533 Website: www.ue.edu.ph
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University of the East

GRADUATE SCHOOL
CERTIFICATE OF ORIGINALITY
I hereby declare that this submission is my own work and that, to the best of my knowledge and belief, it contains no material previously published or written by another person nor material which to a substantial extent has been accepted for the award of any other degree or diploma of a university or other institute of higher learning, except where the due acknowledgement is made in the text.
I also declare that the intellectual content of this dissertation is the product of my own work, even though I may have received assistance from others on style, presentation and language expression.
(Sgd.) RAMON LEO L. GAVAN, CTP
Candidate November 26, 2011
(Sgd.) REYNALDO D. BANZON, DBA
Adviser November 26, 2011
GRADUATE SCHOOL, UE 2219 C.M. Recto Avenue, Sampaloc, Manila Tel. Nos.: (63-2) 735-5471 loc. 358/ 374 Telefax: (63-2) 735-8533 Website: www.ue.edu.ph
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ACKNOWLEDGMENT
This dissertation is the culmination of a long and tedious process, where I spent many hours in data gathering and successively toiled independently in the actual writing of this paper in the last four laborious months, the longest marathon in my life. The success of this endeavor could not have been possible without the generous assistance of the following individuals to whom I express my heartfelt gratitude: My sincerest gratitude goes to the chief officers, senior executives, internal auditors and risk/functional managers for their precious time in responding to the survey. Without their participation this study will never materialize. To Dr. Roberto F. Villarroel, who actually stood as my unofficial adviser, for his meritorious advises on the construction of the survey instrument and on the details of multiple regression analysis which gave me immeasurable guidance. He has been a very patient and excellent motivator taxing this researcher to the limit of his ability. To Dr. Virgilio V. Salentes, for his honest critique on the dependent variables the researcher initially considered, becoming instrumental to the overall quality of this study resulting to an empirical investigation of research variables that supported the hypotheses. To my two little kids Monique Leigh-Ann and Rayszard Leigh, for giving me true happiness and motivation to finish this dissertation for my doctoral degree so that I could provide them a brighter future as a father. To the mother of my two kids, Mychelle, for helping me during the delivery and collection stages in the conduct of the survey. To my beloved parents, Atty. Cenesio C. Gavan and Elizabeth L. Gavan, for their encouragement and support as I struggled on. I humbly dedicate this work for the greater glory of the Almighty Father.
RAMON LEO L. GAVAN
ABSTRACT
Dissertation Title : Enterprise Risk Management Practice: Impact on Financial Performance of Top Multinational Companies in the Philippines : : : : : Dr. Ramon Leo L. Gavan, CTP Doctor of Business Administration University of the East, Manila November 26, 2011 Dr. Reynaldo D. Banzon
Researcher Degree School Date of Completion Adviser
This study focused on whether some of the widely-known practices in enterprise risk management cause significant effects on financial performance as indicated by the three most commonly used financial ratios namely, Return on Total Assets (ROTA), Net Profit Margin (NPM) and Return on Equity (ROE) of top multinational companies in the Philippines. Using multiple regression analysis, this research study applied and tested the shareholder value maximization theory on ERM as a strategic tool and the 1st of the 11 risk management principles of ISO 31000:2009 if indeed the ERM practices cause significant changes or effects on financial performance. Additionally, the study determined whether the top MNCs implementing ERM financially outperform those without ERM through the use of the T-Test for Two Sample Means Assuming Equal Variances, following the causal-comparative research design to test the ERM: Theory and Practice. Finally, through the application of index numbers and moving average on the longitudinal data from financial ratios the study examined whether MNCs implementing ERM improve in ROTA, NPM and ROE ex post facto, or after ERM was adopted.
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Using a set of inclusion criteria, this research study covered 60 top multinational companies from the financial, insurance, oil/gas and pharmaceutical industries that are regulated by the Bangko Sentral ng Pilipinas, Insurance Commission, Department of Energy, and the Food and Drug Administration, respectively. Following the descriptivesurvey method and the deductive mode of research, together with the use of inferential statistics, the study produced remarkable results. As shown by the results of the multiple regression analysis at 5% level of significance, the 15 ERM practices have a collective significant effect on NPM and ROE, but not on ROTA. Of the 15 ERM practices, only two are causing significant changes to each of the two dependent variables (NPM and ROE) whose variations can be explained by the linear effect of the ERM practices. Having a local risk manager around causes a negative and significant effect on NPM while integrating risk management across all functions and business units has a positive effect on NPM. Meanwhile, integrating risk management within the strategic planning process does not enhance but rather negatively influence ROE. Using the same set of explanatory variables (responses), the regression also showed that the effectiveness of managing major types of risks is significantly and positively related with ROE. The study found out that at 0.05 level of significance MNCs implementing ERM have no significant advantage over non-ERM firms in the aspects of ROTA and NPM during the same period of time. Interestingly, multinational companies explicitly implementing ERM enjoy a significantly better return on equity over non-ERM firms at the same 5% level of significance.
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Based on the results from the longitudinal data, the results are quite consistent with the overall effects of ERM practices on ROTA, NPM and ROE in the multiple regression analysis. Multinational companies with ERM do not improve in return on total assets over time after ERM was implemented (ex post facto), while they have a significant increase in NPM on the first year after the fact and have very stable or consistent performance over the next 8 years, with a cumulative aggregate increase of 154.55% over the 9-year period, after the base period. MNCs also experienced a steep increase in ROE one year after ERM was adopted and held a fairly stable and positive performance over time, with 57% cumulative aggregate increase from the base period. Based on these conclusions from the findings, the researcher recommends further studies and policy formulation on some specific ERM practices and whether MNCs should implement a fully functioning enterprise risk management.
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TABLE OF CONTENTS
Page Title Page Approval Sheet Certificate of Originality Acknowledgment Abstract Table of Contents List of Tables List of Figures CHAPTER 1 RESEARCH PROBLEM 1.1 Introduction 1.2 Historical and Contextual Backgrounds of the Problem 1.3 Statement of the Problem 1.4 Significance of the Study 1.5 Scope and Limitations of the Study CHAPTER 2 THEORETICAL FRAMEWORK 2.1 Theory Guiding the Study Shareholder Wealth Maximization Stakeholder Theory Agency Theory The Risk-Return Trade-Off All Risk Is Not Equal Murphys Law Enlightened Value Maximization & Enlightened Stakeholder Theory ISO 31000:2009s 1st Principle of Risk Management Modern Portfolio Theory ERM: Theory and Practice Input-Process-Output (IPO) Scheme of the Systems Theory 2.2 Related Literature and Studies 2.2.1 Local Literature 2.2.2 Foreign Literature 2.2.3 Local Studies 2.2.4 Foreign Studies 2.2.5 Synthesis and Relevance of the Related Literature and Studies 2.3 Theoretical Framework 2.4 Research Paradigm 2.5 Research Hypothesis 2.6 Operational Definition of the Variables 20 20 22 23 23 24 25 25 26 26 27 28 29 29 37 49 58 86 88 90 92 93 1 3 8 10 13 i ii iii iv v viii xi xiii
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 2.7 List of Acronyms Used CHAPTER 3 RESEARCH DESIGN 3.1 Research Locale 3.2 Methods of Research Used 3.3 Sources of Data, Population and Sample 3.4 Instrument for Gathering Data and Validation 3.5 Procedure for Gathering Data 3.6 Statistics for Analyzing Data CHAPTER 4 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA On Research Problem No. 1 On Research Problem No. 2 On Research Problem No. 3 On Research Problem No. 4 On Research Problem No. 5 CHAPTER 5 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS Summary of Findings Conclusions Recommendations ENDNOTES BIBLIOGRAPHY Books Local Academic Research Studies Foreign Academic Research Studies Research Reports and Projects Journal Articles and Working Papers Research Survey Publications Electronic Sources Summary of Internet Websites Accessed Magazine Sources Paper Presentation at Conference Legal Documents APPENDICES A. Profile of Respondents B. Letter of Request C. Survey Questionnaire D. Extent of ERM Practices of Respondent MNCs
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103
105 107 108 117 119 121
132 143 150 166 174
189 200 202 205
207 209 210 213 214 215 216 216 216 217 217
221 228 229 234
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Return on Total Assets (ROTA) Ratios of Respondent MNCs, 2004 2009 Net Profit Margin (NPM) Ratios of Respondent MNCs, 2004 2009 Return on Equity (ROE) Ratios of Respondent MNCs, 2004 2009 Data set construction of joint observations between ERM practices and ROTA I. Data set construction of joint observations between ERM practices and NPM J. Data set construction of joint observations between ERM practices and ROE E. F. G. H. CURRICULUM VITAE
237 240 243 246 248 250 252
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LIST OF TABLES
Table No. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 Title Page
Risk Management & Risk-related Issuances for Financial Institutions under BSP Supervision Risk-related Issuances for all Insurance Companies in the Philippines Laws and Issuances Regulating the Activities and Relations of Persons and Entities Engaged in Oil/Gas Industry Principles of risk management 11 Principles for managing risk Key steps to achieve successful Risk Management Risk Management Standards Top Multinational Financial Companies Top Multinational Insurance Companies Top Multinational Oil and Gas Companies Top Multinational Pharmaceutical Companies Dependent and Independent Variables Likert & Likert-type Scale Models Extent of ERM Practices in the Financial Industry Extent of ERM Practices in the Insurance Industry Extent of ERM Practices in the Oil/Gas Industry Extent of ERM Practices in the Pharmaceutical Industry Extent of ERM Practices of Top MNCs in the Philippines Return on Total Assets (%) of Top MNCs by Industry, 2004-2009 MNCs Financial Performance on Return on Total Assets, 2004 vs. 2009 Net Profit Margin (%) of Top MNCs by Industry, 2004 to 2009 MNCs Financial Performance on Net Profit Margin, 2004 vs. 2009 Return on Equity (%) of Top MNCs by Industry, 2004 to 2009 MNCs Financial Performance on Return on Equity, 2004 vs. 2009 Summary of Financial Performance of Top Multinational Companies, 2004 to 2009 Regression Summary of ERM Practices on ROTA F Test for Overall Significance of ERM Practices on ROTA t Test for Individual Significance of ERM Practices on ROTA Regression Summary of ERM Practices on NPM F Test for Overall Significance of ERM Practices on NPM t Test for Individual Significance of ERM Practices on NPM Regression Summary of ERM Practices on ROE F Test for Overall Significance of ERM Practices on ROE t Test for Individual Significance of ERM Practices on ROE Weighted Mean on Return on Total Assets of ERM & Non-ERM Companies, 2004 to 2009 T-test on Return on Total Assets for ERM & Non-ERM Companies Weighted Mean on Net Profit Margin of ERM &
30 32 34 38 40 41 43 113 114 115 115 121 123 133 135 137 139 141 143 144 145 146 147 148 149 150 151 152 156 156 158 161 161 163 167 168
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Non-ERM Companies, 2004 to 2009 T-test on Net Profit Margin for ERM & Non-ERM Companies Weighted Mean on Return on Equity of ERM & Non-ERM Companies, 2004 to 2009 T-test on Return on Equity for ERM & Non-ERM Companies Return on Total Assets of ERM Companies by Length of ERM Index Numbers and Moving Average of Return on Total Assets of ERM Companies from Base Period Net Profit Margin of ERM Companies by Length of ERM Index Numbers and Moving Average of Net Profit Margin of ERM Companies from Base Period Return on Equity of ERM Companies by Length of ERM Index Numbers and Moving Average of Return on Equity of ERM Companies from Base Period
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4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33
169 171 172 173 175 177 180 181 184 186
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LIST OF FIGURES
Figure No. 1 2 3 4 5 6 7 8 Title Theoretical Framework of the Study Research Paradigm of the Study Normal Probability Plot of Regression Standardized Residual with ROTA Normal Probability Plot of Regression Standardized Residual with NPM Normal Probability Plot of Regression Standardized Residual with ROE Moving Average of Return on Total Assets from Base Period Moving Average of Net Profit Margin from Base Period Moving Average of Return on Equity from Base Period Page 88 90 155 160 165 179 183 187
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CHAPTER 1 RESEARCH PROBLEM
This chapter will discuss the research problem at hand through introduction, historical and contextual background, statement of the problem, significance of the study and the scope and limitations of this study.
Introduction As the global economy develops affecting financial markets, and markets affect multinational companies and consumers, risks become quite complicated and interdependent. Earthquakes, tsunamis, terrorism, extreme weather events and the global financial crisis represent the extreme risks that are facing society and commerce. With the recent credit downgrade of the worlds most powerful economy (USA) being hit due to default on its huge debts1 to the global financial markets (especially to Mainland China), together with the current economic downturn of Europe and the economic fallout or aftershocks brought by the massive damage of the US financial crisis of 2008 to the economy causing more than 26 million Americans out of work, four million families lost their homes and nearly $11 trillion in household wealth vanished at the height of the financial crisis2 its implications on multinational companies are quite a threat aimed at the top management or board of directors of such firms. In response to these systematic risks, more organizations are embracing an emerging business practice known as enterprise risk management (ERM)3 because it
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emphasizes a top-down, holistic approach to effective risk management for the enterprise. The goal of ERM is to increase the likelihood that an organization will achieve its core objectives by managing risks to be within the stakeholders appetite for risk. ERM done correctly should ultimately not only protect but also create stakeholder value (Fraser and Simkins, 2010:33). Increasing numbers of organizations have implemented or are considering ERM programs, consulting firms have established specialized ERM units, rating agencies (such as Standard & Poors) have begun to consider ERM in the ratings process 4 and universities have developed ERM-related courses and research centers. Unlike traditional risk management where individual risk categories are separately managed in risk silos, ERM enables firms to manage a wide array of risks in an integrated, enterprise-wide fashion. Academics and industry commentators argue that ERM benefits firms by decreasing earnings and stock-price volatility, reducing external capital costs, increasing capital efficiency, and creating synergies between different risk management activities (Miccolis and Shah, 2000; Cumming and Hirtle, 2001; Lam, 2001; Meulbroek, 2002; Beasley, Pagach, and Warr, 2008). More broadly, ERM is said to promote increased risk awareness which facilitates better operational and strategic decision-making (Hoyt & Liebenberg, 2008). Despite the heightened interest in ERM by academics and practitioners and the abundance of survey evidence on the prevalence and characteristics of ERM programs (see for example Miccolis and Shah, 2000; Hoyt, Merkley, and Thiessen, 2001; CFO Research Services, 2002; Kleffner, Lee, and McGannon, 2003; Liebenberg and Hoyt, 2003), there is an absence of empirical evidence regarding the effects of the extent of
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various enterprise risk management practices on the three most commonly used financial performance ratios: return on total assets (ROTA), net profit margin (NPM) and return on equity (ROE).5 The absence of clear empirical evidence on the value of ERM and its specific practices continues to limit the growth of these programs (Hoyt & Liebenberg, 2008). Through analysis of primary data on some specific enterprise risk management practices obtained from a survey of senior executives and risk management professionals of top MNCs in the Philippines, and of secondary data on financial performance from financial statements of covered firms filed during the years 2004 up to 2009, such an examination or evaluation shall be made and is reported here to investigate the effects of the extent of such risk management practices on financial performance.
Historical and Contextual Backgrounds of the Problem The financial and economic crisis that started in 2007 with US financial institutions caused a panic that rippled across global markets, and practically froze credit markets in 2008. Though the US Financial Crisis Inquiry Report has concluded that dramatic failures of corporate governance and risk management at many systematically important financial institutions were a key cause of the crisis, some have blamed the crisis on a failure of conventional risk management in financial institutions (Fraser and Simkins, 2010). Others have extended the blame to include enterprise risk management (ERM), a new paradigm that had started to supplant conventional risk management, especially within the large financial institutions at the heart of the crisis (Hampton, 2009:66). In truth and in fact, the financial crisis was avoidable as it was the result of
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human action and inaction, not of Mother Nature or computer models gone haywire, with many top executives and regulators ignoring or discounting the warning signs to quell the threats in a timely manner (The Financial Crisis Inquiry Report, 2011). They failed to identify and report the maximum exposure in trading positions, believing that securities were liquid and saleable to third parties, and failed to reject new risky deals and establish adequate controls in the trading account (Fraser and Simkins, 2010:380). The crisis has once again brought risk management to the forefront, not just among top executives within firms, but also among members of Congress and government regulators. However, this concern about risk management had been gaining steam for several years. For instance, section 404 of the Sarbanes-Oxley Act of 2002 requires a topdown risk assessment, which includes the identification of material risks on financial statements. In 2004, the New York Stock Exchange (NYSE) implemented new corporate governance rules requiring audit committees of listed firms to be more involved in risk oversight. The new rules have motivated many boards to require the review and approval of risk management processes and top risk exposures by their audit committee (McShane, Nair, and Rustambekov, 2010). In response to the financial crisis, in October 2008, the US Congress enacted the Emergency Economic Stabilization Act (EESA) of 2008, commonly referred to as a bailout of the U.S. financial system, which created the Troubled Asset Relief Program (TARP), to help troubled financial institutions. TARP stipulates that participating firms must certify that executive compensation programs do not encourage excessive risk taking. In May 2009, Senators Schumer and Cantwell proposed legislation, the Shareholder Bill of Rights, which requires public companies to create stand-alone risk
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committees comprised entirely of independent directors who are responsible for the establishment and evaluation of risk management practices. In October 2009, the Federal Reserve proposed guidance that places responsibility on the board of directors for establishing appropriate incentive compensation arrangements and effectively monitoring risk exposures created by incentive compensation arrangements. New rules from the US Securities and Exchange Commission (SEC) effective February 28, 2010 require enhanced risk-related disclosures in proxy and annual statements. Disclosure is required indicating the relationship of a company's compensation policies and practices to risk management and the board of directors leadership structure, and role in risk oversight (McShane, Nair, and Rustambekov, 2010). Driven by this intense flurry of government and stock exchange activities related to risk management within corporations, trade and business publications directed at top management are full of articles related to enterprise risk management (ERM); yet academic research in the area is still rare. One main roadblock to this research is the difficulty in developing a valid and reliable measure for the ERM construct. Beasley, Pagach, and Warr (2008) and Hoyt & Liebenberg (2010) use the appointment of a chief risk officer (CRO) as a proxy for ERM implementation, while Gordon, Loeb, and Tseng (2009) develop their own ERM index (McShane, Nair, and Rustambekov, 2010). Recent empirical research on the relation between risk management and various measures of firm value has yielded mixed results. Beasley, Pagach, and Warr (2008) investigate equity market reactions to senior management appointments to oversee a firms ERM processes. Their results suggest firm specific benefits of ERM. For nonfinancial firms, they find that market reactions to appointment announcements are
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positively related to firm size and volatility of previous earnings, but negatively related to leverage and the ratio of cash to liabilities. They cannot make the same claim for financial firms and argue these firms may be more driven by other demands for risk management, such as from regulators. Hoyt and Liebenberg (2010) found a positive relation between firm value and the appointment of a CRO. Gordon, Loeb, and Tseng (2009) found that the relation between ERM and firm performance depended on how well ERM implementation was matched with firm specific factors. Allayanis and Weston (2001) study 720 large firms between 1990 and 1995 and find that those using currency derivatives have higher market values than those not using currency derivatives. Other studies, including Graham and Rogers (2002), Adam and Fernando (2006), Carter, Roger, and Simkins (2006), and MacKay and Moeller (2007) find a similar, positive relation between risk management and firm value. However, Guay and Kothari (2003) estimate the implications of hedging on cash flows for a sample of 234 large U.S. non-financial firms, and find the effect to be small. Similarly, Jin and Jorion (2006) examine a sample of 119 U.S. oil and gas producers between 1998 and 2001 and find that hedging does not improve market value. Indeed, over the last decade, there has been an increasing consciousness in risk literature that a more holistic approach to managing risks would enrich the effectiveness of risk management practices across industries. The ultimate development in the risk management area became known as an enterprise-wide risk management approach. Enterprise Risk Management (ERM) emerged as a structured approach combining strategies, resources, technology, and knowledge to assess and manage the uncertainties that various enterprises face as value is being generated (Hoffman, 2009). ERM facilitates effective management of risks that organizations face, and the management of potential
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opportunities embedded in those risks. The major objectives of the ERM approach can be summarized in the following three steps. Firstly, measurable organizational objectives need to be specified. Secondly, an organization needs to identify the risks that may hinder accomplishment of the objectives. Thirdly, controls need to be identified that would mitigate the identified risks (Francis and Richards, 2007 in Burnaby and Hass, 2009). The state of advancement of risk management practices implemented in enterprises and attitudes towards ERM have evolved over time. The importance of implementing a comprehensive approach to ERM became evident in the wakes of the economic crises over the last decades, when the existing risk management programs failed and abnormalities took serious tolls on enterprises performance. Among others, it was the case of some financial organizations which had implemented programs for managing risks in order to protect their assets (Fraser & Simkins, 2010). Nonetheless, fast changes in business environment gave rise to unanticipated risks which organizations could not handle properly. With the foregoing example involving firms successfully implementing a comprehensive approach to ERM when other risk management programs failed to support or enhance enterprises performance, and the profound events of 2007-2009, the researcher looks up to that basis as the historical and contextual background of this research study. With that in mind, the aim of this research study is to move forward and determine the extent of enterprise risk management practices that contribute to the enhancement of financial performance of multinational companies in the Philippines.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Statement of the Problem
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It is the major objective of this study to determine the cause-and-effect relationship between the extent of risk management practices of top MNCs in the Philippines and their financial performance measured in terms of return on total assets (ROTA), net profit margin (NPM) and return on equity (ROE). Thus, this study focuses on the investigation of and the search for answers to the following specific research questions: 1. What is the extent of the practices of respondent firms in the following aspects of enterprise risk management? (Likert & Likert-type scale and weighted mean) a. Appointment of a local risk manager b. Risk management inclusion in key business processes and decision making to optimize risk-adjusted returns c. Sufficient guidance and support from the BOD to launch an effective ERM practice d. Adherence to a common risk terminology and set of standards for managing risks e. Communication of company objectives, risk appetite and risk tolerances f. Understanding of ones level of risk management accountability g. Usage of Key Risk Indicators (KRIs) as a tool to help measure and monitor companys risks h. Risk management integration within strategic planning process i. Usage of technology to enable risk management process
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan j. Risk management integration across all functions and business units k. Basis of developing risk responses/mitigation strategies
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l. Effectiveness of respondent firms in managing the basic elements of risk process (risk identification, risk analysis and quantification, risk treatment/mitigation, risk reporting and monitoring) m. Effectiveness of respondent firms in identifying, assessing and managing major types of risk n. Current stage of respondent firms ERM program o. Strength of respondent firms physical risk management program 2. What is the financial performance of top MNCs-respondents in terms of the following indicators? (Computations of financial performance ratios) 1.1 Return on Total Assets, from 2004-2009; 1.2 Net Profit Margin, from 2004-2009; 1.3 Return on Equity, from 2004-2009. 3. Does the level of enterprise risk management practices by the respondent firms exert a significant effect, individually and collectively, on their financial performance measured in terms of ROTA, NPM and ROE? (Multiple regression analysis) 4. Is there a significant difference on financial performance between firms that explicitly implement ERM and firms that do not? (T-test) 5. Do firms implementing ERM improve in ROTA, NPM and ROE around the time ERM was adopted? (Index numbers and moving average)
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Significance of the Study
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Despite the growing interest on ERM by academics and practitioners, the pace of academic research on ERM as a relatively new area in risk management does not seem to be keeping pace with corporate interest in the topic. It is therefore the aim of this research study to make three major contributions concerning three major research problems in enterprise risk management not yet solved or explored by past researchers and practitioners. Firstly, the main reason for the investigation of this topic by the researcher is to fill an absence of information resulting in a gap in knowledge or literature between the extent of some well-known ERM practices of multinational companies and the impact of such practices on financial performance, measured in terms of ROTA, NPM and ROE which any company can look up to as a valuable reference. To the researchers knowledge, this is the first kind of research study to explore the link between the said variables using first hand data on the enterprise risk management practices from survey respondents, and secondary data on financial performance indicators from financial statements filed by the respondent firms with SEC from 2004 to 2009. By testing the determinants of financial performance, any company, especially MNCs, can be prepared to manage risks that threaten the achievement of companys objectives by properly allocating its capital resources and tuning its capabilities on the specific practices in risk management that have significant impact on firm performance, thereby enhancing shareholder value.
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Secondly, this study shall solve whether companies in highly regulated industries explicitly implementing ERM financially outperform companies that do not, or whose level of risk management is not yet as advanced as enterprise risk management, in order to test the claimed benefits or long-term value creation of ERM that should exceed the nontrivial cost of implementing a fully functioning ERM program, as cited in the theoretical framework and related literature. Thirdly, this research study overcomes the limitations of previous studies conducted by Hoyt and Liebenberg (2006, 2008 & 2010), Pagach and Warr (2010), McShane, Nair and Rustambekov (2010) and all other published works on the value and effects of ERM on firm performance by indicating the extent of some specific ERM practices, the effectiveness of managing the elements of the risk process, the effectiveness of managing the major types of risks, the current stage of ERM within the covered firms, the strength of the physical risk management program thereby identifying specific ways in which ERM contributes to firm value and by identifying the length of time ERM has been in place for companies that implement it which would allow for an ex post analysis of the effects of ERM on organizations. This research study is such a great addition on the relation between risk management (ERM in particular) and financial performance. The results of the study are expected to benefit all multinational companies in the Philippines as well as in other countries, as this would serve as a benchmark information on the best practices in ERM that are predictors of financial performance indicators without need of resorting to a lengthy investigation on their own.
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This study may provide insights for multinational companies to join the bandwagon towards fully implementing ERM in their respective companies, and pick the right tools and most useful ERM practices that can best manage their enterprise risks and achieve business objectives. The results and findings of the study are also intended to assist chief risk officers, chief financial officers, risk managers and other managers/officers or stakeholders involved in the various aspects of risk management in their respective organizations with the proper tools and best practices in the management of enterprise risks that will lead to better firm performance or enterprise value. It is the aim of this study to assist other researchers on ERM, by applying the methodology used in this study to other industries that will enable them to focus their investigation on the other aspects or measures of firm value by using specific risk management practices as determinants in order to advance the literature of enterprise risk management.
The study can also suggest to publicly listed companies, government-owned and controlled corporations that they should adopt the successful enterprise risk management approach, representing the development of an enterprise-wide view of risk, which would allow them to consistently identify, quantify and manage risk on a holistic basis. It would be one that coordinates all the different departments, recognizes the need for education but allows for individual department initiative, flexibility and autonomy as opposed to the historical, fragmented approach to risk management whereby numerous personnel are involved in various aspects of risk management and report to different managers within
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the organization, use different risk assessment procedures and terminology, calibrate risk on different scales, and have different timeframes in mind.
Scope and Limitations of the Study Being national in scope, this research study focuses on and is thus limited to the top multinational companies in the financial, insurance, energy (oil & gas) and pharmaceutical industries, included in the 2010 BusinessWorlds Top 1,000 Corporations in the Philippines, that are regulated by the Bangko Sentral ng Pilipinas (BSP), Insurance Commission (IC), Department of Energy (DOE), and the Food and Drug Administration (FDA), respectively, and by the Philippine Securities and Exchange Commission (SEC). These top MNCs in the stated four industries are purposively selected in order to: (1) achieve a commonality (by type according to foreign nationality or existence of business operations in other countries) and comparability (based on organizational size by gross revenue) of respondents; (2) control for differences or inequality on risk management practices that might arise from regulatory requirements and market differences across industries; and (3) select companies based on the certainty of risk management presence within their organizations through government regulations in the financial, insurance, oil/gas and pharmaceutical industries. In addition to the reasons mentioned in the preceding paragraph and as explained further in Chapter 3, under the section of sample size, further reasons for limiting the subjects of the study to multinational companies in the financial, insurance, oil/gas and pharmaceutical industries ranked in the 2010 BusinessWorlds Top 1,000 Corporations in
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the Philippines are as follows: (1) top multinational companies are inherently large in size, and therefore more likely to adopt ERM because big companies are more complex, face a wider array of risks, and have the institutional size to support the administrative cost of an ERM program where economies of scale involved in operating a fully functioning ERM system are of paramount importance to achieve practicality; (2) companies in the financial, insurance, energy (oil/gas) and pharmaceutical industries in the Philippines are heavily regulated by their concerned industry regulatory agencies, namely the BSP, IC, DOE and FDA, respectively, and are therefore pressured to respond to regulatory requirements; and (3) the four industries mentioned surely face environment uncertainty and intense competition within each industry, and would value ERM more than other industries such as consumer goods where sales and profits are predictable. Although the Conference Board (2008) has indicated that utility industry is one of the three industries (the other two are financial services and energy) to have more developed ERM processes than other industries, the researcher deems it practical to exclude this industry and include instead the oil and gas firms as representatives of the energy sector, because the utility industry in the Philippines is almost exclusively handled or monopolized by locally-owned Meralco Corporation and the state-owned National Power Corporation, particularly in Metro Manila area. In the case of food and beverage companies, although supervised also by the FDA, formerly known as BFAD, the researcher has strictly selected to focus on top MNCs in the pharmaceutical industry because food and beverage companies are selling basic consumer goods daily needed by people no matter what the economy is, so the industry does not face volatile markets or environment uncertainty compared to financial, insurance, oil/gas and pharmaceutical
15 xxviii
industries which are more likely to favor ERM. Furthermore, to include in the study the other top MNCs engaged in the food/beverage and utility industries whose plant operations are in the provinces would be impractical, if not impossible, because it would only add too much burden and inconvenience to the researcher in the data gathering procedure which can significantly lengthen or threaten the completion of this study, and this research study has to be completed within the timeframe of this study which is simply a major limitation. Research commissioned and funded by a large institution relating to ERM practices with data coming from a large number of MNCs from a variety of industries, conducted in a wider span of time by a team of researchers, will help overcome this limitation. Inclusion criteria adopted for the top MNCs to be studied are as follows: (a) top MNCs should have active registration status with SEC; (b) top MNCs should have submitted their audited financial statements (AFS) with SEC for the years 2004 to 2009 for the cross-sectional secondary data required in the multiple regression analysis; (c) top MNCs whose certificates of registration were not revoked by SEC during the period from 2001 up to present; and (d) top MNCs whose operations were not dissolved at any time from 2001 up to present. The total number of top MNCs covered in this study effectively became 60, after some MNCs included in the 2010 BusinessWorlds Top 1000 Corporations in the Philippines engaged in the said four industries, but have missing or incomplete AFS at any time during the period, were disqualified and dropped. The researcher noticed that a few of the top MNCs covered in this study are no longer majority owned by their respective former parent (foreign) companies as reflected in their most recent General Information Sheet (GIS), either because they were acquired
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by a local company (buyout) or majority of their shares were sold to a Filipino company. This observation is referenced by an endnote to the concerned MNCs under sample size. However, for purposes of this study, their inclusion in the 2010 BusinessWorlds Top 1,000 Corporations in the Philippines, classified under the section of multinational corporations by industry, shall be the basis for their being multinational. The researcher also noted that five of the covered top MNCs are in close association with another five covered firms, either as a sister company or wholly-owned subsidiary of the other, headed by the same chief officer and housed in the same main office address. This observation prompted the researcher to send only one letter of request for each of the five groups of companies inviting them to kindly participate in the survey. Thus, the same responses of a key informant-respondent of one covered firm shall be applied to the other relative firm because of the implied shared resources, management decisions and/or benefits of the economy of scale within their group. For the other six covered firms not sent with the letter of request to the chief officer regarding the survey, it was either because the concerned firms have no regular employees, as in the case of holding and investment companies, and therefore their chief officer may not be reached at all even if the researcher would leave the letter and questionnaire with the staff on duty, or the researcher has already secured the responses of the manager/staff present at the time the letter and questionnaire were supposed to be delivered. Sending the letter to the chief officer when the researcher already had the answered questionnaire is, in legal terms, moot and academic. Under research locale, a detailed description of respondent MNCs in terms of demographic data such as capitalization, number of years in operation, total manpower
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complement and corporate governance structure may enhance this paper. However, most covered MNCs have no recent annual reports submitted with SEC where the researcher can extract the needed information. Including this section with only the MNCs that have these information from their annual reports and/or GIS will only create a message distortion or incomplete description of all covered MNCs and should, therefore, be excluded. In other aspects, this study deals only on the 15 ERM practices by respondent firms as defined in research problem no. 1, in order to determine the extent of their ERM practices and the effects of those practices to their financial performance limited to the three most commonly used FP ratios: ROTA, NPM and ROE during the period from 2004 to 2009. Tobins Q is also a good indicator of FP but it has to be excluded in this study, as it is only applicable to research studies involving publicly listed companies as subjects because it has everything to do with the perception of the public, hence the Tobins Q formula: stock exchange value of common stock at the end of economic year n + stock exchange value of preferred stock at the end of economic year n + the book value of total liabilities (Short and Long-term) at the end of economic year n, over the book value of total assets at the end of year n. Another limitation encountered by the researcher with respect to NPM ratio was on the value of total revenue contained in the audited financial statements (specifically income statement) of some concerned MNCs, whereby total revenue was not given or immediately disclosed. Instead, only net sales (the value after sales discounts and allowances are deducted from gross revenue) were shown. The researcher had no choice but to get the value of net sales as the divisor of net income (the dividend) in order to get
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the NPM ratio. A few of the covered firms have inconsistent figures from year to year, and this could be due to a change in their auditor, basis of accounting or fiscal year ended. Step-by-step implementation of ERM, embedding risk management in a companys culture, the process of risk identification, analysis, treatment and monitoring, the measurement of ERM success and other practices in risk management for financial, insurance, energy and pharmaceutical companies not covered in this study deserve separate studies and thus will not be discussed in this paper, since risk management is quite a very broad topic. Rather, this study will find out the extent of their practices with respect to managing enterprise risks based on their assessment of each enterprise risk management practice cited in the survey instrument. The choice of top executives (President, CFO, VP, Senior Management), treasurers/controllers/internal auditors, risk and functional managers as the primary source of data is based on the assumption that these groups of professionals are deemed knowledgeable about the status of risk management in their respective companies, who are accountable for achieving objectives and therefore ensure that risk is effectively managed within the organization as a whole or within his/her specific area of responsibility. As already mentioned several times, the list of these top MNCs in the sample is sourced from the 2010 BusinessWorlds Top 1000 Corporations in the Philippines, while the total population of MNCs in the Philippines is culled from SECs Philippines 10,000 Corporations CY 2009 Edition, provided by the Economic Research and Information Department of the Securities and Exchange Commission. Preparation of this research study was started in January 2011 and was paused for a while. Data analysis and rewriting were resumed in July and the survey was conducted
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intermittently in September and October this year to finish the study in time of the closing of the first semester this school year, the researchers deadline and timeframe of this study. As with other survey research, a major limitation is that survey responses might represent personal opinions. The researcher cannot verify that the opinions provided by respondents coincide with actions within their respective companies.
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CHAPTER 2 THEORETICAL FRAMEWORK
This chapter presents a summary discussion and synthesis of the related literature and studies from foreign and local sources used in the conduct of the study. Foreign related literature and studies, as well as local studies, were classified by topic. This chapter also consists of the theory guiding the study, research paradigm, research hypothesis and key terms used. This section aims to improve understanding on risk management and financial performance and lead to a better appreciation of research objectives.
Theory Guiding the Study To provide anchor and support for this research study, the following theories and principles are cited: The theoretical framework of this study derives much from the primary objective of the corporation: Stockholder Wealth Maximization or Shareholder Value Maximization which can be found in the introductory pages of any finance textbook. In a market economy, the shareholders will provide funds, through the purchase of stocks, to a business in the expectation that they will receive the maximum possible increase in wealth for the level of risk which must be faced but without undue risk exposure. When evaluating competing investment opportunities, therefore, the shareholders will weigh the returns from each investment against the potential risks involved. The market value of the
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shares will in turn reflect the future returns the shareholders will expect to receive over time from the shares and the level of risk involved. The idea behind this value maximization objective is actually for managers to maximize the fundamental price of the firms common stock and achieve the highest possible returns over the long term, although profit maximization is often suggested as an alternative objective for a business (short-term objective). Firms do, of course, have other objectives in particular, the managers who make the actual decisions are interested in their own personal satisfaction, in their employees welfare, and in the good of the community and of society at large. The choice of value maximization as the corporate scorecard must be complemented by a corporate vision, strategy and tactics that unite participants in the organization in its struggle for dominance in its competitive arena. Still, maximizing the fundamental stock price is the most important objective for most corporations. How this shareholder value maximization theory is closely guiding this study is on the thought of whether ERM or any of its parts is adding value to the firm, and more specifically whether the benefits of ERM as a managerial action exceed the cost of implementing it, consistent with the assumption that enterprise risk management is about protecting and enhancing share value to satisfy the primary business objective of shareholder wealth maximization (Chapman, 2006). Clearly, ERM is not a costless activity, and as such, if it fails to deliver observable benefits, its implementation maybe called into question because significant resources are being expended on understanding, developing and implementing ERM programs. Also, even if ERM provides a consistent process for risk identification it is possible that the benefits are not significant enough to
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become evident in the firms financial performance; thus, the purpose of this research investigation.
Another theory similar to value maximization is the Stakeholder Theory by R. Edward Freeman (1984), which argues that managers should make decisions so as to take into account the interests of all stakeholders in a firm. Firm performance is the main dependent factor of this theory, while stakeholder interests are the main independent constructs or factors. In the traditional view of the firm, the shareholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first, to increase value for them. In older input-output models of the corporation, the firm converts the inputs of investors, employees, and suppliers into usable and saleable outputs which customers buy, thereby returning some capital benefit to the firm. By this model, firms only address the needs and wishes of those four parties: investors, employees, suppliers, and customers. However, stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, associated corporations, prospective employees, prospective customers, and the public at large. Sometimes, even competitors are counted as stakeholders. In this study, risk management is of paramount importance for the firm to undertake, apparently on the demands and pressure from its stakeholders. A firm cannot maximize value if it ignores the interest of its stakeholders. However, because the advocates of stakeholder theory refuse to specify how to make the necessary tradeoffs among these competing interests of all stakeholders, they leave managers with a theory that makes it impossible for them to make purposeful decisions. With no way to keep score, stakeholder theory makes managers unaccountable for their actions. It seems clear that such a theory can be
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attractive to the self-interest of managers and directors. This is where the Agency Theory comes in.
The Agency Theory (also called principal-agent problem or agency problem) by Jensen and Meckling (1976) and by Fama and Jensen (1983) is actually the number 7 of the ten principles that form the basics of Financial Management, which says managers wont work for owners unless its in their best interest. This involves a principal-agent relationship which emphasizes the need for board of directors, who represent stockholders as principals, to control management (conceived as agents of the stockholders) against the latters potential for excessive self-interest to the detriment of stockholders-owners. In most cases, shareholders elect directors, who then hire managers to run the corporation on a day-to-day basis. Because managers are supposed to be working on behalf of shareholders, they should pursue policies that enhance shareholder value. This theory, therefore, recommends action by which stockholders, through the board, can better monitor the activities of management by auditing financial statements and managers compensation, by establishing management stock options, bonuses, and perquisites that are directly tied to how closely their decisions coincide with the interest of shareholders. The agency problem will persist unless an incentive structure is set up that aligns the interests of managers and shareholders. In other words, what is good for shareholders must also be good for managers. If that is not the case, managers will make decisions in their best interests rather than maximizing shareholder wealth. Finance principle number 1, The Risk-Return Trade-Off, which states we wont take on additional risk unless we expect to be compensated with additional return also gives theoretical foundations in this research study. This is the principle that potential
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return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. Because of the risk-return tradeoff, one must be aware of his own personal risk tolerance when choosing investments for his portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you cannot cut out all risk. The goal instead is to find an appropriate balance one that generates some profit, but still allows you to sleep at night. This principle straight-forwardly answers why some firms decide at varying degrees depending on the size, complexity of the organization, board of directors monitoring, environment uncertainty and industry competition (Gordon, Loeb and Tseng, 2009) to exercise a risk management framework, implement an enterprise-wide risk management, or shy away from a holistic risk management program due to some reasons such as cost of implementation that may outnumber the benefits. Finance principle number 9, All Risk Is Not Equal, which states some risk can be diversified away, and some cannot also touches this paper as it introduces us to the process of diversification and demonstrates how it can reduce risk. The old saying dont put all of your eggs in one basket is one such concept of diversification. It allows good and bad events or observations to cancel each other out, thereby reducing total variability without affecting expected return. For most projects and assets, some risk can be eliminated through diversification, whereas some risk cannot. The process of diversification can reduce risk, and as a result, measuring a project or an assets risk is very difficult. A projects risk changes depending on whether you measure it standing
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alone or together with other projects the company may take on. Financial risk management through hedging of financial exposures, the use of derivatives and other techniques is such a higher measure of active diversification, while enterprise risk management, which includes risk identification, analysis and quantification of all risks, is such a major project or initiative that should be overseen by a BOD and senior management in order to proactively manage enterprise risks in a systematic manner and make the company competitive. Another theory guiding this study is an old adage or epigram that is typically stated as: If anything can go wrong, it will. This is the Murphys Law, named after Capt. Edward A. Murphy in 1949. Any firm encountering certain types of risks would take precautions as a natural reaction or as part of a bigger strategic plan in order to manage risks or mitigate losses arising from uncertain events. However, as each individual is different from one another, the degree or intensity of risk management between the respondent firms also varies depending on the potential damage of each risk, the risk appetite or risk tolerance levels and resources of each firm. If there is a possibility of several things going wrong, the one that will cause the most damage (highest risk) will be the first to go wrong, and should therefore be treated or mitigated first through the use of a risk management framework.
Going back to value maximization and stakeholder theories, there is a proper relationship between the two based on the so-called Enlightened Value Maximization and Enlightened Stakeholder Theory by Michael C. Jensen (2001). Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the long run value of the firm as the criterion for making the requisite
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tradeoffs among its stakeholders. Managers, directors, strategists, and management scientists can benefit from enlightened stakeholder theory. Enlightened stakeholder theory specifies long-term value maximization or value seeking as the firms objective and therefore solves the problems that arise from the multiple objectives that accompany traditional stakeholder theory. Enlightened stakeholder theory adds the simple specification that the objective function of the firm is to maximize total long-term firm market value. In short, change in total long term market value of the firm is the scorecard by which success is measured.
The first of the 11 principles for managing risk cited in the recent ISO 31000 Risk Management Standard does emphasize that risk management creates and protects value (see Table 2.5). This research study therefore would like to believe if the risk management practices cited herein as independent variables do contribute to the demonstrable achievement of objectives such as improvement of financial performance (or at least in the perspective of the users and beneficiaries of financial statements).
Developments in finance such as the Modern Portfolio Theory, introduced by Harry Markowitz in a 1952 article and a 1959 book, provide a framework for thinking about the collective risk of a group of financial instruments and an individual securitys contribution to that collective risk. With ERM, these concepts have been generalized beyond financial risks to include risks of all kinds, i.e. beyond a portfolio of equity investments to the entire collection of risks an organization faces. According to the Casualty Actuarial Society ERM Committee (2003), a number of principles follow from this thinking, including: (1) portfolio risk is not the simple sum of the individual risk
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elements; (2) to understand portfolio risk, one must understand the risks of the individual elements plus their interactions; and (3) the portfolio risk, or risk to the entire organization, is relevant to the key risk decisions facing that organization. The implications of these principles are having a significant impact on the practice of ERM. There is a growing recognition that risks must be managed with the total organization in mind. To do otherwise (sometimes referred to as managing risk within silos) is inefficient at best, and can be counter-productive. For example, certain risks can represent natural hedges against each other (if they are sufficiently negatively correlated). A classic case is that of an insurer selling both life insurance and annuity business to similarly situated customers and thereby naturally hedging away its mortality risk. To separately hedge mortality risk on these products (e.g. through reinsurance) would be cost inefficient and entirely unnecessary. Another example is that of a global conglomerate with one of its divisions long in a certain foreign currency and another short in the same currency. Separate currency hedges, while seemingly advisable from the point of view of the individual division heads, are unreasonable for the enterprise as a whole. A holistic approach helps organizations to have a true perspective on the magnitude and importance of different risks. The Enterprise Risk Management: Theory and Practice by Brian W. Nocco and Ren M. Stulz (July 2006) suggests that companies that succeed in creating an effective ERM have a long-run competitive advantage over those that manage and monitor risks individually, and this is what this research study seeks to test specifically in research question number 4. They argue that by measuring and managing its risks consistently and systematically, and by giving its business managers the information and incentives to
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optimize the tradeoff between risk and return, a company strengthens its ability to carry out its strategic plan. How ERM creates value on companies is through its effects at both a macro or company-wide level and a micro or business-unit level. ERM creates value at the macro level by enabling senior management to quantify and manage the risk-return tradeoff that faces the entire firm. By adopting this perspective, ERM helps the firm maintain access to the capital markets and other resources necessary to implement its strategy and business plan. At the micro level, ERM becomes a way of life for managers and employees at all levels of the company, ensuring that all material risks are owned and risk-return tradeoffs carefully evaluated by operating managers and employees throughout the firm. The Input-Process-Output (IPO) Scheme of the Systems Theory (Kelly, 1974) also guides this research study. The inputs are the 15 risk management practices by the top multinational firms and the values of financial performance indicators on ROTA, NPM, and ROE during the years 2004 to 2009 (see research paradigm). The process refers to the survey questionnaire, data gathering and financial performance computations, joint matrix observations and the employment of inferential statistics namely multiple regression analysis and t-test, while the output is the attainment of business objectives in terms of better financial performance through best practices in risk management. In summary, the foregoing theoretical approaches serve to provide a better understanding of enterprise risk management practices and its relationship to firm performance. The first principle of ISO 31000s 11 risk management principles clearly says that risk management creates value. The modern portfolio theory helps explain the impact of the principles of portfolio risk on the practice of ERM, while the ERM theory
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and practice helps explain why firms that succeed in creating an effective ERM outperform companies that manage and monitor risks individually. These theoretical discussions indicate that various theories underlying risk management or enterprise risk management seek to enhance firm performance. The foregoing theories and principles are as much statements of common sense as they are theoretical statements. The theories and principles provide the logic behind what is to follow. This research study will build on them and attempt to draw out their implications for decision making in the respondent firms.
Related Literature and Studies Local and Foreign This section provides an overview of risk management, enterprise risk management and financial performance coming from related literature and studies giving direction and support to this research study. Local Literature It is ironic and discouraging, at least in the risk management professions perspective, to note that our own Securities and Exchange Commission does not even require registered corporations including publicly listed companies to adopt a risk management program as part of their corporate governance. Article 3 of The Revised Code of Corporate Governance (SEC Memorandum Circular No. 6, Series of 2009) issued by the said government agency last June 22, 2009 and effective by July 15, 2009, provides proper committees to assist Board of Directors in good corporate governance. The proper committees included in the code comprise the following: Audit Committee, Nomination
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Committee and Compensation or Remuneration Committee. No risk management committee was ever mentioned throughout the text, whereas the Combined Code on Corporate Governance (July 2003) in the UK does include risk management together with financial, operational and compliance as a subset of internal control. The London Stock Exchange also includes risk in its Corporate Governance Framework, overseen by the BOD through supervisory and managerial boards. Other corporate governance guidance in the UK, USA and Canada all commonly suggest sound business practices by incorporating risk management within corporate governance. Because of this absence of risk management requirement for companies registered with SEC, this research study will just focus on multinational companies under the four heavily regulated industries: financial, insurance, oil/gas and pharmaceutical.
It is no surprise to find out if financial institutions have more advanced risk management programs over companies in other industries because of the regulatory requirements imposed on almost every type of risk financial institutions face. The following is a comprehensive list of risk management regulations or guidelines issued by the BSP for all bank and non-bank financial institutions under its supervision.
Table 2.1 Risk Management & Risk-related Issuances for Financial Institutions under BSP Supervision SUBJECT Risk Management Guidelines for Derivatives ISSUANCE DATE ISSUED 26 Dec 1994 14 Dec 1999
Circular Letter To achieve an effective risk management of FX Circular positions Letter
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Guidelines on the Adoption of the Risk-based Capital Adequacy Framework Seminar on Corporate Governance and Risk Management Guidelines to Incorporate Market Risk in the Riskbased Capital Adequacy Framework Guidelines for managing large exposures and credit risk concentrations Amendment of Risk-Based Capital Adequacy Framework to Allow Qualification of Hybrid Tier 1 Instruments Guidelines on Technology Risk Management Guidelines on Supervision by Risk to provide guidance on how financial institutions should identify, measure and control risks Requirement for banks and NBFIs to take appropriate measures, as part of their overall risk management, to fully comply with the provisions specified under Sec. 8 of PD No. 957 (The Subdivision and Condominium Buyers Protective Decree) Guidelines on Market Risk Management Guidelines on Liquidity Risk Management Guidelines on the Use of the Standardized Approach in Computing the Capital Charge for Operational Risks Revised Risk-Based Capital Adequacy Framework Circular 280 Circular Letter Circular 360 Circular 414 Circular 503
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29 Mar 2001 21 Oct 2002 3 Dec 2002 13 Jan 2004 8 Dec 2005
Circular 511 Circular 510
03 Feb 2006 03 Feb 2006
Circular Letter
06 Feb 2006
Circular 544 Circular 545
15 Sep 2006 15 Sep 2006
Memorandum 21 Jun 2007 No. M-2007019 Circular 538 1 Jul 2007
Source: Bangko Sentral ng Pilipinas; accessible at http://www.bsp.gov.ph
Recent regulatory requirements on risk management for insurance companies in the Philippines center much on the capitalization requirements and compliance, implemented after the bankruptcy failures/closures and widespread effects of notorious practices of some insurance companies particularly the Legacy Group and College Assurance Plan, and in order to prevent similar mishaps or practices in the future. These are:
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 2.2 Risk-related Issuances for all Insurance Companies in the Philippines SUBJECT Capitalization Requirements for Insurance Brokers and Reinsurance Brokers Increase in the Amount of Guaranty Fund of Mutual Benefit Associations Minimum Capitalization Requirements for New Life, Non-Life, and Reinsurance Companies, and those to be Rehabilitated, Pursuant to Section 188 in Relation to Section 184 of the Insurance Code, As Amended (for Insurance and Reinsurance Companies Intending to Do Business and to be Rehabilitated) Fees and Charges to All Insurance Companies, Insurance Agents, Variable Contract Agents, Insurance and Reinsurance Brokers, Actuaries, Resident Agents, Rating Organizations, Non-life company Underwriters, Adjusters, Mutual Benefit Associations and Trusts for Charitable Uses Capitalization Requirements for Life, NonLife, and Reinsurance Companies Doing Business in the Philippines Adoption of Risk-Based Capital Framework for the Philippine Life Insurance Industry Adoption of Risk-Based Capital Framework for the Philippine Non-Life Insurance Industry Integrating Compliance Standards for Fixed Capitalization under Department Order No. 27-06 and Risk-Based Capital Framework Under Insurance Memorandum Circular Nos. 6-2006 and 7-2006, and Applicable Fines Adoption of Risk-Based Capital Framework for the Philippine Mutual Benefit Associations Schedule of Fees and Charges to All PreISSUANCE
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DATE ISSUED
Insurance 24 Apr 2006 Memorandum Circular No. 1-2006 Insurance 24 Apr 2006 Memorandum Circular No. 2-2006 Department Order No. 19-2006 15 May 2006
Insurance Memorandum 28 Jun 2006 Circular No. 3-2006
Department Order No. 27-2006
1 Sep 2006
Insurance 5 Oct 2006 Memorandum Circular No. 6-2006 Insurance 5 Oct 2006 Memorandum Circular No. 7-2006 Insurance 29 Nov 2006 Memorandum Circular No. 102006 Insurance Memorandum Circular No. 112006 Circular Letter No. 8 Dec 2006
15 Jun 2010
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Need Companies, Sales Intermediaries and Others Concerned 22-2010
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Source: Insurance Commission of the Philippines; accessible at http://www.insurance.gov.ph The staggered increase in minimum paid-up capital started in 2008 was at its second tranche in 2009, making the minimum paid-up capital for domestic companies equal to P100 million and higher for foreign companies. The increase in the required capital is aimed at improving the writing capacity of insurers. Meanwhile, the energy sector in the Philippines has a number of laws, administrative orders or circulars effectively guarding and supervising the activities of oil/gas companies with respect to risks. For instance, Section 2 of Batas Pambansa Blg. 33, otherwise known as Prohibited Acts involving Petroleum Products, prohibits and penalizes the following acts: a) Illegal trading in petroleum and/or petroleum products; b) Hoarding of petroleum and/or petroleum products; c) Overpricing in the sale of petroleum and/or petroleum products; d) Misuse of petroleum allocations; e) Speed contests and rallies involving mainly the use of motor vehicles, motordriven watercraft or aircraft utilizing petroleum-derived fuels, car and motorcycle rallies and drag racing; and f) Sky-diving and water skiing. Any person who commits any act in the above prohibitions shall mean criminal prosecution against himself with a punishment of a fine amounting to a minimum of Two Thousand Pesos (P2,000.00) but not less than Ten Thousand Pesos (P10,000.00), or
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imprisonment of at least 2 months but not more than 1 year, or both, in the discretion of the court. If the offender is an entity a corporation, partnership or other juridical person the president, general manager, managing partner or such other officer charged with the management of the business affairs thereof shall be criminally liable (Section 4 of BP Blg. 33). Such regulation alone would compel a corporation engaged in the oil industry to exercise a risk management program, or risk being penalized and jeopardize their business. Over and above the said law, there are other laws regulating the business activities of entities engaged therein. Some of those laws are as follows: Table 2.3 Laws and Issuances Regulating the Activities and Relations of Persons and Entities Engaged in Oil/Gas Industry LAW Republic Act 6173 LONG TITLE DATE EFFECTIVE
An Act Declaring a National Policy on the Petroleum Industry, Regulating the Activities and Relations of Persons and Entities Engaged 25 April 1977 Therein, Establishing an Oil Industry Commission To Effectuate the Same, and Defining Its Functions, Powers and Objectives, and For Other Purposes. Amending Batas Pambansa Blg. 33, entitled An 25 May 1983 Act Defining and Penalizing Certain Prohibited Acts Inimical to the Public Interests and National Security Involving Petroleum and/or Petroleum Products, Prescribing Penalties Therefor and for Other Purposes, by including Short Selling and Adulteration of Petroleum and Petroleum Products and other Acts in the Definition of Prohibited Acts, Increasing the Penalties Therein and for Other Purposes. Providing for the Increase of the Minimum 28 Feb 2011 Inventory Requirements of All Oil Companies
Presidential Decree No. 1865
Department Circular No.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan DC2011-030002 Department Circular No. DC2011-030004 and Bulk Suppliers Operating in the Country Enjoining the Strict Compliance of the 15 March Downstream Oil Industry Participants to the 2011 Reportorial Requirements of Republic Act No. 8479 and Other Related Issuances
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Source: Department of Energy; accessible at http://www.doe.gov.ph Although the downstream oil industry in the Philippines is now fully deregulated under Executive Order No. 392, Republic Act No. 8479 and R.A. No. 8180, noncompliance of any of the said laws and regulations would result to penalties, restriction of business activities, criminal prosecution and eventual closure of the business. Such eventualities warrant a holistic risk management for the company.
Whereas, the risk management and risk-related laws under the local pharmaceutical industry closely pertain to product recall, or cease and desist from further importing, distributing and selling medicines that fail safety standards or are found to pose a threat to the public. Under Republic Act 9711 or the Food and Drugs Administration Act of 2009, the new FDA, formerly known as BFAD, will have expanded authority and increased regulatory capacity in the Philippines. The new law will help make it easier for the government to make medicines affordable and accessible to the public and guarantee their efficacy, high quality, and safety. This law would complement the Universally Accessible Cheaper and Quality Medicines Act of 2008 or Republic Act 9052.
The FDA will have the power to immediately recall, ban, or withdraw medical products that fail safety standards or are found to pose a threat to the public. In addition, the agency will be authorized to inspect facilities for compliance and seize products that
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have safety issues. The FDA would also have fiscal independence, where they could retain income to hire new personnel, upgrade laboratory facilities, and purchase necessary testing equipment. All of these actions would not require government approval. These added measures will have a significant effect on compliance and risk management efforts for pharmaceutical companies.
There will be separate centers for every major product category to streamline the regulation of manufacture, importation, exportation, distribution, and sale. Therefore, there will be a center for drug regulation and research in addition to a center for device regulation, radiation, health and research (Pacific Bridge Medical, 2009).
In view thereof, the researcher wanted to show unique risk management requirements applicable to each of the four local industries. For financial companies, almost each type (specially financial) of risks significant to bank and non-bank financial institutions requires proper and appropriate approach in risk management, hence the guidance for each type of risk. Whereas, risk management requirements in the insurance industry refer to compliance with capitalization requirements and the adoption of riskbased capital framework for life, non-life, reinsurance companies and even mutual benefit associations doing business in the Philippines, which is so strict that failure to comply with those requirements means non-approval of business registration for start-up companies, and hefty penalties or closure of business for companies already in operations. In the oil/gas industry, laws and regulations pertaining to the prohibited acts involving petroleum and/or petroleum products, reportorial requirements pursuant to R.A. 8479 and other related issuances, and minimum inventory requirements of all oil companies and
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bulk suppliers operating in the country come in place to safeguard the interests of the public, since petroleum/gas products are important commodities; failure to manage it can cause ripple adverse effects to the economy due to insufficient supply of oil/gas and, if there will be oil spill, would pose a threat to the environment. In this instance, operational risk management and compliance are implicitly required for all oil and gas companies. Finally, for pharmaceutical companies, they are required to ensure safety standards, quality control and assurance of medical products before selling it to the market because of its critical role and irreplaceable importance to the health of the public.
Foreign Literature a. On the principles of risk management The Institute of Risk Management (2010) has discussed the principles and aims of risk management. Several independent bodies and professional associations have attempted to define a set of risk management principles. For instance, the British Standard BS 31100 sets out 11 risk management principles and the international standard ISO 31000 also includes a detailed list of the suggested principles of risk management. The Institute of Risk Management has provided the following list as a consolidated version of these documents. It is suggested that a successful risk management initiative will be: Proportionate to the level of risk within the organization; Aligned with other business activities; Comprehensive, systematic and structured; Embedded within business processes; Dynamic, iterative and responsive to change.
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This provides the acronym PACED and provides a very good set of principles that are the foundations of a successful approach to risk management within any organization. A more detailed description of the PACED principles of risk management is set out in Table 2.4. The approach to risk management is based on the idea that risk is something that can be identified and controlled. Table 2.4 Principles of risk management Principle Proportionate Aligned Comprehensive Embedded Dynamic Description Risk management activities must be proportionate to the level of risk faced by the organizations. Risk management activities need to be aligned with the other activities in the organization. In order to be fully effective, the risk management approach must be comprehensive. Risk management activities need to be embedded within the organization. Risk management activities must be dynamic and responsive to emerging and changing risks.
Source: Institute of Risk Management (2010) The above statement of principles relates to the essential features of risk management. These principles describe what risk management should be in practice. Some lists of principles also include information on what risk management should do or deliver. According to the Institute of Risk Management, it is useful to separate the principles of risk management into two separate lists: what risk management should be, as listed above; and what it should deliver, as listed below: Compliance with laws and regulations; Assurance regarding the management of significant risks; Decisions that pay full regard to risk considerations; Efficiency, Effectiveness and Efficacy in operations, projects and strategy.
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This provides the acronym CADE3 and confirms that outputs from risk management will lead to less disruption to normal efficient operations, reduction of uncertainty in relation to change and improved decisions in relation to evaluation and selection of alternative strategies. In other words, a key part of risk management is improved organizational decision making. The resources available for managing risk is finite and so the aim is to achieve an optimum response to risk, prioritized in accordance with an evaluation of the risks. Risk is unavoidable and every organization needs to take action to manage it in a way that it can justify to a level that is acceptable. The appropriate range of responses to a risk will depend on the nature, size and complexity of the risk (Institute of Risk Management, 2010:46-47).
In Table 2.5, the International Organization for Standardization (ISO) identifies 11 principles for managing risk.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 2.5 11 Principles for managing risk Risk management
a) b) c) d) e) f) g) h) i) j) k)
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creates and protects value. is an integral part of all organizational processes. is part of decision-making. explicitly addresses uncertainty. is systematic, structured and timely. is based on the best available information. is tailored. takes human and cultural factors into account. is transparent and inclusive. is dynamic, iterative and responsive to change. facilitates continual improvement and enhancement of the organization.
Source: ISO 31000:2009 Risk Management Principles and Guidelines (Clause 4) The first principle is most relevant in this research study and will be tested using data from sample firms. Together, these principles support an overall principle: dealing with risk is a management responsibility and will, when performed systematically, generate substantial organizational learning at various levels, strengthening the organizations ability to deal with the entire risk picture.
b. On steps to successful risk management The IRM (2010) has defined key steps for successful risk management, as set out in Table 2.6. In order to improve the risk management performance of an organization, a risk management initiative will be required. The nature of this initiative will depend on the size, complexity and nature of the organization. There is no single correct approach to implementing risk management in an organization. The drivers for undertaking risk management and the expected outputs and impacts will vary between organizations.
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Although there is no single correct approach, Table 2.6 sets out some of the key steps in achieving successful risk management. The initial, and perhaps most important, step is ensuring that the risk management initiative is sponsored by a member of the board or a senior member of the executive committee of the organization. Information on the successful introduction of a risk management initiative is also available in the various risk management standards and frameworks discussed in the next section. Table 2.6 Key steps to achieve successful Risk Management a) Sponsorship of the project by a board or executive committee member b) Develop a shared perception of risk within the organization c) Identify the risks within an agreed classification system d) Define the role of the risk manager as facilitator e) Develop the role of the risk management committee f) Produce the profile of risks using an agreed risk recognition technique g) Develop a risk management culture within the organization h) Ensure that risk management is aligned with the business process i) Determine the risk appetite of the organization j) Quantify the cost of risk controls k) Demonstrate that risk management is making a contribution l) Describe the contribution to objectives and corporate governance m) Undertake a management review of all risk management activities n) Ensure that maximum benefits continue to be delivered
Source: Institute of Risk Management (2010) Although it is important to have an overall plan relating to the implementation of the risk management initiative, it is also vital that the risk manager identifies barriers to the implementation of the initiative in some detail. There are many factors that will influence the effectiveness of risk management initiative, including: Senior management influence within departments;
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan External influences, including corporate governance; Nature of the business, its products and culture; Corporate attitudes, including previous RM experiences; Origins of the risk management department.
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There is no single action that will ensure adequate implementation and no single time frame by which implementation will be fully achieved. It is the experience of many organizations that full implementation of all stages of the approach may take between two and five years (IRM, 2010:328-329).
c. On risk management standards The IRM (2010) has outlined the scope of established risk management standards and frameworks available today. The first such standard, known as The Joint Australian/New Zealand Standard for Risk Management (AS/NSZ 4360:2004), was developed by the standards body in Australia in 1995, which has been followed by those being developed in Canada, Japan, the United Kingdom and the United States. Standards have also been developed by other national standards bodies, as well as by government departments across the world. The overall approach of each of these standards is similar. The standard that had the widest recognition was the Australian Standard AS 4360 (2004). AS 4360 was withdrawn in 2009 in favor of ISO 31000. The ERM version of the COSO standard is also widely applied in many organizations. British Standards BS 311100:2008 Risk management Code of practice was published in 2008.
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The latest addition to the available standards is the international standard ISO 31000:2009 Risk management Principles and Guidelines, which was published in the latter part of 2009. Although some standards are better recognized than others, organizations should select the approach that is most relevant to their particular circumstances. It is important to distinguish between a risk management standard and a risk management framework. A risk management standard sets out the overall approach to the successful management of risk, including a description of the risk management process, together with the suggested framework that supports that process. In simple terms, a risk management standard is the combination of a description of the risk management process, together with the recommended framework (IRM, 2010:53). Table 2.7 provides a summary of the most widely used risk management standards and frameworks. Table 2.7 Risk Management Standards Standard ISO 31000 Risk Management Principles & Guidelines British Standard BS 31100 A Risk Management Standard Description Standard published by the International Standards Organization (2009) Standard published by British Standards Institution (2008) Standard produced jointly by AIRMIC, Alarm and the IRM (2002) Framework produced by the Committee of Sponsoring Organizations of the Treadway Committee (2004) Framework produced by the Financial Reporting Council (2005) Standard produced by HM Treasury of the UK Government (2004) Framework produced by the Canadian Institute of Chartered Accountants (1995)
COSO ERM
Turnbull Report Orange Book CoCo (Criteria of Control)
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In addition, the ISO 28000:2007, also known as Supply Chain Risk Management Standard, is also a recognized standard widely used for companies working with or within the logistics industry, developed by ISO. ISO Guide 73:2009 supports ISO 31000, providing definitions for vocabulary terms related to risk management. A Structured Approach to ERM and the Requirements of ISO 31000 was jointly produced by IRM, AIRMIC and Alarm, to provide up to date guidance on the implementation of ERM in the context of the new ISO standard. Just very recently, the IRM has published the Risk Appetite and Tolerance Guidance Paper aimed to provide guidance to directors, risk professionals and others in relation to that part of the UK Corporate Governance Code that states the board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. However, it is hoped that the guidance will have far broader resonance with anyone interested in the subject of Risk Appetite and Risk Tolerance.6 One of the best-established and most widely used risk management standards was produced by the IRM in 2002 in cooperation with AIRMIC and Alarm. The IRM Standard is a high level approach aimed at non-risk-management specialists and it has been translated into 15 languages. The Australian Standard and the COSO standard/framework are designed for use primarily by specialist risk management practitioners. The IRM Standard is available as a free download from the IRM website. For organizations that are listed on the New York Stock Exchange, the approach outlined in the COSO Internal Control framework (1992) is recognized by the SarbanesOxley Act of 2002 (SOX). The requirements of SOX also apply to subsidiaries of US-
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listed companies around the world. Therefore, the COSO approach is internationally recognized and, in many circumstances, mandated. It is worth noting that SOX requires the approach described in the COSO Internal Control framework (1992). This is not the case as the COSO ERM framework (2004) described later, although the COSO ERM framework does contain all of the elements of the earlier Internal Control version. The COSO Internal Control framework has become the most widely used internal control framework in the United States and it has been adapted and/or adopted by numerous countries and businesses around the world. An enterprise risk management (ERM) framework version of the COSO framework was produced in 2004 and this has both risk management and internal control within scope. Apart from the British, ISO and COSO standards, a number of others are also well regarded and in widespread use. The UKs Turnbull guidance was updated in 2005 and is considered by the Securities and Exchange Commission (SEC) in the United States to be an acceptable alternative to the COSO Internal Control framework for Sarbanes-Oxley compliance. The updated Turnbull guidance can be found as a free download from the website of the Financial Reporting Council. As well as the established standards and frameworks, a considerable amount of guidance on risk management has been published by various government departments. HM Treasury in the UK has published the highly respected Orange Book, which contains a significant amount of useful information on risk management tools and techniques.
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Some of the available standards were developed by risk management professionals, while others were developed by accountants or auditors. There are three distinct approaches followed in the various standards: risk management approach followed by ISO 31000, British Standard 31100 and the IRM Standard; internal control approach developed by COSO Internal Control framework and by the Turnbull Report; risk-aware culture approach developed by the Canadian Institute of Chartered Accountants, known as the CoCo framework (IRM, 2010:54-56).
d. On the drivers of ERM Fraser and Simkins (2010:4) discuss the theoretical and practical arguments for the use of ERM. As risks become complicated and interdependent, there has been an increasing consciousness in risk literature that a more holistic approach to managing risk makes good business sense.7 External drivers for its implementation have been studies such as the Joint Australian/New Zealand Standard for Risk Management,8 the Committee of Sponsoring Organizations of the Treadway Commission (COSO),9 the group of Thirty Report in the United States (following derivative disasters in the early 1990s),10 CoCo (the Criteria of Control model developed by the Canadian Institute of Chartered Accountants),11 the Toronto Stock Exchange Dey Report in Canada following major bankruptcies,12 and the Cadbury report in the United Kingdom.13
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Major legal developments such as the New York Stock Exchange Listing Standards and the interpretation of the recent Delaware case law on fiduciary duties, among others, have provided an additional force for ERM.14 In addition, large pension funds have become more vocal about the need for improved corporate governance, including risk management, and have stated their willingness to pay premiums for stocks of firms with strong independent board governance.15 ERM has also increased in importance due to the Sarbanes-Oxley Act of 2002 which places greater responsibility on the board of directors to understand and monitor an organizations risks. Finally, it is important to note that ERM can increase firm value.16 Security rating agencies such as Moodys and Standard & Poors include whether a company has an ERM system as a factor in their ratings methodology for insurance, banking, and nonfinancial firms.
e. On the benefits of ERM Chapman (2006:9), in his book Simple Tools and Techniques for Enterprise Risk Management, has identified and defined the benefits ERM can provide organizations. Because no risk management process can create a risk-free environment, ERM rather enables management to operate more effectively in a business environment filled with fluctuating risks. According to Chapman (2006) enterprise risk management provides enhanced capability to: 1. Align risk appetite and strategy: Risk appetite is the degree of risk, on a broadbased level, that a business is willing to accept in pursuit of its objectives. Management considers the businesss risk appetite first in evaluating strategic alternatives, then in setting boundaries for downside risk.
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2. Minimize operational surprises and losses: Businesses have enhanced capability to identify potential risk events, assess risks and establish responses, thereby reducing the occurrence of unpleasant surprises and associated costs or losses. 3. Enhance risk response decisions: ERM provides the rigor to identify and select among alternative risk responses risk removal, reduction, transfer or acceptance. 4. Resources: A clear understanding of the risks facing a business can enhance the effective direction and use of management time and the businesss resources to manage risk. 5. Identify and manage cross-enterprise risks: Every business faces a myriad of risks affecting different parts of the organization. The benefits of enterprise risk management are only optimized when an enterprise-wide approach is adopted, integrating the disparate approaches to risk management within a company. Integration has to be effected in three ways: centralized risk reporting, the integration of risk transfer strategies and the integration of risk management into the business processes of a business. Rather than being purely a defensive mechanism, it can be used as a tool to maximize opportunities. 6. Link growth, risk and return: Businesss accept risk as part of wealth creation and preservation and they expect return commensurate with risk. ERM provides an enhanced ability to identify and assess risks and establish acceptable levels of risk relative to potential growth and achievement of objectives. 7. Rationalize capital: More robust information on risk exposure allows management to more effectively assess overall capital needs and improve capital allocation. 8. Seize opportunities: The very process of identifying risks can stimulate thinking and generate opportunities as well as threats. Responses need to be developed to seize these opportunities in the same way that responses are required to address identified threats to a business. The three major benefits of ERM, according to Chapman (2006), are: (1) improved business performance, (2) increased organizational effectiveness and (3) better risk reporting. This research study will focus on the first major ERM benefit, and test whether ERM indeed improves business performance as reflected in the three financial performance indicators cited as dependent variables using data from the sample firms.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Local Studies a. On the effectiveness of risk management practices
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Sarmiento (2010) investigated the effectiveness of risk management practices of special purpose vehicle companies (SPV-AMC) operating under the SPV Act of 2002, enacted, among others, to address the debt overhang in Philippine banking system by transferring the non-performing assets (NPAs) of banks and other financial institutions to special purpose vehicle companies. The banks sale of their NPAs to SPVs enables them to clean their balance and improve their lending activities while the SPVs absorb all the risks associated with the distressed assets. With the absence of regulatory body for SPVs which can help measure and control risk on a formal basis, SPVs risk management is therefore deemed necessary. The objective of the study was to determine the effectiveness of the risk management practices of SPVs using a conceptual model of risk management life cycle (from risk identification to risk monitoring). The data for the study were gathered through questionnaire complemented by key informant interviews and documentary analysis. The study revealed that risk management is considered important to a large degree by SPVs. However, their involvement in cascading the importance of risk management within the organization needs to be improved. The preponderance of respondents believed that personal and corporate experience has been the most effective in identifying risks while best practices from investor/parent companies have been observed to a great extent. Expected Monetary Value is the quantitative techniques observed to a great extent and deemed most effective. Liquidity and market risks have been identified as the financial risks most likely to occur and with greatest impact to the companies performance while legal risk shares the same importance for the non-financial risks. Most
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companies would rather avoid and transfer the risks than retain them. This is generally done through due diligence investigations and insurance contracts.
Bartolome (1997) looked into the effectiveness of the financial risk management of the Philippine National Oil Company in terms of the companys exposure to interest and foreign exchange rates volatilities and developed an alternative financial risk management model to guide the company. The study aimed to determine the financial risk management policies, procedures and programs of the PNOC in terms of identifying, measuring, and minimizing its foreign exchange risk and interest rate risk exposures, and found out that the policy of PNOC on financial risk management pertains only to management of its long term debt, and are therefore inadequate in areas concerning management of exposure to foreign exchange rate risk on long term debt. It completely lacks policies, programs, and procedures in terms of identifying, measuring, and minimizing financial risk exposures in its short term investments and interest rate exposure on long term debt.
The corporate objectives of the policy are not clearly spelled out. There are also no written rules and regulations that govern the implementation and monitoring of the policy. Its implementation is the sole responsibility of Treasury Department. Financial risk management programs developed by the department are not integrated with the overall strategic directions of the company. It was found out that the PNOC does not have programs and procedures to identify, measure, and minimize its interest rate risk exposure on long term debt. It does not also have policy, programs, and procedures to identify, measure, minimize its foreign exchange and interest rate exposure on investments.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan b. On the efficiency of risk management practices
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The study of Estrera (1999) analyzed the efficiency of the credit risk management practices of selected leasing companies in Metro Manila and the methods of how risk should be handled as well as the best techniques used in dealing with risk. Conclusions of the study state that: (1) the use of credit evaluations tools presented in the order of importance (5 Cs of credit, credit investigation, financial ratio analysis and risk rating system) indicate the continuous search of these leasing companies to manage exposures to risk and find ways to deal with risk effectively; (2) most leasing companies conduct credit reviews to reduce losses and monitor credit lease quality, its purpose is to cite an early warning and to provide the basic defense against deterioration in the lease portfolio; (3) identification of risk is needed for effective risk management and control, one should be able to identify the causes or reasons before one can detect the corresponding remedial measures; and (4) restructuring is the most adopted remedial measures in leasing. Likewise, lease extension and extra-judicial foreclosure immediately follows as the other known alternative measures of recovery. Payments in kind or ex-deals and dacion en pago have the least consideration. c. On the effects of innovations on risk management practices Lee (2005) explored the perceived effects of technological innovations on risk management practices of selected top three universal banks in the Philippines. She opined that competition in the banking industry is stiff. Banks are increasing their investment in technology and do a series of technological innovations in order to stay in their current position and avoid being left behind by their competitors in technology area. This could lead to technology related risk exposure if they fail to implement proper risk management
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measure. She identified the risk management practices adopted by the top three universal banks in the Philippines, and further explored into the extent of implementation of technological innovations as well as the possible problems encountered by the banks. In her study, she concluded that technological innovations have significant effect on the enhancement of risk management practices of those banks-respondents, with the key stakeholders benefitting the user-friendliness of technological tools and systems put in place. d. On the relation between business variables and firm performance/value Ferrer (2010) studied how compliance with International Financial Reporting Standards on Balance Sheet and Income Statement is related with and affects financial performance (Tobins Q, ROA, ROE and Basic Earnings per Share) of publicly listed companies, but found out that none of the balance sheet and income statement indices exerts a significant effect on the financial variables cited based on the computed t-statistics whose p-values are greater than the level of significance (=0.05). The study of Salentes (2009) conducted empirical examination on the relationships and influence, through multiple linear regression analysis, of Corporate Governance rating (CGR) on financial performance indicators namely Tobins Q, Asset Growth, Revenue Growth, ROA, and NPM of 90 covered publicly listed companies. The study found out that CGR has a significant effect on Tobins Q and ROA but not on NPM. Aside from significant correlations between corporate governance rating (CGR), Tobins Q and ROA, CGR also has a positive and significant effect on ROA, which means that CGR results in higher productivity for publicly listed companies.
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Tienggo (2008) explored on credit risk management practices of selected nongovernmental organization microfinance institutions in Metro Manila in relation to loan collection performance. Microfinance institutions continue actively in the Philippines since 1980s, in an effort to help the plight of the poor and provide financial services (i.e. loans, voluntary savings). Non-government Organization-Microfinance Institutions (NGO-MFIs) in the rural or urban areas are faced with the challenge of utilizing the resources they have to maintain efficient operations and remain effective. NGOmicrofinance institutions like any other financial institutions are not exempted from the risks that loan activities hold. These risks must be managed well to ensure efficiency and sustainability of operations in an organization. The objectives of her study were to determine the risk management practices applied within the selected NGO-MFIs, the level of loan collection performance and the methods being used to reduce credit risk. Among the risk management practices identified in her study were transferring some of those risks through insurance, and through in-depth credit investigations against applicants-borrowers especially on their capacity to pay. The study was focused on four NGO-MFIs in Metro Manila that were willing to be part of study after being selected purposely from among the members of the Microfinance Council of the Philippines. Camba (2007) examined the impact of corporate governance principles and some selected fundamental financial variables on the operating and market performance of 30 selected publicly listed companies in the Philippines, randomly drawn following the Central Limit Theorem and using the procedures of random table number. It made use of descriptive method of research utilizing published data from PSE Information Management Unit and PSE Center Library. Cross-sectional multiple regression analysis
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were developed in testing the relationships and effects of corporate governance principles, business risk, liquidity and financial leverage on firm performance (ROE and Tobins Q). The study revealed that business risk, liquidity and financial leverage show significant impact on operating performance. However, the corporate governance indicators (fairness, responsibility and accountability) do not significantly affect firm performance based on the results of t-statistics. Dapitons (2007) study aimed to determine the effects of weather on profitability and loss which had recently become a pressing imperative for businesses to find solutions to address such inevitable cause of nature. His study was on hedging farm level risk against extreme climate events, with the Philippine weather derivative market as an alternative risk transfer scheme for rice farmers. The Philippines agriculture industry, specifically crop farming as one of its dominant business sectors accounting for about 20% of the country's gross domestic product, constantly faces an inherent risky activity that is subjected to weather particularly for the small and medium farm owners. The importance of agriculture sector in a developing country like the Philippines plays a key role in the sustainability of its economic development. He found out that the most popular strategy to manage crop related risk is through the purchase of crop insurance. The study was conducted to expand the existing traditional crop insurance system with other alternative risk transfer (ART) scheme, such as weather derivative instrument. To solicit the perception and outlook of key policy decision makers in the field of insurance and reinsurance regarding the viability of adopting a weather derivative market in the Philippines, a survey questionnaire had been deployed augmented by personal interviews from top policy makers. The respondent policy makers deemed that in order to
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adopt and develop a weather derivative market in the Philippines, a great effort would be needed in terms of education to various stakeholders, particularly the farmers. He used the analysis of variance to determine the significance of mean and standard deviation difference of observed precipitation occurrence from the three weather stations: Science garden, Quezon City; Iba, Zambales; and Cabanatuan, Nueva Ecija regarding the determination of basis risk and spatial variability of weather phenomenon. Higher order Markov chains exhibited different properties compared to the initial and first order values. It also revealed that only up to second order Markov chains are self-evident to predict the occurrence of extreme climate events. His study also introduced a pricing formula for the payoff structure of precipitation derivative in option. The proposed pricing formula is a function of the loss-function term and the multiplier term. Chua (1999) examined the relevance of fuel risk management to Philippine Airlines and the Asia Pacific airline industry in general, focusing substantially on the framework of the fuel risk management strategy for PAL. The three questions outlined in the framework were: when to hedge or at what rate should PAL start to hedge, how much of the fuel volume should be hedged, and how to select an efficient hedge. In addition, aside from hedging, the paper also discusses the different alternatives for fuel risk management. To make the strategy sustainable, the study also discusses the policies and procedures of fuel risk management. These policies and procedures include analysis of PALs organizational structure. Furthermore, the paper briefly determined alternatives for the company on how to start the program. To conclude, it recommends the integration of fuel risk management strategy with PALs other risks like interest rates and credit risks. In
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this way, PAL will be able to utilize better the benefits of a risk management program through one corporate risk management umbrella. Salib (1997) addressed the issue of whether existing risk evaluation techniques, most of which have been developed in the advanced market economies, are universally applicable and have uniform explanatory power in differentiating the banks experiences in lending, particularly for Indonesian unique environment. If the answer is negative, then this risk element will be incorporated in an enhanced risk evaluation technique that the study proposed. The study concluded, among others, that (1) there is a relationship between evaluation technique practiced and the loan quality outcome, assuming other factors are not considered; (2) if internal mechanism system has to be considered, then there is no significant difference between the evaluation techniques and loan quality; (3) the degree of risks of each particular sector of industry varies; (4) the Kruskal-Wallis test shows that government banks and private banks employ evaluation techniques according to their needs; (5) banks with larger assets employ more combinations of evaluation techniques for having large lending activities. Abukarsh (1996) investigated the risks associated with the selected financial intermediaries credit decision, how they differ in risks assumed, and how the respondent financial intermediaries assess credit worthiness of their borrowing clients. The study found out that five major credit evaluation techniques are employed by the respondent financial intermediaries in determining the credit worthiness of a borrower. These are the five Cs of credit, LAPP method, Past Experience, five Ps of credit, and Financial Analysis, which all share the common objective of eliminating risks to any business transaction. Although not specifically classified as a credit evaluation tool, past experience
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also plays a major role in the respondent companies credit decisions. Among the five credit evaluation tools mentioned, the traditional 5 Cs of Credit is the most popular which all respondents found as adequate enough safeguard from delinquent borrowers. In his study on the risks assumed by respondent financial intermediaries, credit risk evaluation results are used by the respondents as bases for both ante and post credit decisions and activities, giving rise to conclusion that identification of risk is needed for a more effective risk management and control. Risks were classified according to the transactions that generate risks, the underlying cause giving rise to the risk, and its effects to the business enterprise. Salonga (1991) investigated how cargo surveying establishes the cause of loss or damage. Assessing fairly the degree of such loss on cargoes is dependent on the successful achievement of this objective which is in turn dependent upon the experience and efficiency of the person undertaking the work of surveying. Thus, the surveyor needs to have not only an understanding of the special characteristics of properties of the goods which he called upon to deal, but also to be familiar with any treatment that may be necessary to minimize the loss and be aware of the risk involved in such cargo surveying. The researcher probed the following questions: 1) How are cargo surveyors protected from among the natural and technical risks that they are exposed to? 2) What are the contingency and recovery plans of cargo surveying companies during occurrences of disastrous events? 3) How can cargo surveying companies employ good risk management measures? 4) What and how can cargo surveyors identify major risks involved?
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The study was obviously about risk management in business performing inspection of all types of cargo, general or bulk, and independent claims adjustment of all kinds of property base including fire, marine, and casualty insurance claim. Because profits can be improved or increased by reducing expenses as well as increasing income, risk management can contribute directly to business profit as the study may lower expense through preventing or reducing accidents as the result of certain low-cost measures. The study concluded that: companies are aware of risks involved in cargo surveying; there is ineffectiveness of risk management program; there should be a systematic protection against natural and technical risk; there is absence of contingency and recovery plans; stakeholders have inability to identify risks; and there is improper employment of strategy in some cargo surveying organizations.
Foreign Studies a) On how risk management for the firm adds value Meulbroek (2002) argued that profit-maximizing firms should consider implementing an ERM program only if it increases expected shareholder wealth. While the individual advantages of different risk management activities are clear, there are disadvantages to the traditional silo approach to risk management. Managing each risk class in a separate silo creates inefficiencies due to lack of coordination between the various risk management departments. By integrating decision making across all risk classes, firms are able to avoid duplication of risk management expenditure by exploiting natural hedges. Firms that engage in ERM are able to better understand the aggregate risk inherent in different business activities. This provides them with a more objective basis for
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resource allocation, thus improving capital efficiency and return on equity. Organizations with a wide range of investment opportunities are likely to benefit from being able to select investments based on a more accurate risk-adjusted rate than was available under the traditional risk management approach. The study further pointed out that while individual risk management activities may reduce earnings volatility by reducing the probability of catastrophic losses, there are potential interdependencies between risks across activities that might go unnoticed in the traditional risk management model. ERM provides a structure that combines all risk management activities into one integrated framework that facilitates the identification of such interdependencies. Thus, while individual risk management activities can reduce earnings volatility from a specific source (hazard risk, interest rate risk, etc.), an ERM strategy reduces volatility by preventing aggregation of risk across different sources. A further source of value from ERM programs arises due to improved information about the firms risk profile. Outsiders are more likely to have difficulty in assessing the financial strength and risk profile of firms that are highly financially and operationally complex. ERM enables these financially opaque firms to better inform outsiders of their risk profile and also serves as a signal of their commitment to risk management. By improving risk management disclosure, ERM is likely to reduce the expected costs of regulatory scrutiny and external capital (Meulbroek, 2002). Additionally, for insurers the major ratings agencies have put increasing focus on risk management and ERM specifically as part of their financial review. This is likely to provide additional incentives for insurers to consider ERM programs, and also suggests a potential value implication to the existence of ERM programs in insurers. As an example
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of this interest from the rating agencies in the implications of ERM, in October 2005 Standard & Poors announced that with the emergence of ERM, risk management will become a separate, major category of its analysis. Most recently, in February 2006, A.M. Best released a special report describing its increased focus on ERM in the rating process (Hoyt & Liebenberg, 2008:4). Meulbroek (2002) outlines 7 ways by which risk management adds value to the firm. These are: a) Risk management by the firm can facilitate risk management by the firms equity holders. b) Risk management by the firm can create value in ways that investors cannot duplicate for themselves. c) Risk management can increase firm value by decreasing financial distress costs. d) Risk management can add value by lowering the risk faced by important nondiversified investors. e) Risk management can increase firm value by reducing taxes. f) Risk management can lead to easier and better performance evaluation, thereby reducing external monitoring costs and consequently, the firms capital costs. g) Risk management can add to firm value by providing internal funding for investment projects. In the hypothetical Modigliani-Miller theorem of corporate finance, neither capital structure nor firm risk management affect the value of the firm. The series of examples presented above, involving tax and transactional frictions, costly information gathering, information asymmetries, and agency costs, none of which exist in the Modigliani-Miller
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world, show how risk management can contribute significantly to the objective of maximizing firm value (Meulbroek, 2002:16). The next section discusses the value relevance of risk management.
b) On the value relevance of risk management The paper of Karim, Berawi, Yahya, Abdul-Rahman and Mohamed (2007) examines the relationship and integration between value management (VM) and risk management (RM), since many professionals realized that it is impossible to separate between value and risk. VM is about articulating what represents value in terms of project benefits while RM is about identifying causes of uncertainty and what can go wrong. Both activities complement each other: VM can reduce risk and RM provides opportunities to increase value. In the construction industry, both VM and RM are widely accepted as best practice tools for effective management of projects. The most important features for integrating VM and RM are that both are systematic processes, involving a multidisciplinary team in creative workshops. They both use a brainstorming technique as means for decision making process. Therefore combining the two processes within a single study is practical and logical as both share the same resources. The study examines the application of the integration of RM and VM which is subsequently known as Value and Risk Management (VRM) based on several infrastructure project case studies. Smithson and Simkins (2005) provide a thorough review of the literature regarding the value relevance of risk management. While their study examines four specific questions, their focus on the relationship between the use of risk management and the value of the firm is most relevant to this research study. Of the studies examined by
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Smithson and Simkins (2005), one considered interest rate and foreign exchange (FX) risk management by financial institutions, five considered interest rate and FX risk management by industrial corporations, one considered commodity price risk management by commodity users, and three considered commodity price risk management by commodity producers. While this series of prior studies has considered these specific types of hedging activity, no prior study has considered the effects of firms overall ERM and each specific enterprise-wide risk management practice on financial performance. While many of these prior studies have found evidence of a positive relationship between specific forms of risk management and the value of the firm, others such as Guay and Kothari (2003) suggest that corporate derivatives positions in general are far too small to account for the valuation premiums reported in some of these studies (e.g., Allayannis and Weston, 2001). In contrast to the prior studies of the value-relevance of risk management, the researcher focuses not on assessing the potential value-relevance of specific forms of hedging or risk management but on the overall risk management posture of the firm at the enterprise level and the effects of each specific ERM practice on financial performance.
c) On the relationship between risk management and firm performance value The study of Cornaggia (2011) examines the effect of risk management on productivity, an intermediate channel through which risk management may affect firm value. The author constructs triple-differences tests around shifts in the supply of risk management instruments available to producers in the U.S. agricultural industry. After new instruments become available to producers of particular crops, productivity increases the most among adopters of the new instruments, even in comparison with producers of
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control crops that do not have access to the new instruments. These results suggest a positive, causal effect of risk management on productivity. Supplemental evidence indicates that these results obtain because risk management relaxes financing constraints, thereby enabling productivity-enhancing investments. Overall, this article provides evidence that risk management has real effects on firm outcomes, and it sheds new light on the interaction between access to finance and firms risk management choices. Bakker, Boonstra & Wortmann (2010) investigate the question on whether risk management contributes to IT project success which is considered relevant by people from both academic and practitioners communities already for a long time. This paper presents a meta-analysis of the empirical evidence that either supports or opposes the claim that risk management contributes to IT project success. In addition, this paper also investigates the validity of the assumptions on which risk management is based. The analysis leads to remarkable conclusions. Over the last ten years, much has become known about what causes IT projects to fail. However, there is still very little empirical evidence that this knowledge is actually used in projects for managing risks in IT projects. The paper concludes with indications for new directions for research in the relation between risk management and project success. Key elements are stakeholder perception of risk and success and stakeholder behavior in the risk management process. Pagach and Warr (2010) studied the effects of ERM on firms long-term performance by examining how financial, asset and market characteristics change around the time of ERM adoption. Using a sample of 106 firms that announce the hiring of a Chief Risk Officer (an event frequently accompanied by adoption of Enterprise Risk Management) the authors found that some firms adopting ERM experience a reduction in
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earnings volatility. In general however, the study found little impact from ERM adoption on a wide range of firm variables. While the results could be due to lower power tests, they also raise the question of whether ERM is achieving its stated goals. Overall, the results fail to find support for the proposition that ERM is value creating, although further study is called for, in particular the study of how ERM success can be measured. Two studies indirectly investigate the relation between ERM implementation and firm value. Hoyt and Liebenberg (2010) find a positive relation between firm value and the appointment of a CRO. In an event study of the market reaction to the appointment of senior executives to oversee a firms ERM process, Beasley, Pagach, and Warr (2008) find firm-specific benefits of ERM for non-financial firms, but not for financial firms. Gordon, Loeb, and Tseng (2009) develop their own ERM index and find that the relation between ERM and firm performance is conditional on the match between ERM implementation and firm specific factors. The study of Hoyt and Liebenberg (2010) measured the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. They focus their attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. They use a maximum-likelihood treatment effects framework to simultaneously model the determinants of ERM and the effect of ERM on firm value. In their ERM-choice equation, they find ERM usage to be positively related to factors such as firm size and institutional ownership, and negatively related to reinsurance use, leverage, and asset opacity. By focusing on publicly-traded insurers, the researchers are able to estimate the effect of ERM on Tobins Q, a standard proxy for firm value. They find a positive relation between
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firm value and the use of ERM. The ERM premium of roughly 20% is statistically and economically significant and is robust to a range of alternative specifications of both the ERM and value equations. McShane, Nair and Rustambekov (2010) posit that Enterprise Risk Management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its effectiveness. The scant research on the relationship between ERM and firm performance has offered mixed findings, and has been limited by the lack of a suitable proxy for the degree of ERM implementation. Using Standard and Poors (S&P) newly available risk management rating, the study provides evidence of a positive relation between increasing levels of TRM capability and firm value but no additional increase in value for firms achieving a higher ERM rating.
Gordon, Loeb and Tseng (2009) looked into the basic argument that the relation between ERM and firm performance is contingent upon the appropriate match between ERM and the following five factors affecting a firm: environmental uncertainty, industry competition, firm size, firm complexity, and board of directors monitoring. In recent years, a paradigm shift has occurred regarding the way organizations view risk management. Instead of looking at risk management from a silo-based perspective, the trend is to take a holistic view of risk management. This holistic approach toward managing an organizations risk is commonly referred to as enterprise risk management (ERM). Indeed, there is growing support for the general argument that organizations will improve their performance by employing the ERM concept. Based on a sample of 112 US firms that disclose the implementation of their ERM activities within their 10Ks and 10Qs
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filed with the US Securities and Exchange Commission, empirical evidence confirms the above basic argument. The implication of these findings is that firms should consider the implementation of an ERM system in conjunction with contextual variables surrounding the firm.
Beasley, Pagach, and Warr (2008) conducted an empirical research on the costs and benefits of ERM adoption. Proponents of portfolio theory would argue against ERM because it is costly and idiosyncratic risks can be diversified away by investors at a low cost. On the other hand, it can be argued that markets are never perfect and there are benefits to the adoption of ERM by firms with certain characteristics, whereas ERM adoption by firms with certain other characteristics might destroy value. The study aims to provide empirical evidence on the value of hiring a senior risk executive. The authors measure the equity market response to the hiring announcements of senior executives in charge of risk management. The research hypotheses are that the market reaction to firm announcements of appointment of CROs will be positively associated with the firms: Growth options. Amount of intangible assets. Financial slack. Variance in earnings per share (EPS). Leverage. Size.
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Researchers obtained secondary data through the keyword search of terms such as announced, named, or appointed in conjunction with position descriptions of chief risk officer or risk management through Lexis-Nexis during 1992 to 2003. The final sample consisted of 126 observations. The data was split into two groups financial firms and nonfinancial firms. Multivariate analysis on separated samples indicate that among the financial firms, only the slack variable is found to be significantly associated with the market reaction to announcements of appointments of senior executive officers supervising risk. For nonfinancial firms, there is no statistical association between the announcement period returns and growth. However, announcement period returns are positively associated with a firms extent of intangible assets, prior EPS volatility, and size (while negatively associated with the slack and leverage). The overall results of the study indicate that the shareholders of firms with little financial slack welcome ERM. Shareholders of large nonfinancial firms with volatile earnings, greater amounts of intangible assets, low leverage, and low amounts of slack also act positively toward ERM. The authors conclude that a well-implemented ERM program can create value when it restricts the likelihood of significant downside risks such as financial distress (Fraser & Simkins, 2010:429-430). Hoyt and Liebenberg (2008), contended on the impact of ERM on firm value, as ERM has been the topic of increased media attention in recent years. The objective of this study was to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. Researchers focused their attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. The study used a maximum-
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likelihood treatment effects framework to simultaneously model the determinants of ERM and the effect of ERM on firm value. In the ERM-choice regression, Hoyt and Liebenberg found ERM usage to be positively related to firm size and institutional ownership, and negatively related to reinsurance use and leverage. By focusing on publicly-traded insurers they were able to estimate the effect of ERM on Tobins Q, a standard proxy for firm value. They found a positive relation between firm value and the use of ERM. The ERM premium is statistically and economically significant and approximately 17% of firm value. MacKay and Moeller (2007) model and estimate the value of corporate risk management. It shows how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices. For a sample of 34 oil refiners, the study found that hedging concave revenues and leaving concave costs exposed each represent between two and three percent of firm value. They validate their approach by regressing Tobins q on the estimated value and level of risk management and find results consistent with the model. Carter, Rogers and Simkins (2006) investigated whether hedging adds value to the firm in the US airline industry. If hedging does add value to the firm, the authors ask a follow-up question: is the source of the added value consistent with hedging theory? They investigate jet fuel hedging behavior of firms in the US airline industry during 1992-2003 to examine whether such hedging is a source of value for these companies. They illustrate that the investment and financing climate in the airline industry conforms well to the theoretical framework of Froot, Scharfstein, and Stein (1993). In general, airline industry
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investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedge-able, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. The results show that jet fuel hedging is positively related to airline firm value. The coefficients on the hedging variables in the regression analysis suggest that the hedging premium is greater than the 5% as documented in Allayannis and Weston (2001), and might be as large as 10%. They find that the positive relation between hedging and value increases in capital investment, and that most of the hedging premium is attributable to the interaction of hedging with investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs. El-Masry (2006) presents the results of a questionnaire survey, which focused on the reasons for using or not using derivatives for 401 UK nonfinancial companies. Furthermore, it investigates the extent to which derivatives are used, and how they are used. The results of the study indicate that larger firms are more likely to use derivatives than medium and smaller firms, public companies are more likely to use derivatives than private firms, and derivatives usage is greatest among international firms. The results also show that, of companies not using derivatives, half of them do not use these derivative instruments because their exposures are not significant and that the most important reasons why they do not use derivatives are: concerns about disclosures of derivatives activity required under FASB rules, and costs of establishing and maintaining derivatives programs exceed the expected benefits. The results show that foreign exchange risk is the risk most commonly managed with derivatives and interest rate risk is the next most
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commonly managed risk. The results also indicate that the most important reason for using hedging with derivatives is managing the volatility in cash flows. The paper of Jin and Jorion (2006) studies the hedging activities of 119 U.S. oil and gas producers from 1998 to 2001 and evaluates their effect on firm value. Theories of hedging based on market imperfections imply that hedging should increase the firms market value (MV). To test this hypothesis, the authors collect detailed information on the extent of hedging and on the valuation of oil and gas reserves. They verify that hedging reduces the firms stock price sensitivity to oil and gas prices. Contrary to previous studies, however, they find that hedging does not seem to affect market values for this industry. Adam and Fernando (2006) document that firms in the gold mining industry have consistently realized economically significant cash flow gains from their derivatives transactions. They conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms systematic risk. This finding contradicts a central assumption in the risk management literature, that derivatives transactions have zero NPV, and highlights an important motive for firms to use derivatives that the literature has hitherto ignored. They find considerable evidence of selective hedging in their sample, but the cash flow gains from selective hedging are small at best. Guay and Kothari (2003) examined how much firms hedge with derivatives. Using data from 234 large non-financial corporations using derivatives, they report the magnitude of their risk exposure hedged by financial derivatives. If interest rates, currency exchange rates, and commodity prices change simultaneously by three standard
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deviations, the median firms derivatives portfolio, at most, generates $15 million in cash and $31 million in value. These amounts are modest relative to firm size, and operating and investing cash flows, and other benchmarks. Corporate derivatives use appears to be a small piece of non-financial firms overall risk profile. They also examine whether the firms that theory predicts benefit most from hedging hold derivatives positions with relatively larger cash flow and market value sensitivities. They find some evidence of increased use of derivatives for larger firms and for firms with greater investment opportunities. They observe increased derivatives use among more geographically diverse firms and among firms for which the CEOs sensitivity of wealth to stock price is relatively large. However, the magnitudes of the derivatives positions are quite small for all partitions of the data. This suggests a need to rethink past empirical research documenting the importance of firms derivative use. Blanchard and Dionne (2003) examined the relationship between risk management and corporate governance. They take up the question of potential conflicts between the objectives of risk management policies and those connected with maximization of the firms value. This question is a timely one, since many firms have a special committee devoted to risk management banks and insurance companies in particular. In the wake of the Enron affair, various proposals have been formulated regarding the composition of the different committees set up by boards of directors. In the financial literature, it is now a widely accepted fact that risk management issues can give rise to conflicts of interest between heads of firms and shareholders, notably when executives are remunerated in stock options. In the researchers opinion, the boards risk management committee must
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be composed of competent and independent directors who hold no options to purchase the firms shares. Graham and Rogers (2002) studied whether firms hedge in response to tax incentives. According to them, there are two tax incentives for corporations to hedge: to increase debt capacity and interest tax deductions; and to reduce expected tax liability if the tax function is convex. They test whether these incentives affect the extent of corporate hedging with derivatives. Using an explicit measure of tax function convexity, the study finds no evidence that companies hedge in response to tax convexity. Their analysis does, however, indicate that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. The results also indicate that firms hedge because of expected financial distress costs and firm size. Allayannis and Weston (2001) examine the use of foreign currency derivatives (FCDs) in a sample of 720 large U.S. nonfinancial firms between 1990 and 1995 and its potential impact on firm value. Using Tobins Q as a proxy for firm value, they find a positive relation between firm value and the use of FCDs. The hedging premium is statistically and economically significant for firms with exposure to exchange rates and is on average 4.87% of firm value. The study also finds some evidence consistent with the hypothesis that hedging causes an increase in firm value. The paper of Carter, Pantzalis and Simkins (2001) investigates the impact of firmwide risk management practices on the foreign exchange exposure of 208 U.S. multinational corporations (MNC) over the period 1994 to 1998. Firm-wide risk management is the coordinated use of both financial hedges, such as currency derivatives, and operational hedges, described by the structure of a firms MNC foreign subsidiary
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network, to manage currency risk. They find that the use of currency derivatives, particularly forward contracts, is associated with reduced levels of foreign-exchange exposure. Furthermore, MNCs with dispersed operating networks have lower levels of currency exposure. These findings are robust to alternative ways of measuring foreignexchange exposure. Finally, the results strongly support the view that MNCs hedging in a coordinated manner can significantly reduce exposure to currency risk. These results strongly suggest that operational and financial hedges are complementary risk management strategies.
d) On enterprise risk management Since this study focuses on enterprise risk management and its specific practices, it is but worthwhile to examine academic research studies on enterprise risk management that include empirical results of actual companies. Paape and Spekle (2010) study data from 825 organizations, focusing on (1) the extent of ERM implementation and the factors that are associated with cross-sectional differences in the level of ERM adoption, and (2) specific ERM design choices and their effect on perceived ERM effectiveness. Broadly consistent with previous work in this area, they find that the extent of ERM implementation is influenced by the regulatory environment, internal factors, ownership structure, and firm and industry-related characteristics. As to ERM effectiveness, they find that organizations generally subscribe to a key premise of the COSO ERM framework, i.e. that ERM should address the full set of risks that affect the entitys strategic, operational, reporting, and compliance objectives. However, the results also raise some concerns as to the COSO framework. Particularly,
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they find no evidence that application of the COSO framework improves ERM effectiveness. Neither do they find support for the mechanistic view on risk management that is implicit in COSOs recommendations on risk appetite and tolerance. The working paper of Gates, Nicolas, and Walker (2009) attempts to extend the work performed earlier by examining which components of ERM frameworks lead to better decisions and increased profitability the value of ERM inside the company. The COSO framework on ERM provides a list of components that should be in place to help a company manage risk and provide reasonable assurance about meeting its objectives. However, it is not clear whether these components add value or which of these components add the most value. The authors surveyed audit and risk management executives to obtain data related to ERM deployment and organizational characteristics. The researchers posed the following questions: Which components of the ERM framework lead to better decisions? Which component of the ERM framework leads to increased profitability? The study finds that the ERM stage, a good ERM environment, better top-down and bottom-up communication of ERM missions, and explicit risk tolerance levels, positively influenced better decision making. A better ERM environment, explicit risk tolerance levels along with the number of employees devoted to ERM process appear to have an impact on profitability. Although companies perceive they are making better decisions, the results may not necessarily show up as increased profitability, which highlights the difficulty in bridging the value of ERM and internal control, and financial reports (Fraser & Simkins, 2010:432).
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The working paper of Pagach and Warr (2008a) explored the link between ERM implementation and firm characteristics when published research has focused on the benefits accrued as a result of ERM implementation but few studies have investigated the characteristics of the firms that adopt ERM. Appointment of a chief risk officer (CRO) is used as a proxy for ERM implementation. The objectives of this paper follow closely from Liebenberg and Hoyt (2003), the differences being in the sample size, methodology, and the use of a larger set of variables, including the stock options of managers. The paper tested the following research hypotheses: Firms with more leverage and less financial slack will more likely implement ERM. Firms with more opaque assets, greater R&D expense, and more growth options are more likely to benefit from ERM. Firms with relatively more volatile stock prices are likely to benefit from ERM. Data was collected by performing a search for key terms in the Lexis-Nexis library. For a period between 1992 and 2005 there were 138 announcements of senior risk officers. Data was collected from Compustat and CRSP. The results corroborate previous findings regarding firm size and leverage. Firms that are larger and those with higher leverage tend to hire CROs. Firms that have growth options are less likely to hire a CRO and conversely firms that hire CROs tend to have fewer growth options. (Note: A plausible explanation for the result is that stable firms tend to favor the adoption of ERM as a means to boost their bottom lines.) A negative relation is found between CRO hiring and change in the size of the firm. Higher CEO risk-taking
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incentives increase the likelihood of ERM adoption. When financial firms are considered in isolation, banks with lower Tier 1 Capital are more likely to hire a CRO (Fraser & Simkins, 2010:430-431). Pagach and Warr (2008b) pointed out that the introduction of ERM in the rating process by Standard & Poors is a source of motivation for companies to implement ERM. However, the cost associated with ERM adoption is nontrivial; hence, ERM should be value enhancing in some manner. The working paper focuses on the impact of ERM implementation on financial, asset, and market characteristics. The research hypotheses are: Do firms experience a change in earnings volatility around ERM adoption? Do firms adopting ERM improve financial performance relative to past performance and after controlling for industry performance? Do firm financial characteristics, such as leverage, growth, and asset opacity change after ERM implementation? CRO appointment is used as a proxy for ERM implementation. The business library of Lexis-Nexis was searched for search words such as announced, named, or appointed, in conjunction with words such as chief risk officer or director of risk management. The search produced 138 announcements of senior risk officer between the 1992 and 2004 period. The appointment of a CRO is assumed to be the commencement of an ERM program. The results suggest that there is no support for the position that ERM is valuecreating. Firms hiring a CRO, when compared to non-CRO firms, exhibited increased
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asset opacity, a decreased market to book ratio, and decreased earnings volatility. The authors find a negative relationship between the change in the firms market to book ratio and earnings volatility. The study also notes that banks increased leverage after ERM adoption and that firms adopting ERM exhibit reduced stock price volatility (Fraser & Simkins, 2010:431). Desender (2007) points out that given the increased attention and scrutiny on risk management practices, little research has been performed to explore why some firms adopt ERM and why some do not. The paper explores the link between ERM implementation and board composition. The author claims that the paper makes significant contributions to corporate governance research by establishing a relationship between board composition and ERM. The study tested the following hypotheses: There is a positive relation between the percentage of outside directors on the board and degree of ERM. There is a positive relation between the separation of CEO and chairman, and ERM. The relationship between board independence and ERM is stronger when there is a separation of CEO and chairman. One hundred randomly selected firms from the pharmaceutical industry in 2004 were chosen for the study. To assess the degree of ERM, the author uses publicly available information such as 10-K reports, proxy statements related to fiscal year 2004, and the
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company web site. All other data was collected through Worldscope. One unique aspect of this study is that the author coded the ERM efforts by the COSO ERM component. The pharmaceutical industry was chosen for the following three reasons: (1) this industry has been used in previous corporate governance research; (2) this industry is competitive and has been known to take shortcuts to perform; and (3) the pharmaceutical industry is faced with multiple risks and should display sufficient variation in the implementation of ERM. The results suggest that board independence in isolation has no significant relation with ERM quality. Firms that have a different chairman and CEO favor more elaborate ERM and show the highest level of ERM implementation. The author takes a bold step to postulate that CEOs do not favor ERM implementation and, therefore, withstand pressure from the board to adopt ERM when the CEO is also the chairman of the company (Fraser & Simkins, 2010:429). The paper of Rao (2007) evaluates the current status of enterprise risk management (ERM) in business organizations in Dubai. Primary data are collected from 92 business executives in Dubai belonging to various industry sectors viz., Finance, Banking, Insurance, Islamic Finance, Trade, Manufacturing, Hospitals, and other services through a survey. The survey questions encompass the five components of COSO framework: control environment of the businesses, risk assessment, control activities, information and communication, and monitoring. The study findings indicate that there is a need for a more comprehensive awareness about ERM across all categories of businesses in Dubai. While finance and banking institutions to a greater extent implemented various risk tools
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for managing their risks, other businesses were not even aware of the concepts of risk and its management. The study outlines five-step systematic process that helps businesses in Dubai to make well-informed decisions for managing enterprise risk. The study of Beasley, Clune, and Hermanson (2005a), as the pre-text of the following study (Beasly, Clune, and Hermanson (2005b)), focused on the examination of internal auditings involvement in ERM at the time when there had been a rising interest in ERM and added interest in ERM by many internal auditors. The data used in both of these studies was funded by the IIA Research Foundation to examine internal auditings involvement in ERM. A survey was administered to more than 1,170 Institute of Internal Auditors (IIA) who were members of the Global Auditing Information Network (GAIN) service. Completed survey responses were received by 175 respondents (response rate of 10.3 percent) and approximately 90 percent of those respondents were chief audit executives (CAEs). The CAEs were the primary intended targets for the survey. Majority of the respondents were from the United States, with representation from other countries including Canada, the United Kingdom, and Australia. No one industry represented more than 15 percent of the respondents. Most of the respondents were from government, manufacturing, financial, and education industries. Most of the responding companies were large, with median 2003 revenues of $1.3 billion. The respondents were familiar with Committee of Sponsoring Organizations (COSO) guidelines. Eleven percent of the surveyed firms have a complete ERM framework, 37 percent of the responding firms have a partial ERM framework, and 17 percent of the firms have no plans to implement ERM.
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Respondents were asked about the existence and nature of the CRO as an indicator of the organizations commitment to risk management. Of the responding firms, 33 percent have a formally designated CRO and 15 percent believe they have someone fulfilling the role of CRO. In companies with a formally designated CRO, they found that there is a great deal of interaction between the CRO and CAE. Among firms with partial ERM implementation, there is significant interaction between the audit department and the risk management department. The survey reveals wide diversity in the adoption of ERM and in the internal auditing departments role in ERM. There was optimism regarding ERMs impact on the company and on internal auditing. The authors state that ERM adoption is likely to gain traction and will demand more involvement with internal auditing (Fraser & Simkins, 2010:427-428). The study of Beasley, Clune, and Hermanson (2005b) is the second in a series that the authors conduct. The first study summarized above (see Beasley, Clune, and Hermanson 2005a) describes the survey results. This second article is a more advanced analysis employing regression analysis to more deeply explore factors associated with the extent of implementation of ERM. The authors note that there is little research on what factors affect the stages of ERM implementation, including board of director characteristics. Stages of ERM, which form the dependent variable of this research paper, refer to the level of ERM implementation in an organization. ERM 1 suggests that no plans exist to implement ERM and ERM 5 suggests that a complete ERM is in place.
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As described above, the researchers collected data in 2004 through survey responses from members of GAIN. Responses were received by 175 respondents but 52 observations had to be dropped because applicable data was not available for the regression analysis. The final sample consisted of 123 organizations. The researchers sought answers to the following research questions: Is the presence of a Chief Risk Officer positively associated with an enterprises stage of ERM deployment? Is a higher percentage of board of director (BOD) members who are independent positively associated with enterprises stage of ERM deployment? Are explicit calls from the chief executive officer (CEO) or chief financial officer (CFO) for internal audit involvement in ERM positively associated with an enterprises stage of ERM deployment? Is the presence of a Big Four auditor positively associated with an enterprises stage of ERM deployment? Are larger firms more likely to have further-developed ERM deployments? Are entities in the banking, education, or insurance industries more likely to have further-developed ERM deployments? Are non-U.S. enterprises more likely to have further-developed ERM deployments? As shown in the results, a companys extent of ERM deployment is positively associated with variables such as a CRO presence, more independent BOD, explicit calls from CEO or CFO for internal audit involvement in ERM. Large firms and those audited by Big Four audit firms are further into their ERM deployment stage. Also, banking,
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education, and insurance companies are found to be further into their ERM deployment stages. Finally, the results indicate that U.S. firms are not advanced in their ERM implementations (Fraser & Simkins, 2010:428). Kleffner, Lee, and McGannon (2003) motivated their study by pointing out that public companies worldwide are facing ever-increasing scrutiny of their corporate governance policies and practices. ERM evolved as a result of this scrutiny and as an incidental result of the accounting debacles such as Enron and WorldCom. According to a 2001 study by Economist Intelligence Unit (EIU), only 41 percent of companies in Europe, North America, and Asia had implemented ERM, but when US and Canadian companies are analyzed, the number of firms that had implemented ERM drops to 34 percent. The hypothesis of the study states that increased scrutiny of companies by various agencies, and the Toronto Stock Exchange (TSE) guidelines, will urge more companies to adopt ERM. Questions posed by the researchers are: To what extent do companies in Canada use ERM? What are the characteristics associated with ERM? What obstacles do companies face in implementing ERM? What role have corporate governance guidelines played in the decision to adopt ERM? Survey responses from the members of the Canadian Risk and Insurance Management Society as well as data from telephone interviews with 19 of those respondents were obtained.
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The results indicate that of the 118 firms in the sample, only 37 used an ERM approach, 34 were investigating and ERM approach, and 47 companies were not considering ERM. Of those companies that implemented ERM, 37 percent said that TSE guidelines were a driving force behind the decisions, 51 percent said that it was due to the encouragement of the directors, 28 percent said concern for directors and officers liability was important, and 61 percent said that the presence of a risk manager influenced the decision to implement ERM. Organizational culture that discouraged ERM, an overall resistance to change, and the lack of qualified personnel to implement ERM are factors that deterred the implementation of ERM. The overall results indicate that an increasing number of companies were aware of the importance of ERM and more companies were moving in the direction of implementing ERM as a result TSE guidelines and other agencies (Fraser & Simkins, 2010:426). Liebenberg and Hoyt (2003) state that the appointment of a chief risk officer (CRO) signals to the world the importance attached to ERM by a company and assume that the appointment of a CRO also says that the company is ready to reap the benefits associated with ERM. The objective of the research was to investigate the differences between a sample of firms that have signaled the appointment of CROs and a closely matched control sample that have not appointed a CRO. Just like the researcher of this study, the authors highlight the difficulty in obtaining data since public companies are not mandated to disclose the presence of an ERM system or the appointment of a CRO. The authors investigate the following research hypotheses:
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Firms with higher volatility in terms of earnings and stock price are likely to appoint a CRO.
Highly leveraged firms are more likely to appoint a CRO. Growing firms are more likely to appoint a CRO. Financially opaque firms are more likely to appoint a CRO. Firms that have a higher percentage of institutional holding are more likely to appoint a CRO.
Firms that have subsidiaries in Canada or the United Kingdom are more likely to appoint a CRO. U.S. firms that announced the appointment of a CRO between 1997 and 2001 are
included as the sampling population. The article concludes that there is no systematic difference between firms that signal their use of ERM by the appointment of a CRO and similar firms. However, the research did find that large firms and highly leveraged firms are more likely to appoint a CRO (Fraser & Simkins, 2010:427). Colquitt, Hoyt, and Lee (1999) assessed the characteristics and extent of integrated risk management. The aspects of risk management that were evaluated are: The extent to which risk managers are involved in managing pure financial risks facing their firms. The nonoperational types of risks handled by risk managers and techniques being used to handle a broader set of risks.
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The effect of factors such as firm size, the industry characteristics, and the background and training of the risk manager have on participation in integrated risk management activities. The data was collected from a questionnaire sent in October 1997 to firms found in
the Business Insurance 1995-96 Directory of Buyers of Insurance, Benefit Plans & Risk Management Services. Only those firms with a dedicated employee in charge of risk management were included in the sample. As a result, many smaller firms were not included in the sample. A sample of 1,780 questionnaires was sent and 379 responses (21 percent response rate) were received. Fifty percent of the responses came from the manufacturing industry and only 9 percent of the responses came from finance, insurance, and real estate industries. Among other key findings, the authors found that risk management formed part of the finance and/or treasury department, with 36% of respondents and 29% of companies having separate risk management departments. For 22% of companies, the operational risk management function was handled entirely by the finance and treasury department. Political risk, exchange rate risk, and interest rate risk were the three most common nonoperational risks handled by the risk management department. Among derivative instruments used for risk management, swaps and forwards were the most common. Options and futures were used by 45.8% and 39.5% of the respondents, respectively. Finally, the authors found that multiyear contracts were the favorite alternative risk management, with captives coming in at a distant second. The study concluded by saying that the role of the risk manager was evolving and that the risk manager was getting involved in the management of a wider spectrum of risks
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faced by the firm. The trend toward integrated risk management was expected to continue (Fraser & Simkins, 2010:425-426).
Synthesis and Relevance of the Related Literature and Studies The related literature and studies presented under this chapter cover a wide range of areas relevant to the major variables of this dissertation particularly on ERM and firm performance/value. Foreign literature highlights the principles of risk management, steps to successful risk management, the benefits and drivers of risk management, and risk management standards. Whereas, the local literature zeroes in on risk management and risk-related laws and issuances arising from industry regulations for financial, insurance, oil/gas and pharmaceutical companies in the Philippines. It is important to note that of the local studies reviewed, although some have a significant relationship with firm value, none even touched on the topic of enterprise risk management (ERM), while of the foreign related studies presented, many are written about risk management and ERM but very few comes as a result of doctoral dissertation. Most are research studies and articles beyond the academic requirements, usually with two or more authors. Despite the overwhelming research on risk management and ERM, no study was yet ever written on the relationships between specific ERM practices and FP as indicated by three factors namely, return on total assets, net profit margin and return on equity. The afore-cited literature and studies were found relevant and significant to this study as it provided background material for both the theoretical and empirical
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understanding of risk management principles, benefits, standards, framework and practices in different areas of interest, and the contribution of risk management, in general, to firm value. However, this present study is different from previous studies. As mentioned in Chapter 1, for example, previous studies by Beasley, Pagach and Warr (2008) and Pagach and Warr (2008 and 2010) used CRO appointments as a proxy for ERM implementation, while Hoyt & Liebenberg (2010) utilized Lexis-Nexis for the existence of CRO or Risk Management Committee again as a proxy for the existence of ERM in their sample population, whereas McShane, Nair and Rustambekov (2010) used data based on the newly available risk management rating from Standard & Poors, but none particularly focused on the effects of the extent of enterprise risk management practices, obtained from survey responses, on the three financial performance indicators gathered and computed from financial statements of covered firms. As just mentioned, the review of related literature and studies revealed that while there are books, articles, survey reports, and academic research studies written related to this topic, there is no written material (published, unpublished or web-based) that attempted to address the research objectives of this study, in particular the extent of the 15 enterprise risk management practices and its effects on ROTA, NPM and ROE. Conducting this research study will not therefore duplicate any existing material on the topic and is an original contribution to knowledge.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan THEORETICAL FRAMEWORK
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INDEPENDENT VARIABLES
Extent of Enterprise Risk Management Practices on the following aspects: a. Appointment of a local risk manager; b. Risk management inclusion in key business processes and decision making; c. Sufficient guidance and support from BOD to launch effective ERM practice; d. Adherence to a common risk terminology and set of standards for managing risk; e. Communication of company objectives and risk appetite/tolerance; f. Understanding of ones level of accountability in managing risk; g. Usage of Key Risk Indicators (KRIs); h. Risk management integration within strategic planning process; i. Usage of technology to enable risk management process; j. Risk management integration across all functions and business units; k. Basis of developing risk responses/mitigation strategies; l. Effectiveness in managing the basic elements of risk process; m. Effectiveness in identifying, assessing and managing major types of risks; n. Current stage of ERM program o. Strength of the overall physical risk management program
DEPENDENT VARIABLES
Financial Performance as measured by the following indicators: >Return on Total Assets >Net Profit Margin >Return on Equity
Figure 1 Theoretical Framework of the Study
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Figure 1 shows the theoretical framework of this study based on the theories and principles cited previously under the section of Theory Guiding the Study. Since risk management creates and protects value, according to ISO 31000s 1st principle of managing risks, it is but right to assume that any risk management activity or practice directly enhances firm value, in one way or another, and helps improve the attainment of business objectives through proper and timely mitigation or management of all significant risks. Moreover, since shareholder value maximization says that owners of companies are after the long-term value creation of any business activity, ERM being an excellence in risk management and as a strategic tool therefore is assumed to create value in the long term as it solves many problems on the interdependencies of risks, finite resources of the company, timely decision making, and capital allocation to name a few. Thus, any of ERMs essential components or practices to proactively manage risks across the enterprise can be considered as a value adding activity, which is the reason why these 15 risk management practices represent the explanatory variables. On the other hand, the value referred to in this study is the observable achievement of business objectives such as better financial performance, measured in terms of return on total assets, net profit margin and return on equity, which are assumed to be significantly affected by the degree of risk management practices by the covered firms. Otherwise stated, if the degree of risk management practices is weak or unsatisfactory, then the financial performance of companies is also said to be strained. Without risk management or risk management practices, the achievement of business objectives such as stable, if not better, financial performance is most likely to be impaired.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan RESEARCH PARADIGM PROCESS
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INPUT
PRIMARY DATA from SURVEY on the extent of the 15 Enterprise Risk Management Practices (sub-problem statement nos. 1a through 1o) by respondent firms and the length of time ERM has been in place for firms that implement it. SECONDARY DATA from financial statements on the values of ROTA, NPM and ROE of respondent firms from 2004 to 2009.
Survey questionnaire Data gathering and calculations of the 3 financial performance ratios from 2004 to 2009 Data set construction of joint observations Statistical Treatment - Descriptive Statistics - Multiple Regression Analysis - R2 or Multiple Coefficient of Determination to measure the goodness of fit for each Multiple Regression model - Durbin-Watson statistic, Normal Probability Plot & Variance Inflationary Factor - T-test for Two Sample Means - Index Numbers & Moving Average Data presentation, analysis and interpretation
OUTPUT
Best Practices in Enterprise Risk Management that improve Financial Performance
Figure 2 Research Paradigm of the Study This study will use an input-process-output approach. Input refers to the data that will be obtained from primary and secondary sources. Process is the conversion of these data through statistical treatment, analysis and interpretation. After data has been tabulated, analyzed and interpreted, this will generate results on the best practices in risk
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management that enhance FP consistent with the theoretical framework previously discussed. This is referred to as the output of this study. Figure 2 describes the process by which data is identified, gathered, analyzed and presented in order to determine the best risk management practices that enhance firm performance. To elaborate, the research paradigm serves as a guide for the study to identify in operational terms the process by which survey and secondary data are processed in a logical manner for the purpose of testing the hypotheses and solving the research questions. The Input Box contains all the data requirements in the form of a set of joint observations on each dependent variable and the 15 independent variables in order to subject these variables to regression. The primary data are the survey responses on the extent of the 15 risk management practices of the covered firms as well as the responses on the length of time ERM has been in place for companies that implement it, while the secondary data are the financial performance ratios (ROTA, NPM and ROE) taken and computed from the respondent firms financial statements filed annually from 2004 to 2009. When processed together through statistical treatment, it would yield information on the best practices of risk management causing changes in the behavior of financial performance, which in turn influences shareholder value. The Process Box contains the processes through which raw data are transformed into useful information concerning the best practices in risk management that enhance financial performance. Again, the process consists of the following essential elements:
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survey questionnaire to get the primary data; survey data gathering; research and computations on the values of the three financial performance ratios from 2004 to 2009 for all covered firms; data set construction of joint observations; application of statistical treatment via SPSS 17 and MegaStat Excel 2007 using descriptive statistics and inferential statistics namely multiple regression analysis, multiple coefficient of determination, the Durbin-Watson Test and normal probability plot, t-test for two sample means assuming equal variance, index numbers and moving average; and data presentation, analysis and interpretation. Finally, the Output Box will contain (processed) information about the best risk management practices that predict better financial performance, a claimed major benefit of ERM.
RESEARCH HYPOTHESES Presented in null form, the study tested the following hypotheses based on the specific questions under the statement of the problem this study sought to answer: H1: Enterprise risk management practices of respondent firms have no significant effect, individually and collectively, on their financial performance measured in terms of ROTA, NPM and ROE. H2: There is no significant difference on financial performance (ROTA, NPM and ROE) between firms that explicitly implement ERM and firms that do not.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan OPERATIONAL DEFINITION OF VARIABLES This study will use the following key terms, as operationally defined:
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Business Risk Management is a level of risk management program directly preceding enterprise risk management. Commodity Price Risk is the risk that changes in commodity prices impact the expected cash flows of an entity. Compliance Risk is the current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain companys products or activities of the firms clients may be ambiguous or untested. This risk exposes the firm to fines, payment of damages, and the voiding of contracts. Compliance risk can lead to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential, and lack of contract enforceability. (BSP)
Compustat is a database of financial, statistical and market information on active and inactive global companies throughout the world. The service began in 1962. This database provides a broad range of information products directed at institutional investors, universities bankers, advisors, analysts, and asset/portfolio managers in corporate, M&A, private capital, equity, and fixed income markets. The database covers 99,000 global securities, covering 99% of the world's total market capitalization with annual company data history available back to 1950 and
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quarterly available back to 1962 (depending when that company was added to the database). (Wikipedia) Credit Risk arises from counterpartys failure to meet the terms of any contract with the financial institution or otherwise perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance. It arises any time FI funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet. (BSP) Durbin-Watson statistic is used to detect autocorrelation in the residuals, and check if residuals are independent (not correlated with) of one another. Enterprise risk management (ERM) can be viewed as a natural evolution of the process of risk management. It is defined as a process, effected by an entitys board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, manage risk to be within its risk appetite and to provide reasonable assurance regarding the achievement of entity objectives (COSO 2004). It encompasses all the structures, methods and processes used by organizations to identify, measure and manage risks, or to seize opportunities, related to the achievement of business and strategic objectives. ERM Framework is a set of components that provide the foundations and organizational arrangements for designing, implementing, monitoring, reviewing and continually improving risk management throughout the organization (ISO Guide 73 Risk Management Vocabulary 2009, Geneva). It is integrated into the organizations
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overall strategic and operational policies and practices. There is one ERM framework at the organizational level and as many risk management processes as there are decision/management positions hundreds or even thousands. Risk Management Process is specified by the ERM framework and is the key risk management process. Event is an incident or occurrence, from sources internal or external to an entity that could affect the implementation of strategy or achievement of objectives. Financial Risk is the risk borne by equity holders due to a firms use of debt. If the company raises capital by borrowing money, it must pay back this money at some future date plus the financing charges (e.g. interest charged for borrowing the money). This increases the degree of uncertainty about the company because it must have enough income to pay back this amount at some time in the future. Foreign Exchange Risk is the risk to earnings or capital arising from adverse movements in foreign exchange rates (BSP). This is particularly important for investors that have a large amount of overseas investment and wish to sell and convert their profit to their home currency. If exchange rate risk is high even though a substantial profit may have been made overseas, the value of the home currency may be less than the overseas currency and may erode a significant amount of the investments earnings. That is, the more volatile an exchange rate between the home and investment currency, the greater the risk of differing currency value eroding the investments value.
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Hazard Risk is a category of risk that is associated with the management of pure risks, or the control of events that can only undermine key dependencies and/or the achievement of objectives (ISO Guide 73). Impact is a result or effect of an event. There may be a range of possible impacts associated with an event. The impact of an event can be positive or negative relative to the entitys related objectives. Inherent Risk is the risk to an entity in the absence of any actions management might take to alter either the risks likelihood or impact. Interest Rate Risk is the current and prospective risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (re-pricing risk); from changing rate relationships among different yield curves affecting companys activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options embedded in financial institution products (options risk). (BSP) Internal Control is all the elements of an organization that, taken together, support people in the achievement of the organizations objectives. The elements include resources, systems, processes, culture, structure and tasks (Criteria of Control). ISO Guide 73 provides the definitions of generic terms related to risk management. It aims to encourage a mutual and consistent understanding of, and a coherent approach to, the description of activities relating to the management of risk, and the use of uniform risk management terminology in processes and frameworks dealing with the management of risk.
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Key Risk Indicator (KRI) is a measure to indicate the potential presence, level, or trend of a risk. A KRI is first and foremost a measurement tool, and helps monitor risk. It can indicate whether a risk has occurred or is emerging, a sense of the level of the risk exposure, the trending of and/or changes in risk exposure. KRI measures the risk of the well-being of an organization, which can be equated to a thermometer that measures the temperature of a patient. When effectively designed and used, KRIs have predictive value and can act as early warning signals on the possible changes in an organizations risk profile. KRIs are linked to risk, performance and strategy. Likelihood is used to refer to the chance of something happening, whether defined, measured or determined objectively or subjectively, qualitatively or quantitatively, and described using general terms or mathematically such as a probability or a frequency over a given time period (ISO Guide 73). Liquidity Risk is the current and prospective risk to earnings or capital arising from a companys inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. (BSP) Market Risk is the risk to earnings or capital arising from adverse movements in factors that affect the market value of instruments, products, and transactions in an institutions overall portfolio, both on or off-balance sheet. Market risk arises from
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market-making, dealing, and position-taking in interest rate, foreign exchange, equity and commodities markets. (BSP) Net Profit Margin measures the companys flow of net income in relation to the flow of revenue. The higher this ratio, the more after-tax profits a company generates. Normal Plot of Residuals is used to check if residuals are normally distributed. Opportunity is a possibility that an event will occur and positively affect the achievement of objectives. Operational Risk is risk that can impact the key dependencies or corporate objectives of an organization, with the impact materializing immediately the risk occurs (ISO). It is defined in Basel II and BS 31100 as risk of loss or gain, resulting from inadequate of failed internal processes, people and systems or from external events. Probability is a measure of the chance of occurrence expressed as a number between 0 and 1, where 0 is impossibility and 1 is absolute certainty. Reputational Risk is the current and prospective impact on earnings or capital arising from negative public opinion. This affects the companys ability to establish new relationships or services or continue servicing existing relationships. This risk may expose the company to litigation, financial loss, or a decline in its customer base. In extreme cases, companies that lose their reputation may suffer a run on deposits. Reputation risk exposure is present throughout the organization and requires the responsibility to exercise an abundance of caution in dealing with customers and the community. (BSP)
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Residual Risk is the remaining risk after management has taken action to alter the risks likelihood or impact. Return on Equity measures how much the shareholders earned for their investment in the company relative to the stock of their investment in the company; it indicates how profitable a company is by comparing its net income after tax to its total shareholders equity. Return on Total Assets measures the companys flow of net income in relation to the stock of assets. The greater the ratio, the larger the net income per dollar invested in assets. Risk is the effect of uncertainty on objectives, measured by impacts x probability. An effect may be positive, negative, or a deviation from the expected (ISO Guide 73). Also, risk is often described by an event, a change in circumstances or a consequence. Risk Analysis is a process to comprehend the nature of risk and to determine the level of risk; it provides the basis for risk evaluation and decisions about risk treatment and includes risk estimation (ISO Guide 73). Risk analysis requires determining the probability (or likelihood) of the event actually occurring within the discrete time frame being assessed to provide the decision maker with sufficient understanding of the risk, that they are satisfied they have the appropriate level of knowledge about the risk to make decisions on risk treatment and acceptance. Risk Appetite is the amount and type of risk that an organization is willing to pursue or retain (ISO Guide 73); means the level of risk that is acceptable to the organization, encompassing the hazard risks that it is willing to tolerate, the control
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risks that it is willing to accept and the opportunity risks in which it is willing to invest. Risk Identification is the process of finding, recognizing and describing risks; involves the identification of risk sources, events, their causes and their potential consequences (ISO Guide 73). Risk Management is the process which aims to help organizations understand, evaluate and take action on all their risks with a view to increasing the probability of success and reducing the likelihood of failure (HM Treasury); supports risk taking and the organization's ability to compete. Risk Management Framework is a set of components that provide the foundations and organizational arrangements for designing, implementing, monitoring, reviewing and continually improving risk management throughout the organization. The foundations include the policy, objectives, mandate and commitment to manage risk. (ISO Guide 73) Risk Management Practices are pro-active practices in risk management that comprise the 15 independent variables cited in this study. Risk Management Process is systematic application of management policies, procedures and practices to the activities of communicating, consulting, establishing the context, and identifying, analyzing, evaluating, treating, monitoring and reviewing risk. (ISO Guide 73) Risk Management Standard is a guide to organizations on the design and implementation of risk management and made up of a description of the risk management process, together with advice on establishing a suitable risk management framework.
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Risk Matrix is a tool for ranking and displaying risks by defining ranges for consequence and likelihood. (ISO Guide 73) Risk Monitoring is the continual checking, supervising, critically observing or determining the status of risks in order to identify change from the required or expected level of risk, and disseminating the resulting information to the right manager at the right time is critical. This involves designing risk reports and reporting processes that are meaningful and provide the information necessary to evaluate the risks, enabling management to make optimal decisions. Risk Quantification, also referred to as risk measurement, means attaching a probability to the happening of a negative event. If it is certain that an event cannot occur, it is given a probability of 0; if it is certain that it will occur, it is given a probability of 1. Uncertain risks are assigned between 0 and 1. Maximum risk at maximum uncertainty occurs when its probability is 0.5. Risk Register is the profile and record of the risks faced by an organization, with particular emphasis on the significant risks, the controls currently in place, additional controls that have been identified and responsibility for control activities; sometimes referred to as risk log. Risk Reporting is a form of communication intended to inform particular internal or external stakeholders by providing information regarding the current state of risk and its management. Risk Tolerance is the risk exposure an organization determines appropriate to take or avoid taking. It is defined by ISO Guide 73 as the organization or stakeholders
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readiness to bear the risk after risk treatment in order to achieve its objectives. Risk tolerance can be influenced by legal or regulatory requirements. Risk Treatment is the process to modify risk which can involve avoiding the risk, taking or increasing the risk in order to pursue an opportunity, removing the risk source, changing the likelihood, changing the consequences, sharing the risk with another party or parties, and retaining the risk by informed decision. (ISO Guide 73) Significant Risk is risk with the ability to impact about the benchmark test for significance for the organization. (ISO Guide 73) Strategic Risk is the long-term or opportunity risk that can impact the key dependencies or corporate objectives of an organization, with the impact materializing sometime after the action or event occurs. It is defined in BS 31100 as Risk concerned with where the organization wants to go, how it plans to get there and how it can ensure survival. Technology Risk is a risk that is related to information technology, defined by ISO Guide 73 as the potential that a given threat will exploit vulnerabilities of an asset or group of assets and thereby cause harm to the organization. It is measured in terms of a combination of the probability of an event and its consequence. The measure of an IT risk can be determined as a product of threat, vulnerability and asset values. Terminate is a risk response that is appropriate when the level of risk is not acceptable to the organization, also referred to as avoid or eliminate. Tolerate is risk response option that is appropriate when the level of risk is acceptable to the organization, also referred to as accept or retain.
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Transfer is risk response option for risks that the organization wishes to transfer to another party, usually by means of insurance or contractual transfer. Treat is risk response option for risks that the organization believes can be further treated by the introduction of cost-effective (corrective) controls, also referred to as control or reduce. Traditional Risk Management means a compartmentalized, silo-based approach in managing risk. Uncertainty is the inability to know in advance the exact likelihood or impact of future events. Variance Inflationary factors are used to check for multicollinearity effects associated with each predictor, and determine whether data are not ill-conditioned.
List of Acronyms Used AIRMIC AFS Alarm BASEL II BFAD BOD BP BSP CAE CEO CFO COSO CRO CRSP Df = = = = = = = = = = = = = = = The Association of Insurance and Risk Managers Audited Financial Statement The National Forum for Risk Management in the Public Sector 2nd of BASEL Accords issued by the Basel Committee on Banking Supervision Bureau of Food and Drugs Board of Directors Batas Pambansa Bangko Sentral ng Pilipinas Chief Audit Executive Chief Executive Officer Chief Financial Officer Committee of Sponsoring Organizations of the Treadway Commission Chief Risk Officer Center for Research in Security Prices Degree of freedom
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan DOE EO ERM FDA FI FP GR GAIN GIS HR IC IIA IRM ISO MNC PD RA RT SBO SEC TRM VIF Research Variables ROTA NPM ROE RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS EMRP EMTR SERM SPRM = = = = = = = = = = = = = = = = = = = = = = Department of Energy Executive Order Enterprise Risk Management Food and Drug Administration Financial Institution Financial Performance Gross Revenue Global Audit Information Network General Information Sheet Human Resource Insurance Commission Institute of Internal Auditors Institute of Risk Management International Organization for Standardization Multinational Company Presidential Decree Republic Act Risk Tolerances Strategic Business Objectives Philippine Securities and Exchange Commission Traditional Risk Management Variance Inflationary Factor
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= = = = = = = = = = = = = = = = = =
Return on Total Assets Net Profit Margin Return on Equity Risk Manager Appointment Risk Management inclusion in Decision Making Support from Board of Directors Risk Terminology and set of Risk Management Standards Communication of Company Objectives, Risk Appetite and Risk Tolerance Understanding of Risk Management Accountability Key Risk Indicators Risk Management integration within Strategic Planning Technology for Risk Management Process Risk Management integration across all Functions Risk Response Strategies Effectiveness of Managing the Risk Process Effectiveness of Managing Types of Risks Current Stage of ERM Strength of Physical Risk Management program
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CHAPTER 3 RESEARCH DESIGN
This chapter will elaborate on the research design used in this study through a description and presentation of the research locale, methods of research, sources of data, population and sample size, instrument for gathering data and validation, data gathering procedure and statistical tools used in analyzing data.
Research Locale The research setting is the Philippine environment in the financial, insurance, oil/gas and pharmaceutical industries from the onset of the 21st century when ERM was gaining grounds for implementation by companies up to the present time. Except for one MNC whose office address is located in Canlubang Industrial Estate, Calamba Laguna, the main office addresses of all other covered top multinational companies in the Philippines are located in Metro Manila, giving convenience for the researcher to reach the target respondents in a timely fashion. Presidents/Managing Directors/Country Managers or their executive officers and managers of respondent MNCs were the primary individual respondents to represent their respective companies. Only multinational companies engaged in the financial, insurance, energy (oil and gas) and pharmaceutical sectors whose gross revenues are ranked in the 2010 BusinessWorlds Top 1000 Corporations in the Philippines are chosen as target respondents in the study.
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To reiterate from Chapter 2 under local literature, based on the risk management and risk-related issuances for financial institutions under the BSP supervision mentioned in Table 2.1, multinational financial companies face almost all types of risks, especially financial risks, such as but not limited to foreign exchange risk, market risk, credit risk, technology risk, liquidity risk, and operational risk. Financial institutions also have to adopt the risk-based capital adequacy framework, strongly required under the Basel II framework. As set out in Table 2.2, multinational insurance companies have to comply with minimum capitalization requirements for insurance brokers, reinsurance brokers, and for life, non-life and reinsurance companies doing business in the Philippines, and those to be rehabilitated pursuant to Section 188 in relation to Section 184 of the Insurance Code of the Philippines as amended. Increase in the amount of guaranty fund is also required for mutual benefit associations, and the adoption of risk-based capital framework for both the Philippine life and non-life insurance industries, as well as for mutual benefit associations. These regulatory requirements on risk management have been implemented in response to bankruptcy failures and notorious practices of some insurance companies particularly the Legacy Group and the College Assurance Plan. Failure to comply with those capitalization and other requirements means non-approval of business registration for start-up companies, and hefty penalties or closure of business for those already established. Meanwhile, oil and gas firms face a number of laws and issuances pertaining to prohibited acts (as particularly defined under Section 2 of Batas Pambansa Blg. 33) and penalties involving petroleum and/or petroleum products, effectively regulating the activities and relations of persons and entities engaged in the industry to protect the public
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interests and national security. All oil companies and bulk suppliers also face minimum inventory requirements under Department Circular No. 2011-03-0002. Violation of any laws as defined under BP 33, R.A. 6173, PD 1865, EO 392, R.A. 8479, R.A. 8180 and other regulations or department circulars would surely result to penalties, restriction of business activities, criminal prosecution and eventual closure of the business for those concerned. Managing operational risk, strategic risk, commodity risk and regulatory compliance are therefore imperative for all oil/gas companies. Lastly, requirements on risk management for pharmaceutical firms closely pertain to safety standards, quality control and assurance of medicines and/or medical products before selling it to the market because of its critical role and irreplaceable importance to the health of the public. Operational risks resulting from inadequate or failed internal processes, people and systems, or from external events are therefore the common risks faced by pharmaceutical MNCs. These common risks and risk management requirements unique to each of the four industries may help us understand the degree of their ERM practices as reflected in the findings for research problem no. 1.
Methods of Research The study used mainly the descriptive-survey method of research to provide an accurate description of enterprise risk management practices (the independent variables) by the top MNCs in the country, and its effects on the financial performance indicators such as ROTA, NPM and ROE (the dependent variables) using primary data obtained
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from the questionnaire and secondary data from financial statements. The survey strategy allows the researcher to collect quantitative, first hand data which can be analyzed quantitatively using descriptive and inferential statistics. Data collected using a descriptive-survey method of research can be used to suggest possible reasons for particular relationships between the said independent and dependent variables. Because this research study aims to determine the cause of existing differences on financial performance between two groups of firms (the ERM and non-ERM companies), particularly applied in research problem no. 4 where having ERM is the independent variable, the causal-comparative (or after the fact) research design is made to examine the effects on financial performance of ERM and non-ERM firms ex post facto. The T-test was particularly used to test in order to find out if firms explicitly implementing ERM financially outperform companies that do not, or whose level of risk management is not yet as advanced as ERM. The deductive mode of research is also utilized to test whether the research findings confirm or negate the theories stated in Chapter 2, and explain the nature of the relationship, if any, between the enterprise risk management practices and the financial performance indicators of respondent multinational companies.
Sources of Data, Population and Sample Size Because firms are not required to report whether they engage in enterprise risk management, sometimes deliberately hidden to prevent competitors from gaining competitive advantage, the researcher adopted the survey approach for the respondent
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firms to assess the extent of their risk management practices and determine whether or not they are currently engaged in ERM activity. First-hand data on the extent of ERM practices were obtained from a survey of senior executives and managers of the top multinational companies included in the sample. Hence, all answers or input of the survey respondents in the questionnaire, intended to answer research problem no. 1, serve as the primary source of data in this study. For data comparability, the non-experimental secondary data used in this study were extracted from the audited financial statements of respondent firms filed with the Securities and Exchange Commission during the years 2004 up to 2009, in answer to research question number 2. The longitudinal data on NPM for companies that are implementing ERM required in the ex post analysis were also taken from the respondent firms AFS, to solve research question no. 5. The researcher utilized the SEC i-view facility provided in its official website.
Population The population of interest in this study pertains to the 371 top multinational companies that made it to the 2010 BusinessWorlds Top 1000 Corporations in the Philippines. These multinational companies are classified into 14 industries, namely: Mining & Quarrying (with 11 MNCs); Manufacturing (203); Electricity, Gas, Steam and Air Conditioning Supply (14); Water Supple, Sewerage, Waste Management and Remediation Activities (1); Construction of Buildings (5); Wholesale and Retail Trade,
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Repair of Motor Vehicles and Motorcycles (37); Transportation and Storage (14); Accommodation and Food Service Activities (6); Information and Communication (6); Financial and Insurance Activities (31); Real Estate Activities (3); Professional, Scientific and Technical Activities (9); Administrative and Support Service Activities (30); and Arts, Entertainment and Recreation (1). All these 371 top MNCs had a grand total of PhP2.603 Trillion in gross revenues for the year 2009, PhP765B or 29.4% of which came from the 60 sample multinational firms. These top MNCs constitute 38.8% of the total 956 multinational corporations in the Philippines as published in SECs Philippines 10,000 Corporations CY 2009 Edition (please refer to the list of multinational corporations in the Philippines in the Appendix). These multinational companies are closely regulated and monitored by the Philippine SEC in accordance with the Corporation Code of the Philippines (Batas Pambansa Blg. 68), Securities Regulation Code and other laws such as the Foreign Investments Act of 1991 (RA 7042, as amended), the Omnibus Investments Code of 1987 (E.O. 226), and the Regional Headquarters for Multi-National Companies Act (RA 8756) amending certain provisions of EO No. 226.
Sample Size All the top multinational corporations were considered as subjects of this study. However, in order to control for differences or inequality on risk management practices that might arise from regulatory requirements and market differences across industries and to select companies on an apple-to-apple basis, the researcher has elected to focus on the
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financial, insurance, oil/gas, and pharmaceutical multinational firms (totaling 60 covered top MNCs) included in the 2010 BusinessWorlds Top 1000 Corporations in the Philippines, since the activities of these firms are heavily regulated by their concerned industry regulatory agencies the Bangko Sentral ng Pilipinas, Insurance Commission, Department of Energy, and the Food and Drug Administration, respectively, aside from the Securities and Exchange Commission. They are therefore expected to have improved, if not fully developed, risk management systems in response to regulatory pressure (Collier et al., 2006). Choosing the top multinational companies from such industries to have implicit robust risk management programs within their respective organizations is further supported by several studies. Firstly, Beasley et al. (2003) and Kleffner et al. (2003) posit that the size of an organization is likely to affect the extent of ERM adoption. Presumably, there are considerable economies of scale involved in operating an ERM system, and it may well be the case that only larger organizations can afford a fully functional ERM system (Paape & Spekl, 2010). Organizational size is indeed positively associated with the extent of ERM implementation because big companies are more complex, face a wider array of risks, have the institutional size to support the administrative cost of an ERM program, etc. (Colquitt, Hoyt, and Lee, 1999; Hoyt et al., 2001; Beasley et al., 2005; and Standard and Poors, 2005). Moreover, Gordon, Loeb and Tseng (2009) contend five factors (firm complexity, firm size, board of directors monitoring, environment uncertainty and industry competition) affecting the firm and having appropriate match with ERM by which firm performance will improve. Multinational companies from such industries belonging to the top 1,000 corporations in the Philippines fit the bill.
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Secondly, Beasley et al. (2005), Kleffner et al. (2003) and Liebenberg & Hoyt (2003) quite commonly assumed that firms in the financial services industry are more likely to embrace ERM. Since the release of Basel II, banks experience strong incentives to adopt ERM, as that may help to reduce capital requirements (Liebenberg & Hoyt, 2003; Wahlstrm, 2009; cf. also Mikes, 2009). In addition, ERM may serve as a valuable commitment device in the banking industry, lowering the cost of capital (Liebenberg & Hoyt, 2003). Financial institutions particularly banks and insurance companies have a central role in the financial markets and manage the allocation of large resources. Their business failures may have tremendous implications on the global economy. Since they are a source of systemic risk, banking and insurance activities are subject to heavy regulatory regimes. Primarily, such regimes are intended to prevent unnecessary risk exposure and to ensure that, when a risk materializes, it is adequately managed so as to avoid ripple effects on the worldwide financial system (The Conference Board, 2007). Likewise, Kleffner et al. (2003) report that energy firms are relatively heavy ERM users, which they ascribe to the volatile markets in which these firms operate. Because ERM may reduce earnings volatility (Hoyt & Liebenberg, 2003), firms in such markets may value ERM more than firms that face stable market conditions. Furthermore, in a study by Desender (2007) to explore the link between ERM implementation and board composition, the pharmaceutical industry where 100 randomly selected firms as subjects of his study come from was chosen for the following three reasons: (1) this industry has been used in previous corporate governance research; (2) this industry is competitive and has been known to take shortcuts to perform; and (3) the pharmaceutical industry is faced with multiple risks and should display sufficient variation in the implementation of ERM.
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Finally, the current state of ERM globally has it that companies in the financial services, energy and utility industries have more developed, and therefore more mature, ERM processes than other industries (The Conference Board, 2008). With the supporting studies and literature just mentioned, any argument on whether any of the subject companies in the sample may not have risk management program at all in order to compare or select companies on an apple-to-apple basis is to be ruled out as invalid. Accordingly, this study will consider only the top multinational firms in the financial, insurance, oil/gas and pharmaceutical industries that belong to the list of 2010 BusinessWorlds Top Multinational Corporations. The following top MNCs are considered as sample in this study:
Table 3.1 Top Multinational Financial Companies

09 GR Rank 50 90 188 228 275 400 482 490 508 560 619 Company Name Gross Revenues Nationality (in million pesos) 20,001 American 12,153 British 6,631 5,390 4,495 3,207 2,501 2,444 2,277 2,080 1,872 British HK-Chinese Japanese Dutch Taiwanese German American Malaysian British Parent Company
Citibank, N.A. Hongkong and Shanghai Banking Corp. Ltd., The Standard Chartered Bank Philippine Telecommunications Investment Corp. Sithe Philippines Holdings, Inc. ING Bank N.V. Chinatrust (Philippines) Commercial Bank Corp. Deutsche Bank AG Chevron Holdings, Inc. Maybank Philippines, Inc. Lisbon Star Philippines Holdings, Inc.
Citibank, N.A. HSBC Holdings plc Standard Chartered Bank First Pacific Co., Ltd. Marubeni Corp. ING Bank N.V. Chinatrust Financial Holding Co. Ltd. Duetsche Bank Aktiengesellschaft Chevron Corp. Malayan Banking Berhad BG Group Plc

630 742 789 899 931 Ayala DBS Holdings, Inc. Toyota Financial Services Philippines Corp. HSBC Savings Bank (Philippines), Inc. Mizuho Corporate Bank Ltd. 1,825 1,450 1,354 1,170 Singaporean Japanese HK-Chinese Japanese
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Development Bank of Singapore Toyota Financial Services Corp. HSBC Holdings plc Mizuho Financial Group, Inc. Citibank Overseas Investment Corp.
Citicorp Financial Services and 1,121 American Insurance Brokerage Philippines, Inc. 974 JPMorgan Chase Bank, N.A. 1,076 American JPMorgan Chase & Manila Branch Co. TOTAL NO. OF TOP MULTINATIONAL FINANCIAL COMPANIES: 17
Table 3.2 Top Multinational Insurance Companies

09 GR Rank 38 75 121 COMPANY NAME Gross Nationality Revenues (in million pesos) 25,667 American 15,421 10,018 Canadian Australian Parent Company
AXA Group of Companies 221 5,589 Canadian The Manufacturers Life Insurance Corp. 240 5,026 British Prudential PLC. 246 4,873 American STI Investments, Inc. 345 3,677 Italian Assicurazioni Generali S.p.A 652 1,727 American Danvil Holdings, Inc. 693 1,587 Canadian Sun Life Financial, Inc. 823 1,298 Canadian Manulife Financial Corp. 853 Mapfre Insular Insurance Corp. 1,248 Spanish Mapfre International of Spain 932 Chartis Philippines Insurance, Inc. 1,120 American American International Group, Inc. TOTAL NO. OF TOP MULTINATIONAL INSURANCE COMPANIES: 12
Philippine American Life and General Insurance Co., The Sun Life of Canada (Philippines), Inc. Philippine AXA Life Insurance Corp. Manufacturers Life Insurance Co. (Phils.), Inc., The Pru Life Insurance Corp. of U.K. PhilPlans First, Inc. Generali Pilipinas Life Assurance Co., Inc.17 Danvil Plans, Inc. Sun Life Financial Plans, Inc. Manulife Financial Plans, Inc.
American International Group, Inc. Sun Life Financial, Inc.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 3.3 Top Multinational Oil/Petroleum and Gas Companies
09 COMPANY NAME GR Rank 2 Petron Corp.18 Pilipinas Shell Petroleum Corp.19 Chevron Philippines, Inc. Chevron Malampaya LLC Total (Philippines) Corp. Shell Philippines Exploration B.V. Liquigaz Philippines Corp. Shell Gas Eastern, Inc. Shell Philippines LLC Unioil Petroleum Philippines, Inc. Petronas Energy Philippines, Inc. BP Philippines, Inc. Air Liquide Phils., Inc. Consolidated Industrial Gases, Inc.20 Ingasco, Inc. Gross Nationality Revenues (in million pesos) 176,897 Dutch
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Parent Company
3 11 41 51 64 105 148 338 344 402 674 712 721 887
135,772 69,598 24,173 19,461 17,264 11,238 8,454 3,742 3,692 3,188 1,654 1,544 1,522 1,188
Dutch American American French British Dutch Dutch British British Malaysian British Singaporean German Japanese
SEA Refinery Holdings B.V. (SEA BV) Shell Overseas Investments B.V. Chevron Corp. Chevron Malampaya LLC Total S.A. Royal Dutch Shell Group plc SHV Holdings N.V. Shell Petroleum N.V. Royal Dutch Shell Group plc Unioil Investments, Inc. Petroliam Nasional Berhad Castrol Ltd. Air Liquide Industrial Services, Pte., Ltd. Linde AG Taiyo Nippon Sanso Corp.
TOTAL NO. OF TOP MULTINATIONAL OIL & GAS COMPANIES: 15
Table 3.4 Top Multinational Pharmaceutical Companies

09 GR Rank 18 35 77 80 COMPANY NAME Gross Nationality Revenues (in million pesos) 56,975 Malaysian 28,143 Filipino 14,483 14,250 American Bahamian Parent Company
Zuellig Pharma Corp. United Laboratories, Inc. Wyeth Philippines, Inc. Metro Drug, Inc.
The Zuellig Corp. United Laboratories, Inc. Pfizer, Inc. Zuellig Group, Inc., The

157 158 226 359 363 382 421 424 637 669 953 993 GlaxoSmithkline Philippines, Inc. Abbott Laboratories Pfizer, Inc. Roche (Philippines), Inc. Boehringer Ingelheim (Philippines), Inc. AstraZeneca Pharmaceuticals (Phils.), Inc. Novartis Healthcare Philippines, Inc. Bayer Philippines, Inc. Merck Sharp & Dohme (I.A.) Corp. Merck, Inc. Schering-Plough Corp. Eli Lilly (Philippines), Inc. 8,076 8,015 5,464 3,498 3,433 3,304 2,984 2,970 1,794 1,670 1,106 1,057 British American American Swiss German British Swiss German American Swiss American Dutch
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GlaxoSmithkline plc. Abbott Laboratories Pfizer, Inc. Roche Holding AG C.H. Boehringer Sohn AstraZeneca PLC Novartis AG
Bayer AG Merck & Co., Inc. Merck A.G. Merck & Co., Inc. Eli Lilly Nederlands B.V. TOTAL NO. OF TOP MULTINATIONAL PHARMACEUTICAL COMPANIES: 16 TOTAL SAMPLE SIZE: 60
Source: BusinessWorld Top 1,000 Corporations in the Philippines, Vol. 24, 2010 Purposive sampling technique was utilized in this study. Purposive sampling was used to identify the above-mentioned respondent firms based on three criteria: the multinationality or existence of business operations in other countries of such companies, rank performance or organizational size based on gross revenue, and the certainty of risk management presence within those companies through government regulations in such industries. In other words, only companies with headquarters or parent companies in other countries or companies with business operations in other countries are considered, and from that group only those financial, insurance, oil/gas and pharmaceutical companies whose gross revenue ranks belong to the 2010 BusinessWorlds Top 1,000 Corporations in the Philippines are made as sample to provide homogeneity as to the existence of risk management within their respective organizations. Logically, only the top executives, department heads, risk or functional managers of such companies are considered as survey respondents since they are in the right
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position and therefore credible to provide accurate answers on risk management practices applicable to their respective organizations. These are subjects considered to be the most appropriate source of data in terms of the objectives of the study. The sample size covers one key informant-respondent, as a representative of his/her company, for every top MNC included in this study.
Instrument for Gathering Data and Validation First-hand data were obtained from the respondents answers on enterprise risk management practices in the survey questionnaire used by the researcher, while secondary data on the financial performance of respondent companies on ROTA, NPM and ROE from 2004 up to 2009 were taken from the audited financial statements of each company filed with SEC. The questionnaire was structured to cover questions on some known practices in enterprise risk management as applicable in the respondents respective companies. The research instrument used in this study was the self-administered survey questionnaire. It allowed contact with otherwise inaccessible respondents like company Presidents, Country Managers, Managing Directors, CROs, CFOs and other top executives. Fixed alternative or closed-ended type of questions was used in the preparation of the questionnaire actually divided into two parts. The first part was about the respondents profile, reported in the appendix, which included data on age, gender, level of position, no. of years of risk management
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experience, highest educational attainment and the respondent companys size (by revenue), industry and nationality. The second part of the research instrument was the questionnaire proper to answer statement of the problem no. 1 the ERM practices of top multinational companies in the Philippines. In answering the statement of the problem no. 1 in the questionnaire proper, the respondents were asked to answer questions based on the extent of their assessment on each item on a scale of 1 to 5 where 5 means strongly agree, very effective or excellent depending on the suitability of each question (please see survey instrument). The scale is set out in the questionnaire and the respondent ticks out the category that best describes his answer. Initial pilot testing was conducted to a few managers, from whom one commented on an item (How effective is the respondent company in managing the ISO risk management process?) in the questionnaire saying it is in conflict with another item concerning adherence to a risk management standard which includes other risk management standards aside from the ISO 31000 as choices. If a particular company adheres to COSO risk management standard, it follows that they are likely to use COSO risk management process too. Another commented on the consistency aspect of the first questionnaire which included questions answerable by yes or no, while the rest are answerable on a scale of 1 to 5. The researcher then just adopted the 5-point Likert and Likert-type scale model throughout the instrument for statistical consistency with regression analysis. At least 3 sets of questionnaire were distributed to each MNC in the sample to replace lost or unanswered questionnaires and to ensure representation of each MNC in the study for statistical purposes.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Procedure for Gathering Data
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Delivery and collection approach was followed to float the self-administered sets of questionnaire to get the primary data. Secondary data on the financial performance indicators of respondent firms were sourced from their financial statements filed with the Philippine SEC from 2004-2009, and viewed by the researcher through the SEC i-views facility provided in its official website. Unlike research studies involving publicly listed companies where data can be taken from published sources with convenience and without need of survey, the researcher painstakingly took the rigor in conducting the selfadministered survey, sorting the appropriate secondary data from financial statements, and in the enormous calculations on each financial performance indicator of all covered firms for the years 2004 to 2009. Through a cover letter, the researcher requested permission of
CEOs/Presidents/Country Managers/Managing Directors, CFOs or heads of functional departments of MNCs in the sample as courtesy and for possible endorsement, to float the survey questionnaires to themselves or their concerned executives, risk managers or other officers responsible for managing risks within their respective companies. Whenever possible, the researcher would ask the executive secretary, receptionist or concerned staff of the CEO/President/Country Manager/Managing Director, CFO or head of a functional department to have the cover letter, together with the set of questionnaire, stamp-received as validation. The researcher would ask if they can immediately answer the questionnaire for fast retrieval, to be personally administered and collected thereafter. For letters and copies of the survey instrument left with the receptionist, executive secretary, staff or even the security guard on duty, and to be
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forwarded to the intended respondent, the researcher had to follow them up as soon as possible in order to secure the responses of a key informant-respondent. Some were kind enough to email back the answered questionnaire. Realizing that the behavior or attitude of target respondents towards the survey is beyond the researchers control, the researcher made it a point to obtain the responses of at least one key informant-respondent as a representative of his/her company, if only to ensure that all 60 sample firms are covered. Hence, if the CEO/President/Country Manager/Managing Director is not around, not available or refuses to participate in the survey for having no ERM or for any other reason, or if he has not yet filled out the questionnaire after some days, then the researcher would go to the next lower position (CFO/COO/VP/Senior Executive, Treasurer/Controller/Internal Auditor, or
Risk/Functional Manager) without a separate formal letter of request addressed to a particular person but any possible respondent, until a qualified and willing respondent showed up. This is clearly not an intrusion into or violation of any personal right of respondents especially that this research does not contain ethical and moral issues. For those chief officers who refused to participate in the survey for probably having no ERM, it does not mean that being in that position also earns them the right to restrict their employees or subordinates actions or willingness to answer the questionnaire, especially that no company owns its employees. In fact, it is for their benefit that this research study has been conducted.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Statistics for Analyzing Data
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This paper argued that better financial performance is determined by the 15 ERM practices cited in research problem no. 1 and in Table 3.5. Thus, multiple regression models were developed for the top MNCs in the sample. For this study, ROTA, NPM and ROE are used as indicators of financial performance representing as the dependent variables of the 15 ERM practices by the respondent firms. These research variables are summarized in Table 3.5. Table 3.5 Dependent and Independent Variables VARIABLES I. Dependent Variables 1. Return on Total Assets, 2004-2009 2. Net Profit Margin, 2004-2009 3. Return on Equity, 2004-2009 II. Independent Variables 1. Risk Manager appointment 2. Risk management inclusion in decision making 3. Guidance & support from BOD 4. Common risk terminology and set of risk management standard 5. Company objectives, risk appetite and risk tolerance 6. Understanding of risk management accountability 7. Usage of Key Risk Indicators 8. Risk management integration within strategic planning process 9. Technology for risk management process 10. Risk management integration across all functions 11. Basis of risk response strategies 12. Effectiveness of managing the risk process 13. Effectiveness of managing types of risks 14. Current stage of ERM program REGRESSION CODE ROTA NPM ROE RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS EMRP EMTR SERM
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 15. Strength of physical risk management program SPRM
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The results of this research study will be analyzed according to the sequence of research questions asked under the statement of the problem. The data gathered from the set of questionnaires and financial statements will be tabulated in worksheets and presented in tables and figures, analyzed and treated statistically using descriptive and inferential statistics. 1) For research problem no. 1, since the items in sub-problems 1(a) through 1(o) have assigned points, the weighted mean was selected to measure the average of responses taken from the Likert and Likert-type scaled questionnaire items. Rank order was also employed to show the ranking of data for each independent variable based on the responses in each item under research question number 1. The formula for the weighted mean is as follows:
x1f1 + x2f2 + x3f3 + x4f4 + x5f5 __ f(x) Xw = --------------------------------------- OR X = --------N N
(Equation 1)
__ Where: Xw or X = is the weighted mean x = is the weight or score assigned to a scale f = is the number of responses per scale f(x) = sum of all the products of f and x where f is the frequency of each score and x, weight of x score N = is the number of respondents A statistical 5-point Likert as well as Likert-type scale model was set-up to score items in sub-problem numbers 1(a) through 1(o), and in after the fact analysis on the effects of ERM to organizations that implement it, and interpret the same as follows:
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 3.6 Likert & Likert-type Scale Models
SCALE DESCRIPTION Research Problems No. 1(A through K) 5 Strongly Agree 4 Agree 3 Uncertain 2 Disagree 1 Strongly Disagree Research Problem No. 1(L & M) 5 Very Effective 4 Somewhat Effective 3 Neutral 2 Somewhat Ineffective 1 Not at All Effective Research Problem No. 1(N) 5 ERM in complete stage 4 ERM in partial stage 3 Planning to implement ERM 2 Investigating ERM 1 No plans to implement ERM Research Problem No. 1(O) 5 Excellent 4 Good Ex Post Facto Analysis (5) >8 yrs.
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SCALE RANGE
4.21 5.0
(4) >6 but <8 3.41 4.20 yrs. 3 Satisfactory (3) >4 but <6 2.61 3.40 yrs. 2 Poor 1 Very Poor (2) >2 but <4 1.81 2.60 yrs. (1) >1 but < 1.0 1.80 2 yrs.
Moreover, data and relevant information on the profile of individual respondents and their respective MNCs, reported in the appendix, were shown in tabular presentation using frequency distribution and percentage distribution. A frequency distribution is the number or frequency of responses for each item or variable, whereas percentage is computed using the following formula: % = f/n x 100 Where: (Equation 2)
% = is the computed percentage f = is the frequency or number of responses n = is the total number of respondents; and 100 = constant
MNCs were tabulated according to industry classification or sector, size by annual revenues and nationality. Data from this sub-problem were of course taken from the survey responses.
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2) For research problem no. 2, secondary data on the financial performance of covered MNCs were sourced from their audited financial statements (AFS) submitted annually with SEC from 2004 to 2009. Data were transferred to a worksheet template to facilitate computations of the three financial performance ratios. Annual changes in the values of the specific performance indicators were shown in terms of the amount of increase or decrease year on year and in terms of percentage (see Equation 2). The following are three of the most commonly computed and quoted performance ratios representing the dependent variables in the regression models:
Measures of Financial Performance a. Return on Total Assets (ROTA) Return on total assets measures the companys flow of net income in relation to the stock of assets. The greater the ratio, the larger the net income per dollar invested in assets. Net Income after Tax ROTA = ----------------------------- x 100 Total Assets b. Net Profit Margin (NPM) NPM measures the companys flow of net income in relation to the flow of revenue. The higher this ratio, the more after-tax profits a company generates. Net Income after Tax NPM = ---------------------------- x 100 Total Revenue
(Equation 3)
(Equation 4)
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan c. Return on Equity (ROE)
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Also called Return on Net Worth, ROE is a widely used measure of profitability that stockholders and investors often monitor. The higher the ratio percentage, the more efficient management utilizes its equity base and the better return to investors. ROE can be computed through the following formula: Net Income after Tax = ---------------------------- x 100 Total Equity
ROE
(Equation 5)
3) To answer research problem no. 3, multiple linear regression analysis had to be conducted for testing the straight-line relationships and impact of the 15 enterprise risk management practices (independent variables) on financial performance, measured in terms of ROTA, NPM and ROE (dependent variables), and estimated using the Least Squares Method. This would mean running the multiple regression analysis three times, one for each dependent variable. They are mathematically expressed as follows:
(Equation 6) ROTA =
+ (1RMA1) + (2RMDM2) + (3SBOD3) + (4TRMS4) + (5CORA5) +
(6URMA6) + (7KRIs7) + (8RMSP8) + (9TRMP9) + (10RMF10) + (11RRS11) + (12EMRP12) + (13EMTR13) + (14SERM14) + (15SPRM15) + (Equation 7) NPM =
(6URMA6) + (7KRIs7) + (8RMSP8) + (9TRMP9) + (10RMF10) + (11RRS11) + (12EMRP12) + (13EMTR13) + (14SERM14) + (15SPRM15) +
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan (Equation 8) ROE =
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(6URMA6) + (7KRIs7) + (8RMSP8) + (9TRMP9) + (10RMF10) + (11RRS11) + (12EMRP12) + (13EMTR13) + (14SERM14) + (15SPRM15) + Where: ROTA = return on total assets NPM = net profit margin ROE = return on equity
0 = is the intercept for each dependent variable when all the predictors are zero 1 - 15 = are parameter estimates or the beta coefficients (Slope) for each independent
variable of ROTA, NPM and ROE = is an error term that accounts for the variability in each dependent variable that cannot be explained by the linear effect of the 15 independent variables; a random variable with mean or expected value of zero for each dependent variable; that is E()=0. For the other regression codes on the independent variables in each equation, refer to Table 3.5.
Testing for Significance 1. The F test is used to determine whether a significant relationship exists between the dependent variable and the set of all the independent variables; we will refer to the F test as the test for overall significance. 2. If the F test shows an overall significance or that the multiple regression relationship is significant, the t test is used to determine whether each of the individual independent variables is significant. A separate t test is conducted for each of the independent variables in the model; we refer to each of these t tests as a test for individual significance.

F TEST FOR OVERALL SIGNIFICANCE H0: 1 = 2 = . = 15 = 0 Ha: One or more of the parameters are not equal to zero TEST STATISTIC: MSR F = ---------MSE Where: (Equation 9)
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SSR SSE MSR = -------MSE = -----------p np1 MSR = mean square due to regression MSE = mean square due to error SSR = sum of squares due to regression SSE = sum of squares due to error n = number of observations p = number of independent variables REJECTION RULE: p-value approach: Reject H0 if p-value Critical value approach: Reject H0 if F F Where: F is based on an F distribution with p degrees of freedom in the numerator and n p 1 degrees of freedom in the denominator.
If the computed F-ratio exceeds critical values at a specified level of significance, say 5%, then the regression model is deemed statistically and significantly different from zero. Taken collectively, the explanatory or independent variables exert a significant influence on the dependent variable of choice. The F-ratio is also a test of significance of R2 (the multiple coefficient of determination) which in turn assesses the strength of a cause-and-effect relationship between a numerical dependent variable and the 15 numerical independent variables, and indicates the degree of the goodness of fit for the multiple regression model. A value of 1 in the multiple regression coefficient means that all the variation in dependent variable can be explained statistically by the independent variables. A value of zero means that none of the variation in the dependent variable can be explained by the independent variables.
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In multiple regression analysis, the t-test is used to find out the probability of the relationship between each of the individual independent variables and the dependent
t TEST FOR INDIVIDUAL SIGNIFICANCE For any parameter i H0: i = 0 Ha: i 0 TEST STATISTIC: b tn-k = --------(Equation 10) se(b) Where: n = is the number of observations k = is the number of estimated coefficients b = is the estimator se(b) = is the estimated standard error of estimator REJECTION RULE: p-value approach: Reject H0 if p-value Critical value approach: Reject H0 if t t/2 or if t t/2 Where: t/2 is based on a t distribution with n p 1 degrees of freedom.
variable occurring by chance. In contrast, the F-test is used to find out the overall probability of the relationship between the dependent variable and all the independent variables occurring by chance. The t distribution table and the F distribution table are used to determine whether a t-test or an F-test is significant by comparing the results with the t distribution and F distribution respectively, given the degrees of freedom and the predefined significance level.
Coefficient of Multiple Determination To indicate that this study measures the goodness of fit for the estimated multiple regression equation, the term multiple coefficient of determination, denoted R2, is used and computed as follows:
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan SSR R = ----------SST

2
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OR;
e2 R = 1 - -------y2
2
(Equation 11)
Where:
SSR = sum of squares due to regression SST = total sum of squares e2 = squared deviations of estimates from actual observation y2 = squared deviations of actual data from its mean The multiple coefficient of determination can be interpreted as the proportion of
the variability in the dependent variable that can be explained by the estimated multiple regression equation. Hence, when multiplied by 100, it can be interpreted as the percentage of the variability in each dependent variable that can be explained by the estimated regression equation. This R2 is automatically computed in the regression. To evaluate whether the regression assumption about the error term (Independence of Errors) is not violated, this study will draw a conclusion for each regression based on the results of the Durbin-Watson test statistic from SPSS to detect significant autocorrelation in regression residuals whether or not the correlation between two adjacent error terms is zero. The test is based upon an assumption that errors are generated by a first-order autoregressive process. If there are missing observations, these are omitted from the calculations, and only the non-missing observations are used. To reach a conclusion from the test, we will need to compare the displayed statistic with lower and upper bounds in a table. This test statistic ranges in value from zero to four, with a value of two indicating no autocorrelation is present. If D > upper bound, no correlation exists; if D < lower bound, positive correlation exists; if D is in between the two bounds, the test is inconclusive.
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The normal probability plot will also be taken for interpretation whether the assumption about the normality of error is not violated in the regression model. 4) The t-test was used to determine if discrepancies between means on financial performance of two independent groups (firms that explicitly implement ERM and firms that do not) are statistically different and not just a product of chance, to solve research problem no. 4. This was useful for the study since the researcher tried to uncover if companies implementing ERM financially outperform companies that do not, or whose level of risk management is not yet as advanced as enterprise risk management. The formula for the t-test is shown below: _ _ X1 X2 t= (Equation 12) var1 + var2 n1 n2 _ X1 = mean of the sample taken from ERM companies _ X2 = mean of the sample taken from non-ERM companies var1 = variance of the sample taken from ERM companies var2 = variance of the sample taken from non-ERM companies n1 = size of the sample taken from ERM companies n2 = size of the sample taken from non-ERM companies If the computed t-value exceeds the critical value at a specified level of significance, say 5 percent, one can conclude that the difference between the means for the two groups is significantly different.
Where:
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5) To solve the longitudinal data in research problem no. 5, this study used index numbers to examine the trend or relative change over time on ROTA, NPM and ROE for all the concerned respondent firms after ERM was adopted (the base period), in order to make after the fact analysis on the effects of ERM to companies that implement it based on the length of time (year) it has been in place. Index numbers are designed to compare or measure the magnitude of economic changes on the weighted mean of financial performance ratios over time against the weighed mean of the base period. To calculate simple index numbers for each case of a longitudinal variable, the following formula is used: Data value for case Index number of case = --------------------------------Data value for base period
x 100
(Equation 13)
A moving average is also calculated by replacing each value in the time series, based on the weighted mean of FP ratios after ERM was adopted, with the mean of that value and those values directly preceding and following it. This will smooth out the variation in the data so that we can see the composite long-term trend more clearly. Because of the enormous computational requirements, estimations were carried out using the following statistical software packages: Software Packages for Social Sciences (SPSS 17) and the MegaStat Excel 2007.
If a box is full of salt it cannot be filled with sand, and if our hearts are full of hatred, how can God fill them with His love?
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CHAPTER 4 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
This chapter contains the organized presentation, analysis and interpretation of primary data gathered from the survey questionnaires, and secondary data from financial statements of covered firms in the form of tables and statistical results to answer the specific research problems defined at the beginning of the study. The tables, statistical results and discussion are presented in the sequential order of the research problems to which they pertain followed by their analysis and interpretation. It also presents a statistical analysis and discussion to either reject or accept the formulated hypotheses. The conclusions pertinent to the research questions are reserved for Chapter 5.
Research Problem No. 1: On the extent of ERM practices of respondent firms cited as independent variables in the study. (Likert & Likert-type scale and weighted mean) Because each industry has unique risk management requirements different from each other, the extent of ERM practices of respondent firms is shown accordingly by industry in Tables 4.1 to 4.4. The extent of ERM practices of respondent multinational corporations in the financial industry is shown in Table 4.1.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.1 Extent of ERM Practices in the Financial Industry ERM Practices RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS Average EMRP EMTR SERM SPRM Total Mean Average Total Weighted Mean Length of ERM Weighted Mean 3.82 4.71 4.53 4.35 4.71 4.24 4.18 4.47 4.18 4.47 4.53 4.38 4.53 4.29 4.18 4.12 4.35 2.94 Descriptive Rank Category Agree 9 Strongly Agree 1 Strongly Agree 2 Strongly Agree 4 Strongly Agree 1 Strongly Agree 6 Agree 7 Strongly Agree 3 Agree 7 Strongly Agree 3 Strongly Agree 2 Strongly Agree Very Effective 2 Very Effective 5 ERM in partial stage 7 Good 8
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>4 but <6 years
Respondents in the financial industry strongly agree on the following: Risk management inclusion in decision making and Communication of company objectives, risk appetite and risk tolerance each with a weighted mean of 4.71 which tied at rank 1; Guidance and support from BOD and Basis of risk response strategies each with a weighted mean of 4.53 which tied at rank 2; Risk management integration within strategic planning process and Risk management integration across all functions both with a weighted mean of 4.47 which tied at rank 3; Usage of common risk terminology and set of risk management standards with a weighted mean of 4.35 which ranked 4; and Understanding of risk management accountability with a weighted mean of 4.24 which ranked 6.
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Financial respondents agree on the following: Usage of Key Risk Indicators and Usage of technology for risk management process both with a weighted mean of 4.18 which tied at rank 7; and Risk manager appointment with a weighted mean of 3.82 which ranked last at no. 9. They are very effective on the Effectiveness of managing the risk process with a weighted mean of 4.53 which also ranked 2, and the Effectiveness of managing types of risks with a weighted mean of 4.29 which ranked 5. Respondents are in the partial stage of ERM under the Current stage of ERM program with a weighted mean of 4.18 which ranked 7. Meanwhile, respondents indicated that their Strength of physical risk management program is good with a weighted mean of 4.12, which ranked 8. Data showed that the top MNCs in the financial industry generally have strong agreement for having or performing the above-mentioned 15 ERM practices with a total mean average of 4.35, the highest weighted mean among the four groups of industries. These may be pointed to the stringent risk management requirements imposed on all financial institutions under the BSP supervision, and the minimum yet complex requirements of the Basel Committee on Banking Supervision under the Basel II framework. Whereas, the total weighted mean on the length of time they have been implementing ERM is 2.94 which means more than 4 but less than 6 years, the longest among the 4 industries of interest in the study. Table 4.2 illustrates the perception of top multinational insurance companies with regard to their ERM practices, the weighted mean score and its verbal interpretation.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.2 Extent of ERM Practices in the Insurance Industry ERM Practices RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS Average EMRP EMTR SERM SPRM Total Mean Average Total Weighted Mean Length of ERM Weighted Mean 4.0 4.50 4.08 4.25 4.33 4.0 4.42 4.0 4.0 3.92 4.17 4.15 4.42 4.25 3.75 3.83 4.13 1.75 Descriptive Category Agree Strongly Agree Agree Strongly Agree Strongly Agree Agree Strongly Agree Agree Agree Agree Agree Agree Very Effective Very Effective ERM in partial stage Good Rank 7 1 6 4 3 7 2 7 7 8 5 2 4 10 9
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>1 but <2 years
Respondents in the insurance industry strongly agree on the following practices of ERM: Risk management inclusion in decision making with a weighted mean of 4.5 which ranked 1; Usage of Key Risk Indicators with a weighted mean of 4.42 which ranked 2; Communication of company objectives, risk appetite and risk tolerance with a weighted mean of 4.33 which ranked 3; and Usage of common risk terminology and set of risk management standards with a weighted mean of 4.25, which ranked 4. Respondents agree on the following: Basis of risk response strategies with a weighted mean of 4.17 which ranked 5; Guidance and support from BOD with a weighted mean of 4.08 which ranked 6; Risk manager appointment, Understanding of
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risk management accountability, Risk management integration within strategic planning process and Usage of technology for risk management process each having a weighted mean of 4.0 which all tied at rank 7; and Risk management integration across all functions with a weighted mean of 3.92 which ranked 8. They are also very effective on the following: Effectiveness of managing the risk process with a weighted mean of 4.42 which tied with KRIs at rank 2; and the Effectiveness of managing types of risks with a weighted mean of 4.25 which also ranked 4. The insurance respondents Strength of physical risk management program is good with a weighted mean of 3.83 which ranked 9, while they are in the partial stage of ERM under the Current stage of ERM program with a weighted mean of 3.75 which ranked 10. Data revealed that the top multinational insurance firms generally agree that they perform or have the said 15 ERM practices with a total mean average of 4.13, while the weighted mean on the length of time they have been implementing ERM is 1.75 which means more than 1 but less than 2 years. The extent of ERM practices as perceived by top multinational companies in the oil and gas industry is shown in Table 4.3.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.3 Extent of ERM Practices in the Oil & Gas Industry ERM Practices RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS Average EMRP EMTR SERM SPRM Total Mean Average Total Weighted Mean Length of ERM Weighted Mean 2.80 4.47 4.27 4.47 4.67 4.40 4.07 4.60 4.13 4.47 4.27 4.24 4.20 4.33 3.67 4.33 4.21 2.13 Descriptive Rank Category Uncertain 11 Strongly Agree 3 Strongly Agree 6 Strongly Agree 3 Strongly Agree 1 Strongly Agree 4 Agree 9 Strongly Agree 2 Agree 8 Strongly Agree 3 Strongly Agree 6 Strongly Agree Somewhat Effective 7 Very Effective 5 ERM in partial stage 10 Excellent 5
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>2 but <4 years
The respondents in the oil/gas industry strongly agree on the following practices of ERM: Communication of company objectives, risk appetite and risk tolerance with a weighted mean of 4.67 which ranked 1; Risk management integration within strategic planning process with a weighted mean of 4.6 which ranked 2; Risk management inclusion in decision making, Usage of common risk terminology and set of risk management standards and Risk management integration across all functions each with a weighted mean of 4.47 which tied at rank 3; Understanding of risk management accountability with a weighted mean of 4.4 which ranked 4; Guidance and support from
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BOD and Basis of risk response strategies both with a weighted mean of 4.27 which tied at rank 6. They agree for having Usage of technology for risk management process with a weighted mean of 4.13 which ranked 8, and on the Usage of Key Risk Indicators with a weighted mean of 4.07 which ranked 9. However, they are uncertain on Risk manager appointment with a weighted mean of 2.8 which ranked 11. They are very effective under the Effectiveness of managing types of risks with a weighted mean of 4.33 which ranked 5. Whereas, they are somewhat effective on the Effectiveness of managing the risk process with a weighted mean of 4.2 which ranked 7. Interestingly, their Strength of physical risk management program is excellent with a weighted mean of 4.33 which ranked 5. Their Current stage of ERM program is in partial stage with a weighted mean of 3.67 which ranked 10. The calculated overall rating for the oil and gas industry reflects a total mean average equal to 4.21 which falls within the descriptive category of Strongly Agree, while the total weighted mean on the length of ERM for this particular industry is 2.13 which can be interpreted as more than 2 but less than 4 years. Table 4.4 presents the extent of ERM practices in the pharmaceutical industry.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.4 Extent of ERM Practices in the Pharmaceutical Industry ERM Practices RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS Average EMRP EMTR SERM SPRM Total Mean Average Total Weighted Mean Length of ERM Weighted Mean 3.13 4.19 3.88 4.13 4.56 4.13 3.81 4.31 3.75 4.31 4.0 4.02 3.81 3.88 3.19 3.81 3.93 0.75 Descriptive Category Uncertain Agree Agree Agree Strongly Agree Agree Agree Strongly Agree Agree Strongly Agree Agree Agree Somewhat Effective Somewhat Effective Planning to implement ERM Good Rank 10 3 6 4 1 4 7 2 8 2 5 7 6 9 7
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>0 but <1 year
The pharmaceutical respondents perceived strong agreement on the following: Communication of company objectives, risk appetite and risk tolerance with a weighted mean of 4.56 which ranked 1; Risk management integration within strategic planning process and Risk management integration across all functions each with a weighted mean of 4.31 which tied at rank 2. Meanwhile, they agree practicing on the following aspects: Risk management inclusion in decision making with a weighted mean of 4.19 which ranked 3; Usage of common risk terminology and set of risk management standards and Understanding of
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risk management accountability each with a weighted mean of 4.13 which ranked 4; Basis of risk response strategies with a weighted mean of 4.0 which ranked 5; Guidance and support from BOD with a weighted mean of 3.88 which tied at rank 6; Usage of Key Risk Indicators with a weighted mean of 3.81 which ranked 7; and Usage of technology for risk management process having a weighted mean of 3.75 which ranked 8. They are uncertain on Risk manager appointment with a weighted mean of 3.13 which ranked 10. They are somewhat effective on their Effectiveness of managing types of risks with a weighted mean of 3.88 which ranked 6 alongside SBOD. Their Effectiveness of managing the risk process is also somewhat effective with a weighted mean of 3.81 which ranked 7. Moreover, their Strength of physical risk management program is good with a weighted mean of 3.81 which tied with EMRP at rank 7. Finally, they are still planning to implement ERM under the Current stage of ERM program with a weighted mean of 3.19 which ranked 9. Data showed that top MNCs in the pharmaceutical industry had a general agreement on the 15 ERM practices with a total mean average of 3.93. However, the weighted mean on the length of ERM for this industry is only .75 which can be interpreted as more than zero but less than 1 year. The researcher also noticed that pharmaceutical respondents-MNCs have no risk management department or risk manager position in particular, but have similar departments they call as quality assurance division, quality assurance and compliance department, and have positions identified as quality services manager, risk assurance
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manager or quality assurance manager. These positions relating to quality assurance may be equivalent to the risk manager position since pharmaceutical firms are only required by law to ensure quality and safety standards of their medical products. Table 4.5 below collectively summarizes the extent of ERM practices of top multinational companies from the four regulated industries. Table 4.5 Extent of ERM Practices of Top MNCs in the Philippines ERM Practices a. RMA b. RMDM c. SBOD d. TRMS e. CORA f. URMA g. KRIs h. RMSP i. TRMP j. RMF k. RRS l. EMRP m. EMTR n. SERM o. SPRM GRAND WEIGHTED Weighted Mean 3.417 4.467 4.20 4.30 4.583 4.20 4.10 4.367 4.017 4.317 4.25 4.233 4.183 3.70 4.033 4.16 Descriptive Category Agree Strongly Agree Agree Strongly Agree Strongly Agree Agree Agree Strongly Agree Agree Strongly Agree Strongly Agree Very Effective Somewhat Effective ERM in partial stage Good Rank 14 2 8 5 1 8 10 3 12 4 6 7 9 13 11
Agree/Somewhat Effective/ERM in partial
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan MEAN Grand Weighted Mean Length of ERM stage/Good 1.92 >2 but <4 years
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A thorough analysis of the table above reveals that (CORA) Communication of company objectives, risk appetite and risk tolerance received the highest weighted mean ratings in the assessment of respondents in the financial, insurance, oil/gas and pharmaceutical industries, garnering a weighted mean of 4.583 (Strongly Agree), followed by 14 other practices in enterprise risk management. These are as follows: (RMDM) Risk management inclusion in decision making, Xw = 4.467, ranked 2nd; (RMSP) Risk management integration within strategic planning process, Xw = 4.367, ranked 3rd; (RMF) Risk management integration across all functions, Xw = 4.317, ranked 4th; (TRMS) Usage of common risk terminology and set of risk management standard, Xw = 4.30, ranked 5th; (RRS) Basis of risk response strategies, Xw = 4.25, ranked 6th; (EMRP) Effectiveness of managing the risk process, Xw = 4.233, ranked 7th; (SBOD) Guidance and support from Board of Directors, and (URMA) Understanding of risk management accountability, each with Xw = 4.20, both ranked 8th; (EMTR) Effectiveness of managing types of risk, Xw = 4.183, ranked 9th; (KRIs) Usage of Key Risk Indicators, Xw = 4.10, ranked 10th; (SPRM) Strength of physical risk management program, Xw = 4.033, ranked 11th; (TRMP) Usage of technology to enable risk management process, Xw = 4.017, ranked 12th; (SERM) Current stage of ERM, Xw = 3.70, ranked 13th; and (RMA) Risk manager appointment, Xw = 3.417, ranked last at no. 14.
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The overall grand mean on the ERM practices of top MNCs in the Philippines is equal to 4.16, which falls within the upper tail of scale range Agree, Somewhat Effective, ERM in partial stage and Good. On the length of ERM of top MNCs, the grand weighted mean is 1.92, which has a verbal interpretation of more than 2 but less than 4 years. The data imply that the respondent multinational companies favorably agree with the ERM practices as beneficial to their respective organizations. The respondents therefore manifest an intention to keep or take advantage of those practices so as to reduce, if not totally eliminate, enterprise risks.
Research Problem No. 2: On the financial performance of top MNCs-respondents in terms of the following indicators: ROTA, NPM and ROE from 2004 to 2009. (Computations of financial performance ratios)
On Return on Total Assets Table 4.6 Return on Total Assets (%) of Top MNCs by Industry, 2004-2009 Industry Financial Insurance Oil/Gas 2004 2005 2006 6.88 2.60 7.23 2007 8.74 4.36 9.41 9.61 2008 6.83 4.22 8.68 9.01 2009 3.95 1.65 8.94 5.74 Average (%) 8.76 3.02 7.29 9.76 450.82 7.51
[17] 11.61 14.55 [12] 2.03 3.28 7.31
[15] 2.20
Pharmaceutical [16] 9.61
12.51 12.09
Total for 60 MNCs 408.54 596.47 450.18 495.77 441.13 312.84 Mean - ROTA Annual Increase/Decrease 31.49% 9.20% (41.07%) 6.81 9.94 7.50 8.26 7.35 5.21
(0.38%)
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Table 4.6 displays the weighted mean of the Return on Total Assets of MNCs by industry from 2004 to 2009. Based on the data, MNCs in the financial industry have declined in ROTA with 11.61% in 2004 and 3.95% in 2009, having an average of 8.76% over the period. This is the industry with the second highest average in ROTA next to pharmaceutical. The insurance held a relatively consistent value in ROTA with 2.03% in 2004 and 1.65% in 2009. This has an average of 3.02% over the period, the lowest among the four industries. Oil and gas multinational companies experienced an increase in ROTA with 2.20% in 2004 and 8.94% in 2009, registering an average of 7.29% over the period. Companies in the pharmaceutical industry experienced a fluctuating but positive value in ROTA with 9.61% in 2004 and 5.74% in 2009, with an average of 9.76% over the period. Based on the data in the table, it can be observed that MNCs experienced an overall decline of 41.07% in ROTA from 2008 to 2009. This could be one of the adverse effects of the 2008 global financial crisis to the top multinational companies in the Philippines. This decline has overcome the positive increases in the two previous 2-year periods, rounding up with an annual average decrease of .38%.
Table 4.7 MNCs Financial Performance on Return on Total Assets, 2004 vs. 2009 Number of MNCs Particulars Improvement in the ROTA Decline in the ROTA Total ERM 19 14 33 Non-ERM 17 10 27 36 24 60 Total Percentage (%) 60 40 100
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In Table 4.7, we see how many firms improved and declined in their financial performance with respect to return on total assets. Among the MNCs that improved in ROTA from 2004 to 2009, 19 of which are ERM companies while 17 are non-ERM firms. This is equivalent to 60% of total sample firms that experienced growth in ROTA. Whereas, among the companies that declined in ROTA 14 of them are ERM companies, and 10 are non-ERM. Therefore, 40% of the covered MNCs experienced a decrease in ROTA from 2004 to 2009.
On Net Profit Margin Table 4.8 Net Profit Margin (%) of Top MNCs by Industry, 2004 to 2009 Industry Financial Insurance Oil/Gas [17] [12] [15] 2004 28.09 4.07 9.48 6.82 777.71 12.96 2005 42.88 10.78 12.81 8.11 2006 41.86 6.71 12.89 8.27 2007 37.64 7.80 12.80 7.25 2008 37.05 (1.18) 12.36 6.37 2009 32.33 8.02 14.03 3.40 910.8 15.18 Average (%) 36.64 6.03 12.39 6.71 988.50 16.47
Pharmaceutical [16] Total for 60 MNCs Mean - NPM Annual Increase/Decrease
1,180.13 1,117.77 1,041.58 903.00 19.67 18.63 17.36 15.05
34.11%
(7.32%)
0.86%
9.22%
Table 4.8 shows the net profit margin of top MNCs by industry from 2004 to 2009. Based on the table, the financial industry experienced a significant increase in NPM from 2004 to 2005, and held it fairly comparable to their financial performance in 2006, 2007 and 2008, and then declined in 2009 with 32.33% NPM ratio. This industry garnered the highest average of 36.64% over the period. Meanwhile, the insurance sector also increased
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in NPM with 4.07% in 2004 and 8.02% in 2009, registering an average of 6.03% over the period, the lowest among the four industries. Oil and gas companies held a fairly stable performance in NPM from 2004 to 2009, with 9.48% in 2004 and 14.03% in 2009, having an average of 12.39% over the period. The NPM increase of this industry in 2009 from 2008 could be due to the rising price of oil and gas commodities during the period, when the rising cost of oil and gas are obviously in favor for oil/gas firms. Whereas, for pharmaceutical firms, their financial performance from 2004 up to 2008 was comparably stable, but declined in 2009. Still, this industry registered an average of 6.71% over the period. The highest annual increase in performance for the four industries was in 2005 compared to their performance in 2004, garnering 34.11% increase. In the next 2-year period, there was a decline of 7.32% in 2007 from 2006, and sample firms registered a positive and relatively the same NPM ratios in 2008 and 2009 with a meager .86% increase in 2009 from 2008. Considering three comparisons of financial performance within the 6 year period, 9.22% was the average annual increase in NPM of top MNCs in the four industries from 2004 to 2009.
Table 4.9 MNCs Financial Performance on Net Profit Margin, 2004 vs. 2009 Number of MNCs Particulars Improvement in the NPM Decline in the NPM Unchanged Total ERM 21 12 0 33 Non-ERM 15 10 2 27 36 22 2 60 Total Percentage (%) 60 36.67 3.33 100
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The table above shows the overall performance of MNCs from 2004 to 2009, according to the number of ERM and non-ERM firms. Among the companies that improved in NPM from 2004 to 2009, 21 of them are companies implementing ERM, while 15 are non-ERM firms. As in ROTA, this number that improved in NPM is also 60% of the total sample firms. For MNCs that declined in NPM in 2004 versus 2009, 12 of them are ERM firms, and 10 are non-ERM. 2 non-ERM firms held a relatively unchanged performance in NPM from 2004 to 2009.
On Return on Equity Table 4.10 Return on Equity (%) of Top MNCs by Industry, 2004 to 2009 Industry Financial Insurance Oil/Gas 2004 [17] 24.30 [12] [15] 3.84 41.04 2005 28.31 6.27 23.28 22.29 2006 20.29 6.78 17.36 16.93 2007 19.52 2008 15.45 2009 12.19 (41.98) Average 20.01 (7.54) 17.89 18.95 819.26 13.69
(11.35) (8.81) 23.32 21.92
(22.51) 24.84 19.22 126.68 2.11 14.76 312.24 5.20
Pharmaceutical [16] 18.59 Total for 60 MNCs Mean ROE Annual Increase/Decrease
1,372.17 1,262.17 957.34 896.26 22.87 21.04 15.96 14.94
(8.70%)
(6.83%)
59.42%
14.63%
Table 4.10 presents the weighted mean on return on equity of top MNCs by industry, from 2004 to 2009. For this financial measure, companies in the financial industry experienced a decline in ROE with 24.30% in 2004 and 12.195 in 2009, garnering an average of 20.01% over the period.
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The insurance industry even experienced a greater loss with 3.84% in 2004 and negative 41.98% in 2009. This had an average of -7.54% over the period. Based on the financial performance of top MNCs by industry hereby attached as an appendix to this study, the 41.98% decrease of ROE from 2008 to 2009 is largely influenced by the huge deficit of one insurance company with a recorded 568% loss in ROE in 2009. If we take out this number, the ROE average of all covered insurance firms, except that company with the huge loss, in 2009 would be equal to 5.85%. Moving on to multinational companies in the oil and gas industry, we can see that their performance also declined over time with 41.04% in 2004 and 24.84% in 2009, having an average of 17.89% ROE ratio over the period. All their ROE performances were positive except in the year 2008 with negative 22.51% ROE ratio average. The pharmaceutical industry also declined in ROE with 18.59% in 2004 and 14.76% in 2009, with an average of 18.95% almost equal to that of Oil/Gas industry. The average annual increase of top MNCs in ROE over the period is 14.63%. Among the three financial measures, it can be observed that only in return on equity that the covered firms have experienced an overall decline in performance from 2004 to 2009, as compared to ROTA and NPM where the covered MNCs overall performances are relatively stable. Table 4.11 MNCs Financial Performance on Return on Equity, 2004 vs. 2009 Number of MNCs Particulars Improvement in the ROE Decline in the ROE Total ERM 18 15 33 Non-ERM 15 12 27 33 27 60 Total Percentage (%) 55 45 100
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The table above, as in the two previous financial measures, shows us the number of top MNCs that increased or decreased in ROE from 2004 to 2009. Based on the table, 18 ERM firms improved in ROE while 15 non-ERM firms also experienced the same increase from 2004 to 2009. This number is equivalent to 55% of the total sample firms. 15 ERM firms however decreased in ROE during the period while 12 non-ERM firms also experienced the same decline, equivalent to 45% of the covered MNCs. It would be noted that the overall number of ERM firms that improved in financial performance in terms of ROTA, NPM and ROE is equal to 58 which outnumbers 47 nonERM firms that experienced the same increase. The number suggests that ERM companies are performing better than non-ERM firms. If the number is not significant, then it could be due to the unequal number of ERM (33) and non-ERM (27) companies included in the study where the proportion may not be significantly different.
Table 4.12 Summary of Financial Performance of Top Multinational Companies, 2004 to 2009 Industry Number of MNCs Financial Insurance Oil/Gas Pharmaceutical 17 12 15 16 8.76 3.02 7.29 9.76 450.82 7.51% 36.64 6.03 12.39 6.71 988.50 16.47% 20.01 (7.54) 17.89 18.95 821.14 13.69% ROTA NPM ROE
Total Sum (60 covered MNCs) Total Weighted Mean
The above table shows us the summary of financial performance of top MNCs from 2004 to 2009, taken from the weighted mean of all covered MNCs according to
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industry. The total weighted mean for ROTA is 7.51%, while NPM has 16.47% and ROE 13.69%.
Research Problem No. 3: On the effect of ERM Practices to ROTA, NPM and ROE. This study proceeded with the following hypothesis, formulated in Chapter 2, which is based on statement of the problem number 3 this study wanted to answer: H1: Enterprise risk management practices of respondent firms have no significant effect, individually and collectively, on their financial performance measured in terms of ROTA, NPM and ROE. To determine if the individual components of the ERM practices exert any significant effect on financial performance, a multiple regression analysis was performed for each dependent variable. The regression results for ROTA are summarized in Table 4.13.
On Return on Total Assets
Table 4.13 Regression Summary of ERM Practices on ROTA

Change Statistics Std. Error DurbinR Adjusted of the R Square Sig. F Watson Square R Square Estimate Change F Change df1 df2 Change .067 9.36196 .304 1.283 15 44 .253 2.265
Model 1
.552a .304
a. Predictors: (Constant), RMA, RMDM, SBOD, TRMS, CORA, URMA, KRIs, RMSP, TRMP, RMF, RRS, EMRP, EMTR, SERM, SPRM
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.14 F Test for Overall Significance of ERM Practices on ROTA
ANOVAb Model 1 Regression Residual Total Sum of Squares 1686.998 3856.441 5543.439 df 15 44 59 Mean Square 112.467 87.646 F 1.283 Sig. .253a
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a. Predictors: (Constant), RMA, RMDM, SBOD, TRMS, CORA, URMA, KRIs, RMSP, TRMP, RMF, RRS, EMRP, EMTR, SERM, SPRM b. Dependent Variable: ROTA
Table 4.14 shows that there is no overall significant relationship between ROTA and the set of all the independent variables (ERM practices). At the .05 level of significance, the F value of 1.283 and its corresponding p-value (labeled Significance F) of 0.253 indicate that the 15 ERM practices do not exert a significant effect on ROTA. Because F = 1.283 is less than the 1.92 critical value at .05 level of significance, we accept the null hypothesis, H0, and conclude that there is no significant relationship between return on total assets and the 15 independent variables (ERM practices). Alternatively, because the p-value is more than = .05 level of significance, the null hypothesis that the ERM practices have no significant effect, individually and collectively, on ROTA is accepted. This means that the 15 ERM practices cited in this study do not in any way affect the value of ROTA of the covered MNCs. This could be largely due to other factors such as the decision rules in capital budgeting or wise investment management decisions that guide companies in purchasing or investing in capital assets to generate earnings. With the models predictive power or goodness of fit (R2) at 0.3043, in Table 4.13 we see that only 30.43% of the variability in ROTA of top MNCs can be explained statistically by the linear effect of the 15 ERM practices, while 69.57% of variation in
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ROTA is attributable to factors outside the multiple regression model. This indicates that the regression model itself is not statistically significant. The result negates ISO 31000s 1st of the 11 principles for managing risk (risk management creates and protects value), and does not conform with the assumption that ERM as a strategic tool is about creating and enhancing share value in the long term to satisfy the primary business objective of shareholder wealth maximization. Since the Durbin-Watson statistic for ROTA is 2.265, a number that is sufficiently above 2.067 upper critical value of D with 60 observations and 15 independent variables at 1% level of significance, we can conclude with certainty that there is no evidence of positive autocorrelation among the residuals in the regression with ROTA. This means that the least squares method used is appropriate.
Table 4.15 t Test for Individual Significance of ERM Practices on ROTA

Coefficients
a
95.0% Unstandardized Standardized Coefficients Std. Model B Error Beta t Stat .447 -.385 .127 .375 -.133 .014 -.042 -.542 Sig. Coefficients Confidence Interval for B Lower Bound Upper Bound Tolerance VIF Collinearity Statistics
1 (Constant) 10.401 23.277 RMA RMDM SBOD TRMS CORA URMA KRIs -2.512 2.453 4.970 -1.997 .274 -.786 -5.526 1.542 5.213 4.112 4.296 4.024 3.806 3.424
.657 -36.511 57.312 -5.618 -8.053 -3.316 .595 12.958 13.257 6.661 8.383 6.884 1.376 .282 .216 .164 .193 .371 .388 .140 3.541 4.630 6.095 5.180 2.694 2.578 7.144
-1.629 .110 .470 .640
1.209 .233 -.465 .068 -.207
.644 -10.655 .946 .837 -7.836 -8.456
-1.614 .114 -12.427
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RMSP TRMP RMF RRS EMRP EMTR SERM SPRM
-5.105 -.221 2.362 1.856 -6.976 6.138 4.776 -.387
3.800 3.751 3.868 3.800 4.050 3.320 2.840 3.199
-.321 -.023 .152 .135 -.536 .459 .561 -.025
-1.343 .186 -12.764 -.059 .611 .488 .953 .545 .628 -7.782 -5.433 -5.802
2.554 7.339 10.158 9.513 1.187 12.829 10.499 6.060
.277 .106 .255 .208 .163 .257 .142 .358
3.614 9.470 3.924 4.818 6.126 3.896 7.049 2.795
-1.722 .092 -15.139 1.849 .071 1.681 .100 -.121 .904 -.553 -.948 -6.835
a. Dependent Variable: ROTA
To determine which of the independent variables are associated with NPM, we shall read the significance of each independent variable based on the results of the t-test for individual significance. In Table 4.15, it is clear that none of the 15 independent variables affects ROTA, since all their p-values are greater than .05 level of significance and their t Stat values do not exceed the critical value of 2.0154 which is based on the t distribution table with n-p-1 (60-15-1) at = 0.05 level of significance. Because the same conclusion is obtained from the t value and its associated pvalue for each independent variable, we shall read the significance of each individual parameter based on its corresponding p-value for easier interpretation. Together with their corresponding p-values, all independent variables exhibited negligible influence on ROTA, as follows: RMA (0.11), RMDM (.64), SBOD (0.64), TRMS (.64), CORA (.95), URMA (.84), KRIs (.11), RMSP (.19), TRMP (.95), RMF (.54), RRS (.63), EMRP (.09), EMTR (.07), SERM (.1), and SPRM (.90). Hence, we accept the null hypothesis H0, and conclude that they do not significantly affect the behavior or change in ROTA.
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Based on the unstandardized regression coefficients, an increase in Risk Manager Appointment by an index point, holding other independent variables constant, leads to a reduction in the value of ROTA by 2.51% per year. Conversely, if the RMA variable is decreased by an index point, the value of ROTA will increase by 2.51% per year. However, this explanatory variable does not exert a statistically significant effect on ROTA given its p-value of .1103 which is greater than 5% level of significance. Alternatively, with a t Stat value of -1.6296, the null hypothesis is accepted because this value does not exceed the critical value of -2.0154 at = .05 divided by 2 (two-tail) or .025 level of significance based on a t distribution with n p 1 (60 15 1) degrees of freedom. An increase in RMDM, SBOD and CORA by an index point, all other things equal, also leads to an increase in ROTA by 2.45%, 4.97% and .274%, respectively. On the other hand, a similar increase in RMF, RRS, EMTR and SERM leads to an increase in ROTA by 2.36%, 1.86%, 6.14% and 4.78%, respectively. An increase in TRMS, URMA, KRIs, RMSP, TRMP, EMRP and SPRM by an index point tends to an annual decline in ROTA by 1.997%, 0.79%, 5.53%, 5.11%, 0.22%, 6.98% and 0.39%, respectively. However, once again, all these independent variables do not significantly affect the variation or change in ROTA. In order to determine if the regression coefficients can be estimated with accuracy, multicollinearity test was applied utilizing Tolerance and Variance Inflationary Factors (VIF) as seen on the last 2 columns to the right in the t test for individual significance table. Table 4.15 reveals that the VIF of each of the different explanatory variables does not exceed 10. The VIF has ranged from 2.578 to 9.470. This means that the 15 ERM
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practices are not highly inter-correlated or collinear with each other, otherwise if any VIF has exceeded 10 then the set is said to be highly collinear or there is too much correlation between one independent variable and the other explanatory variables. Likewise, it could be noted that the range of tolerance of the explanatory variables is from .106 to .388 which are not at all zero but fall within the lower half of 1. The implication is that the regressors are not highly collinear. The same set of values on the Tolerance and Variance Inflationary Factors is applied in the regression with NPM and ROE because they are regressed against the same set of independent variables.
Figure 3
The normal probability plot of standardized residuals in the regression for ROTA in the above figure shows an approximate linear pattern consistent with a normal
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distribution. Therefore, the validity of the assumption that the error term has a normal probability distribution for this model is substantiated.
On Net Profit Margin Using the same set of explanatory variables, the Net Profit Margin (NPM) was regressed against the 15 ERM practices. The regression results for NPM are summarized in Table 4.16. Table 4.16 Regression Summary of ERM Practices on NPM
Change Statistics R Model 2 R .652
a
Adjusted R Std. Error of Square .228 the Estimate 20.95582
R Square Change .425
F Change 2.164 df1 15
Sig. F
Durbin-
Square .425
df2 Change Watson 44 .024 1.841
a. Predictors: (Constant), RMA, RMDM, SBOD, TRMS, CORA, URMA, KRIs, RMSP, TRMP, RMF,
RRS, EMRP, EMTR, SERM, SPRM
Table 4.17 F Test for Overall Significance of ERM Practices on NPM

ANOVA Model 2 Regression Residual Total Sum of Squares 14252.680 19322.442 33575.122
b
df 15 44 59
Mean Square 950.179 439.146
Sig.
a
2.164 .024
a. Predictors: (Constant), RMA, RMDM, SBOD, TRMS, CORA, URMA, KRIs, RMSP, TRMP, RMF, RRS, EMRP, EMTR, SERM, SPRM b. Dependent Variable: NPM
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The above results show that an overall significant relationship exists between NPM and the set of independent variables selected, as evidenced by its p-value (Significance F) of .024 which is lower than the 5% level of significance. The F value of 2.164 also exceeds the critical value of 1.92 based on the F distribution table with 15 and 44 degrees of freedom. The coefficient of multiple determination, R2, on the other hand, indicates that 42.5% of the variation in NPM can be explained by the linear effect of the 15 ERM practices, while 57.5% is attributable to factors outside the model. With that result, the null hypothesis that ERM practices have no significant effect on NPM is rejected. We can therefore conclude that at least one of the 15 ERM practices is significantly associated with financial performance of top MNCs in terms of net profit margin. The result confirms the argument of the 1st principle of risk management by the ISO 31000 that risk management creates and protects value, and favors the assumption that ERM as a strategic tool will create value in the long term whereby shareholder value maximization is substantiated. Since the Durbin-Watson statistic for NPM is 1.841, which is in between the upper critical value of D at 2.067 and the lower critical value at .893 with 60 observations and 15 independent variables at 1% level of significance, we are therefore unable to arrive at a definite conclusion on whether there is evidence of positive autocorrelation among the residuals in the regression with NPM.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.18 t Test for Individual Significance of ERM Practices on NPM
Coefficients Unstandardized Coefficients Standardized Coefficients
a
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95.0% Confidence Interval for B Lower Upper Bound 66.147 -2.128 42.462 20.977 21.450 14.999 3.767 3.899 2.854 5.342 36.129 21.629 23.811 26.613 22.330 15.071
Collinearity Statistics
Model
Std. Error 52.103 3.451 11.668 9.203 9.616 9.007 8.519 7.665 8.506 8.397 8.658 8.505 9.066 7.431 6.357 7.161
Beta
t Stat -.746
Sig. .460
Bound -143.866 -16.037 -4.568 -16.119 -17.309 -21.305 -30.570 -26.997 -31.433 -28.503 1.229 -12.653 -12.732 -3.341 -3.294 -13.793
Tolerance
VIF
2 (Constant) -38.860
RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS EMRP EMTR SERM SPRM
-9.082 18.947 2.429 2.070 -3.153 -13.402 -11.549 -14.289 -11.580 18.679 4.488 5.540 11.636 9.518 .639
-.566 .400 .075 .056 -.066 -.289 -.461 -.365 -.485 .489 .132 .173 .353 .455 .017
-2.632 .012 1.624 .264 .215 -.350 .112 .793 .831 .728
.282 .216 .164 .193 .371 .388 .140 .277 .106 .255 .208 .163 .257 .142 .358
3.541 4.630 6.095 5.180 2.694 2.578 7.144 3.614 9.470 3.924 4.818 6.126 3.896 7.049 2.795
-1.573 .123 -1.507 .139 -1.680 .100 -1.379 .175 2.157 .528 .611 1.566 1.497 .089 .036 .600 .544 .125 .141 .929
a. Dependent Variable: NPM
On the t-test for individual significance of parameters, Table 4.18 shows that only RMA and RMF have a statistically significant effect on the value of NPM. As evidenced by their p-values of .012 and .036, respectively, which are both less than .05 level of significance, we reject the null hypothesis and conclude that having a risk
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manager and integrating risk management across all functions can significantly cause a change in net profit margin. However, while an increase in RMF by an index point leads to an absolute 18.68% increase in NPM, RMA has a significant negative effect on NPM. An increase in RMA by an index point will cause a decline in NPM by 9.082%. Usually, the active role of a risk manager within a company should contribute to the enhancement or protection of financial performance because he is able to foresee future events that may threaten or cause a decline in sales or increase in unexpected expenses, and because of his active role in the risk management process he is able to identify all potential risks and accordingly he knows how to mitigate and monitor those risks in a timely manner that the other managers within the company may not be able to see or perform. However, in the instant case where RMA has an inverse relationship with NPM, could it be due to a selection of a bad risk manager who further complicates matters and makes things worse, or due to the unnecessary duplication of duty that the risk manager position brings to the firm when unit or functional managers can manage risks within their units or departments, or is his compensation just too expensive so as to cause a decline in net income? The answer is obviously either of the first two possibilities. On the other hand, having risk management across all functions could also be the explanation why firms improve in net profit margin when all their business units or functional managers are also acting as risk managers or owners of risks within their areas of responsibility. All other independent variables which exhibited no significant effect on NPM are as follows: RMDM with a p-value of .11, SBOD .79, TRMS .83, CORA .73, URMA .12, KRIs .14, RMSP .10, TRMP .17, RRS .60, EMRP .544, EMTR .12, SERM .14, and
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SPRM .93. All their corresponding t Stat values also do not exceed the critical value of 2.0154 (either positive or negative) at 5% level of significance. Based on the unstandardized regression coefficients, an increase in RMA by an index point, holding other variables constant, tends to decrease NPM by 9.08% per year, whereas a similar increase in RMF tends to increase NPM by 18.68% per year. Similarly, an increase in CORA, URMA, KRIs, RMSP and TRMP by an index point will cause an annual decrease in NPM by 3.15%, 13.4%, 11.55%, 14.29%, and 11.58% respectively. On the other hand, a similar increase in RMDM, SBOD, TRMS, RRS, EMRP, EMTR, SERM and SPRM leads to an increase in NPM by 18.95%, 2.43%, 2.07%, 4.49%, 5.54%, 11.64%, 9.52% and .64%, respectively.
Figure 4 Figure 4 is the normal probability plot for the regression model with NPM. As with Figure 3, this probability plot is used to determine whether the pattern observed deviates
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from the line enough to conclude that the standardized residuals are not from a standard normal probability distribution. Since the points are clustered about the 45-degree line and there is no substantial curvature in the plot, we can conclude that the assumption about the error term having a normal probability distribution is reasonable.
On Return on Equity The following table illustrates the regression summary of ERM practices on ROE. Table 4.19 Regression Summary of ERM Practices on ROE
Adjusted Std. Error R Model 3 R .683
a
Change Statistics R Square F df1 15 df2 44 Sig. F Durbin-
R Square .286
of the Estimate 30.83529
Square .467
Change Change .467 2.572
Change Watson .008 2.601
RMA, RMDM, SBOD, TRMS, CORA, URMA, KRIs, RMSP, TRMP, RMF, RRS, EMRP, EMTR, SERM, SPRM
a. Predictors: (Constant),
Table 4.20 F Test for Overall Significance of ERM Practices on ROE

ANOVA Model 3 Regression Residual Total Sum of Squares 36680.215 41835.867 78516.082 df 15 44 59
b
Mean Square 2445.348 950.815
F 2.572
Sig. .008
a
a. Predictors: (Constant), RMA, RMDM, SBOD, TRMS, CORA, URMA, KRIs,
RMSP, TRMP, RMF, RRS, EMRP, EMTR, SERM, SPRM

b. Dependent Variable: ROE
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The table above shows that a significant relationship is present between Return on Equity and the set of explanatory variables. If a level of significance of 0.05 is used, we can determine from Table 4.20 that the critical value on the F distribution (with 15 and 44 degrees of freedom) is approximately 1.92. Because the F-statistic = 2.572 > 1.92, and because the p-value of .008 is less than 0.05, the null hypothesis that ERM practices have no significant effect on ROE is rejected, and we conclude that at least one of the explanatory variables (ERM practices) is related to ROE. Based on the value of R2, which is .467, we know that 46.7% of the variation in ROE is jointly caused by the 15 ERM practices. We can also observe that among the three regressions performed, regression with ROE against the 15 ERM practices has the highest percent of variation (46.7%) collectively caused by the said practices. As in the case of NPM, this result is consistent with the assumption that enterprise risk management is about protecting and enhancing shareholder value in the long term because it solves many problems on the interdependencies of risks, finite resources of the company, timely decision making, and capital allocation to satisfy the primary business objective of shareholder wealth maximization, and confirms the argument of the 1st principle of risk management by the ISO 31000 that risk management creates and protects value. As in the case of ROTA, the Durbin-Watson statistic for ROE is 2.601, which far exceeds or is sufficiently above 2.067 upper critical value of D with 60 observations and 15 independent variables at 1% level of significance. With this result, we conclude with certainty that there is no evidence of positive autocorrelation among the residuals
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in the regression with ROE. This means that the least squares method used is appropriate. Table 4.21 t Test for Individual Significance of ERM Practices on ROE
Coefficients Unstandardized Coefficients Standardized Coefficients
a
95.0% Confidence Interval for B Lower Upper Bound 57.748 1.506 40.586 38.309 41.779 28.977 17.216 2.462 -.198 22.204 43.490 35.259 2.462 46.125 36.287 35.406
Collinearity Statistics
Model 3 (Constant)
B -96.763 -8.727 5.984 11.016 13.263 2.268 -8.047 -20.269 -25.424 -2.696 17.813 10.037 -24.423 24.088 17.435 14.170
Std. Error 76.666 5.077 17.169 13.542 14.150 13.253 12.535 11.279 12.516 12.355 12.740 12.515 13.340 10.935 9.354 10.537
Beta
t Stat -1.262
Sig. .214 .093 .729 .420 .354 .865 .524 .079 .048 .828 .169 .427 .074 .033 .069 .186
Bound -251.273 -18.960 -28.617 -16.276 -15.253 -24.442 -33.309 -43.000 -50.649 -27.597 -7.863 -15.185 -51.308 2.050 -1.418 -7.066
Tolerance
VIF
RMA RMDM SBOD TRMS CORA URMA KRIs RMSP TRMP RMF RRS EMRP EMTR SERM SPRM
-.356 .083 .221 .235 .031 -.113 -.529 -.425 -.074 .305 .194 -.499 .478 .545 .247
-1.719 .349 .813 .937 .171 -.642 -1.797 -2.031 -.218 1.398 .802 -1.831 2.203 1.864 1.345
.282 .216 .164 .193 .371 .388 .140 .277 .106 .255 .208 .163 .257 .142 .358
3.541 4.630 6.095 5.180 2.694 2.578 7.144 3.614 9.470 3.924 4.818 6.126 3.896 7.049 2.795
a. Dependent Variable: ROE
As in the case of net profit margin, a closer look at Table 4.21 discloses that only 2 of the explanatory variables are causing significant changes in ROE. At = .05 level of significance, only RMSP and EMTR significantly affect ROE with their p-values of
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0.048 and 0.033, respectively. Meaning to say, if the said two (2) ERM practices in fact do not affect ROE, the probability of detecting a difference this large or larger in the two parameters is only 4.8% and 3.3%, respectively. However, RMSP has a significant negative effect on ROE. Holding other variables constant, an increase in RMSP by an index point will cause a decrease of 25.42% in ROE per year. This result may be due to the overly integration of risk management within strategic planning process that the process itself is already negatively influenced to a certain degree, especially when important considerations or opportunities are missed and always overruled by the decision rule they set up with regards to the risks. Their risk appetite and tolerance should be clearly defined. Unlike RMSP having a negative effect on ROE, the effectiveness of managing the major types of risks has an implied positive effect on ROE because when serious risks are mismanaged, ignored or overlooked, it can unexpectedly force the shareholders to shell out more equity in order to put up any additional and necessary physical measures within the company to respond to the direct21 and indirect22 costs associated with financial distress when risks have already materialized. All other ERM practices which have no significant effect on ROE are as follows: RMA with a p-value of 0.093, RMDM .729, SBOD .420, TRMS .354, CORA .865, URMA .524, KRIs .079, TRMP .828, RMF .169, RRS .427, EMRP .074, SERM .069, and SPRM .186. Their corresponding t Stat values also do not exceed the upper or lower tail critical value of 2.0154. When all other variables are held constant, based on the unstandardized regression coefficients an increase in RMA, URMA, KRIs, TRMP and EMRP by an index point
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causes a decrease in ROE by 8.73%, 8.05%, 20.27%, 2.7% and 24.42% respectively. On the other hand, when RMDM, SBOD, TRMS, CORA, RMF, RRS, EMTR, SERM and SPRM are increased by an index point each of them also causes an increase in ROE by 5.98%, 11.02%, 13.26%, 2.27%, 17.81%, 10.04%, 24.09%, 17.43% and 14.17% respectively. It should be noted that the change in percentage is expressed as annually, because the value of each FP ratio entered into the multiple regression analysis as the dependent variable against the ERM practices is the average value from 2004 to 2009.
Figure 5
In the above figure, the plotted points are clustered closely around the 45degree line passing through the origin. Because of this close clustering or grouping of the points about the line, we can therefore conclude with certainty that the
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assumption of the error term having a normal probability distribution is very reasonable. In other words, the standardized residuals are normally distributed or have come from a normal distribution.
Research Problem No. 4: On whether there is a significant difference on financial performance between firms that explicitly implement ERM and firms that do not. (T-test) For this research problem, a hypothesis was developed to test whether having ERM in general can significantly improve financial performance compared to firms that are not implementing it. We shall see if there is truth in the null hypothesis for each financial performance indicator. H2: There is no significant difference on financial performance (ROTA, NPM and ROE) between firms that explicitly implement ERM and firms that do not. To determine if ERM and non-ERM companies significantly differ in their financial performance when classified according to Return on Total Assets, Net Profit Margin and Return on Equity, the t-Test for Differences in Two (2) Means assuming equal variances was applied for each financial indicator.
On Return on Total Assets The t-test results for ROTA are shown in Table 4.22.
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Table 4.22 Weighted Mean on Return on Total Assets of ERM & Non-ERM Companies, 2004 to 2009 Observations (ERM Companies) 1 2 3 6 7 8 10 13 14 15 16 17 18 19 20 21 22 23 26 27 29 30 31 32 33 35 37 38 45 46 47 48 53 Weighted MEAN Average ROTA (%) 2.11 1.82 0.84 3.63 1.26 1.49 (0.04) 1.13 0.69 1.70 55.49 0.56 3.31 2.88 1.45 20.13 4.02 (1.40) (1.26) 1.69 2.12 4.53 8.38 2.08 13.93 16.40 1.50 29.89 3.19 6.32 20.86 7.41 20.39 7.23% Observations (Non-ERM Companies) 4 5 9 11 12 24 25 28 34 36 39 40 41 42 43 44 49 50 51 52 54 55 56 57 58 59 60 Weighted MEAN Average ROTA (%) 23.25 15.06 7.76 19.39 12.83 (4.38) 2.86 4.85 (1.90) 3.02 0.92 0.80 10.20 10.28 2.97 6.42 9.11 13.71 0.80 9.03 13.64 0.68 6.41 5.17 21.54 4.90 13.04 7.87%
The data in Table 4.22 shall be the basis in determining whether ERM companies outperform non-ERM firms in the aspect of Return on Total Assets. As can be seen on the
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table, the weighted mean or average of ERM firms is 7.23 while the weighted mean of non-ERM firms is slightly higher at 7.87. In performing the pooled-variance t-test for the difference between two means, the data on the average ROTA of each covered firm grouped into two independent groups (ERM and non-ERM firms) were used in computing the t-test. In Table 4.23, we shall see the results of this t-test for ROTA. Table 4.23 T-test on Return on Total Assets for ERM & Non-ERM Companies t-Test: Two-Sample Assuming Equal Variances Return on Total Assets ERM Companies Non-ERM Companies Mean 7.227121212 7.865185185 Variance 132.7814016 49.548549 Observations 33 27 Pooled Variance 95.47012285 Hypothesized Mean Difference 0 df 58 t Stat -0.251648131 P(T<=t) one-tail 0.40110129 t Critical one-tail 1.671552762 P(T<=t) two-tail 0.802202581 t Critical two-tail 2.001717484 Once again, assuming that the samples are from underlying normal populations having equal variances, the pooled-variance t-test can be used. If the test is done at the = .05 level of significance, with 58 degrees of freedom, the rejection region is divided into the two tails for this two-tail test, i.e., two equal parts of 0.025 each, and the difference in mean scores shows no significant difference, though the non-ERM companies have a slightly higher NPM mean. The computed t-statistic of -.2516 is not lower than the twotailed critical value of -2.0017. Therefore, the null hypothesis that there is no significant difference on ROTA between firms that explicitly implement ERM and
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firms that do not is accepted. The observed difference between ERM and non-ERM companies on ROTA can be attributed to chance element. The results indicate that having ERM poses no significant advantage in ROTA for companies that implement it if they are compared against non-ERM companies. Consequently, it means that the financial performance of top MNCs on ROTA, regardless of whether they have ERM or not, was basically the same. This may be attributed to the standardized decision rules or methods in capital budgeting or due to the conservative investment management decisions made by the respondent firms. The result of the t-test for ROTA negates the ERM: Theory and Practice by Brian W. Nocco and Ren M. Stulz (2006) that says companies that succeed in creating an effective ERM have a long-run competitive advantage over those that manage and monitor risks individually. The negligible difference on the means between the two groups may be due to the fact that the subject MNCs with ERM are generally still in the early stage of ERM implementation, having started ERM more than 2 years but less than 4 years ago as shown in the findings for research problem no. 1.
On Net Profit Margin Table 4.24 Weighted Mean on Net Profit Margin of ERM & Non-ERM Companies, 2004 to 2009 Observations (ERM Companies) 1 2 3 6 7 Average NPM % 26.81 20.83 10.91 54.83 15.06 Observations (Non-ERM Companies) 4 5 9 11 12 Average NPM % 99.87 53.13 5.92 77.64 99.97
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 8 10 13 14 15 16 17 18 19 20 21 22 23 26 27 29 30 31 32 33 35 37 38 45 46 47 48 53 Weighted MEAN 31.33 0.28 10.47 12.11 40.63 54.89 8.23 15.02 12.76 5.45 40.93 8.31 (6.93) (6.77) 4.94 11.81 2.00 3.05 0.79 32.42 47.94 0.49 49.62 1.10 8.10 14.23 2.44 11.08 16.52% 24 25 28 34 36 39 40 41 42 43 44 49 50 51 52 54 55 56 57 58 59 60 Weighted MEAN (17.34) (6.77) 10.99 (0.50) 1.02 0.33 1.35 5.34 24.11 8.19 9.75 8.71 8.85 (0.22) 6.20 9.03 (0.10) 6.26 3.06 12.29 3.63 12.65 16.42%
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The table above shows the weighted mean on net profit margin of each company from the years 2004 up to 2009, grouped according to the presence or non-presence of ERM in the sample firms. As in the previous financial measure, the weighted mean on NPM taken from the years 2004 to 2009 of each covered MNC becomes the basis of data for determining whether there is a significant difference between the two sample means, assuming variances are equal. It is important not to be confused with using only the
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weighted mean or total average of each group as the data to be entered in comparing the two independent sample means. Table 4.25 T-test on Net Profit Margin for ERM & Non-ERM Companies t-Test: Two-Sample Assuming Equal Variances Net Profit Margin ERM Companies Non-ERM Companies Mean 16.52 16.42074074 Variance 315.9989875 902.4233994 Observations 33 27 Pooled Variance 578.8788963 Hypothesized Mean Difference 0 df 58 t Stat 0.015897923 P(T<=t) one-tail 0.493685194 t Critical one-tail 1.671552762 P(T<=t) two-tail 0.987370389 t Critical two-tail 2.001717484
The results of the t-Test in Table 4.25 show no significant difference on NPM between the two sample means. Using the 0.05 level of significance, the null hypothesis that there is no significant difference on NPM between firms that explicitly implement ERM and firms that do not is accepted, because t = .0159 which is lower than the critical value of 2.0017. The p-value of 0.9874 is also greater than = 0.05 (level of significance). In other words, there is no sufficient evidence to reject the null hypothesis. We can conclude that the financial performance of ERM and non-ERM firms in the aspect of net profit margin is basically the same, regardless of the presence of enterprise risk management. Similar to the result of the t-test for ROTA, the findings for NPM in the table above also negate the ERM: Theory and Practice by Nocco and Stulz (2006). The result contradicts their argument that companies that succeed in creating an effective ERM have
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a long-run competitive advantage over those that manage and monitor risks individually. This may be due to the current stage of ERM implementation where companies implementing ERM are still in its partial stage and the length of time they have been implementing it falls within the range of more than 2 years but less than 4 years, while non-ERM firms may be contented with their current risk management program. It should be noted however that while the ERM companies financial performance in the aspects of ROTA and NPM may not significantly exceed non-ERM companies performance, their weighted mean as a group is at par with that of the non-ERM companies.
On Return on Equity Table 4.26 Weighted Mean on Return on Equity of ERM & Non-ERM Companies, 2004 to 2009 Observations (ERM Companies) 1 2 3 6 7 8 10 13 14 15 16 17 18 19 20 21 22 23 26 Average ROE % 25.93 31.25 6.95 15.84 6.38 11.85 (0.84) 9.53 10.92 16.24 69.30 7.26 13.30 16.61 19.18 30.83 19.50 (40.50) (22.20) Observations (Non-ERM Companies) 4 5 9 11 12 24 25 28 34 36 39 40 41 42 43 44 49 50 51 Average ROE % 23.27 15.07 52.97 25.40 12.83 (154.43) 1.0 10.34 (8.23) 6.77 (83.61) 1.51 31.46 12.87 10.29 10.22 11.24 18.53 (1.11)
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 27 29 30 31 32 33 35 37 38 45 46 47 48 53 Weighted MEAN 15.12 2.81 12.34 25.77 75.20 (39.72) 99.55 5.06 108.84 47.17 8.59 31.31 43.39 48.78 22.17% 52 54 55 56 57 58 59 60 Weighted MEAN 13.71 18.18 (0.56) 12.30 (16.62) 42.87 10.14 15.26 3.40%
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The above table displays the data used in testing the null hypothesis with respect to ROE. Based on the table, the weighted mean of ERM firms greatly outnumbers the weighted mean of non-ERM firms, with 22.17% ROE for ERM companies and only 3.4% for non-ERM firms.
Table 4.27 T-test on Return on Equity for ERM & Non-ERM Companies t-Test: Two-Sample Assuming Equal Variances Return on Equity ERM Companies Non-ERM Companies Mean 22.16772727 3.395185185 Variance 1035.484999 1542.016526 Observations 33 27 Pooled Variance 1262.550856 Hypothesized Mean Difference 0 df 58 t Stat 2.035925459 P(T<=t) one-tail 0.023166942 t Critical one-tail 1.671552762 P(T<=t) two-tail 0.046333884 t Critical two-tail 2.001717484
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Unlike in the two previous financial measures, the results in the table above give a favorable evidence for ERM companies. The null hypothesis that there is no significance difference on ROE between firms that explicitly implement ERM and firms that do not is rejected, because the t value is equal to 2.036, which is greater than the upper tail critical value of 2.0017. Alternatively, the p-value of .0463 is less than the stated 5% level of significance. Therefore, we conclude that in terms of return on equity, the companies that implement ERM financially outperform companies that do not implement it, or whose level of risk management is not yet as advanced as ERM. Based on these results, ERM companies enjoy a significantly better return on equity over non-ERM firms. Because of the significant difference on ROE between ERM and non-ERM companies, the findings do confirm and support the argument cited in the Enterprise Risk Management: Theory and Practice by Brian W. Nocco and Ren M. Stulz (July 2006), stating that companies that succeed in creating an effective ERM have a long-run competitive advantage over those that manage and monitor risks individually.
Research Problem No. 5: On whether firms implementing ERM improve in ROTA, NPM and ROE around the time ERM was adopted. (Index numbers and moving average) In an effort of the researcher to show evidence of financial data for each firm implementing ERM, this study deems it practical to include the corresponding table containing financial ratios of MNCs based on the length of time they have been implementing ERM. This length of time is expressed in a maximum 10-year period since
clxxxviii 175
ERM is a relatively new area in risk management, with the first use of ERM terminology started in the mid-1990s by James Lam, who coined the term Chief Risk Officer and subsequently became the first to hold the title in 1998.
On Return on Total Assets Table 4.28 below presents the actual financial ratios of ERM companies based on the length of time or year they have been implementing enterprise risk management.
Table 4.28 Return on Total Assets of ERM Companies by Length of ERM

Observations Length (ERM of ERM Companies) (years) 1 10 2 8 3 10 6 4 7 10 8 10 10 10 13 6 14 8 15 8 16 8 17 8 18 10 19 4 20 6 21 4 22 4 23 4 26 4 27 4 29 2 30 10 31 10 32 10 33 4 Return on Total Assets (%) by Length of ERM (year) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2.03 (0.31) 2.08 0.5 2.07 1.48 1.68 0.23 2.12 1.32 1.20 2.40 1.76 1.44 3.27 2.83 2.09 1.08 0.57 0.47 (1.85) 0.85 1.37 1.48 61.31 1.75 0.72 1.98 2.41 50.19 1.51 0.64 (6.78) 2.18 1.72 2.15 (0.58) 2.90 0.26 0.65 0.51 1.55 0.96 1.27 43.57 1.26 4.66 2.95 0.49 55.02 (2.84) (7.18) 1.94 3.85 1.67 1.20 0.67 5.12 1.41 1.66 0.24 1.74 0.84 0.50 23.31 (0.30) 4.64 2.42 2.59 2.52 2.75 0.52 (0.50) (3.70) (5.42) (4.00) 3.63 4.14 11.40 (4.95) 5.19 20.99 14.05
2001 1.78 0.15
1.56 2.43 2.72 2.95 (1.87) (2.23)
2.52
4.02
1.81 1.76 2.68 2.25 0.60 0.24 0.86 1.09 (1.17) (0.29) 0.86 0.38 1.09 1.34 2.49 3.14 82.65 86.34 85.72 32.68 (1.50) (1.28) 0.86 1.08 5.25 3.94 3.89 2.03 0.60 2.34
2.53 1.77 2.75 1.23 (1.72) 0.00
2.41 7.43 3.57
5.76 6.05 6.29 8.31 6.96 5.98 7.73 6.98 5.96 10.89 7.30 10.61 4.03 (9.12) (6.90) (1.67) 10.35 10.46 15.01
1.17 1.03 3.05 1.68 1.10 0.13 1.62 1.95 0.50 18.31 0.94 2.64 2.15 2.24 7.18 2.65 2.68 (0.92) (7.77) 5.48 5.12 10.20 5.80 21.41
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 35 37 38 45 46 47 48 53

Weighted MEAN 10 10 10 6 4 4 4 6 6.97 (7.19) 0.65 (16.89) 0.70 0.23 4.17 3.42 4.60 7.24 0.66 4.52 0.22 10.39 10.16 30.23 2.49 19.29 0.00 36.93 3.95 5.38 15.47 7.03 18.55 28.33 28.2 8.63 7.12 8.95 8.10 0.55 32.72 2.69
clxxxix 176
34.33 24.85 0.73 2.96 (0.00) 60.76 8.56 4.07 4.12 3.97 7.83 7.81 7.65 9.41 11.76 18.49 7.43 8.18 7.57 21.09 11.01 21.49 8.65 4.77 4.98
(0.26)
2.63
6.64
7.12
Table 4.28 displays the return on total assets ratio of each ERM company year on year based on the length of time they have been implementing it. The length of ERM expressed in years is based on the responses of covered MNCs in Question No. 6, Part 2 in the survey questionnaire. Since the data for this research problem is ordinal, or ranked, and involves a natural ordering by year for each category, the responses on the first scale (more than 1 but not less than 2 years) shall be construed as, for purposes of this study, having started ERM in the last 2 years, while for responses on the second scale (>2 but <4 years) the start of ERM implementation shall be meant as four years ago, and so on. This is because even if some MNCs have in fact started ERM sometime in the middle of the year, for instance, there are just no financial statements made for the middle of the year to make it as basis of the start of ERM implementation. Financial statements are always made for the fiscal year ended. Therefore, the number scale indicated in the survey instrument for the length of time ERM has been implemented is simply multiplied by 2. Thus, we have over 10-year period and not over 5-year period. Audited financial statements for the three (3) companies that started ERM 10 years ago, but do not have figures for 2010 in the table, were not reflected in the SEC i-Views database or may not yet be available.
cxc 177
The same table containing FP ratios by length of ERM becomes the basis in solving for the index numbers and moving average in order to determine whether firms implementing ERM do in fact improve in ROTA, NPM and ROE from the time it has been implemented. If the results do not show an increase in financial performance over time, then ERM may be called into question or even stopped because significant resources are being expended and the costs may be found to exceed the financial benefits. After all, the question is: why should firms implement ERM if they know beforehand that it will not add value in the long term, or if the long-term benefits will not in any way overcome the costs? Table 4.29 Index Numbers and Moving Average of Return on Total Assets of ERM Companies from Base Period
Observations Length (ERM of ERM Companies) (years)
Base
1.78 0.5 0.15 1.08 1.56 2.72 (1.87) 0.86 (1.17) 1.09 82.65 (1.50) 2.52 1.98 0.60 50.19 1.51 0.64 (6.78) 2.18
Return on Total Assets (%) from Base Period 1 2 3 4 5 6 7 8

2.03 1.68 (0.31) 2.90 2.43 2.95 (2.23) 1.09 (0.29) 1.34 86.34 (1.28) 4.02 2.95 2.34 55.02 (2.84) (7.18) 1.94 3.85 2.08 1.32 2.07 5.12 2.53 2.75 (1.72) 0.85 0.86 2.49 85.72 0.86 5.25 2.42 2.41 2.52 2.75 0.52 (0.50) (3.70) 1.48 1.76 0.23 3.05 1.77 1.23 0.00 1.55 0.38 3.14 32.68 1.08 3.94 2.15 0.49 7.18 2.65 2.68 (0.92) (7.77) 2.12 2.83 1.20 1.81 2.68 0.60 1.74 1.37 1.48 61.31 1.75 3.89 2.59 2.40 2.15 1.44 1.76 2.25 0.24 1.62 0.96 1.27 43.57 1.26 2.03 2.24 3.27 1.20 2.09 1.72 1.67 1.17 (0.58) 0.67 1.41 1.66 0.24
1 2 3 6 7 8 10 13 14 15 16 17 18 19 20 21 22 23 26 27
10 8 10 4 10 10 10 6 8 8 8 8 10 4 6 4 4 4 4 4
1.03 1.68 1.10 0.13
0.57 0.26 0.47 0.65 (1.85) 0.51 0.84 0.50 23.31 (0.30) 0.72 1.95 0.50 18.31 0.94 4.66
4.64
2.64

2 10 10 10 4 10 10 10 6 4 4 4 6 Weighted MEAN 2-Year MOVING AVERAGE INDEX NUMBERS
cxci 178
29 30 31 32 33 35 37 38 45 46 47 48 53
(5.42) 2.41 7.43 3.57 15.01 (7.19) 0.65 (16.89) 2.49 5.38 15.47 7.03 18.55 5.73
5.48 5.76 7.73 4.03 20.99 0.70 0.23 4.17 2.69 7.83 9.41 7.43 28.33 7.93 6.83 138
6.05 6.98 (9.12) 14.05 3.42 0.66 10.39 3.95 7.81 11.76 8.18 28.20 6.53 7.23 114
6.29 5.96 (6.90) 21.41 4.60 4.52 10.16 4.07 7.65 18.49 7.57 21.09 5.11 5.82 89
8.31 6.96 5.98 (4.00) 3.63 10.89 7.30 10.61 4.14 11.40 (1.67) 10.35 10.46 (4.95) 5.19 7.24 0.22 30.23 4.21 8.10 19.29 0.55 0.00 32.72 36.93 3.97
5.12 10.20 5.80
34.33 24.85 0.73 2.96 (0.00) 60.76 8.56
11.01 21.49 7.42 6.26 129 7.36 7.39 128 7.13 7.25 124 7.12 7.13 124 5.17 6.15 90 3.46 4.31 60
100
In table 4.29, we use the same set of ROTA ratios here from the previous table concerning the length of ERM, although in a different configuration. In order to compute for the index numbers and moving average, a careful treatment of data should be applied. Hence, we move the data on ROTA ratios to the left side of the table because the base period is the start of ERM implementation. The configuration of financial ratios is not moved or affected for those companies that have started implementing ERM in the last 10 years. For this financial measure, we can see on the table that the weighted mean of ERM companies increased in the first year by 38% from base period. Their performance was fairly comparable or stable from the first year of ERM implementation until the 7th year. On the 8th and 9th year, the performance declined by 10% and 40%, respectively, if the number is compared against the performance in the base period.
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The cumulative aggregate index number on ROTA of ERM companies over a 9year period is 111, which means that only 11% is the observable increase in ROTA over the period after ERM was implemented. This result is still not bad because a good risk management program such as ERM should reduce earnings volatility and enhance the use of assets to generate profits.
2-Year Moving Average, ROTA

9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 1 2 3 4 5 6 7 8 9 10 Years from Base Period Mean, Return on Total Assets
Actual Forecast
Figure 6 Moving Average of Return on Total Assets from Base Period The above graph shows a 2-year moving average of ROTA of ERM companies, with actual and forecasted data over the 9-year period. Though the figure contains positive ratios, the moving average in the line graph appears to be in a curvilinear up and down motion, and so the effect of ERM on ROTA over time is inconclusive.
On Net Profit Margin The following table contains information about NPM ratios of ERM companies by length of time or year they have started implementing ERM.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Table 4.30 Net Profit Margin of ERM Companies by Length of ERM
Observations Length (ERM of 2001 Companies) ERM
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Net Profit Margin (%) by Length of ERM (year) 2002 2003 2004 2005 2006 2007 2008 2009 2010
(years) 1 2 3 6 7 8 10 13 14 15 16 17 18 19 20 21 22 23 26 27 29 30 31 32 33 35 37 38 45 46 47 48 53
Weighted MEAN 10 8 10 4 10 10 10 6 8 8 8 8 10 4 6 4 4 4 4 4 2 10 10 10 4 10 10 10 6 4 4 4 6 6.97 24.86 31.50 1.65 34.13 22.48 25.37 28.28 6.85 18.26 15.79 20.96 (2.62) 17.30 4.20 16.56 15.55 39.85 20.93 23.94 27.62 26.55 15.79 25.06 29.37 (6.11) 5.90 23.54 17.55 48.71 121.30 118.60 5.02 3.60 16.23 21.01 11.78 14.48 56.76 70.31 (22.99) 9.72 3.0 2.12 7.65 13.48 17.06 18.03 20.48 17.43 18.67 34.78 30.99 27.74 21.82 18.12 55.50 57.62 65.57 62.99 29.45 35.43 (13.02) 37.17 3.16 20.20 24.91 36.17 11.38 14.31 14.0 13.63 4.38 1.99 18.94 9.53 90.06 94.78 11.36 26.10 3.43 (8.71) 9.56 0.07 3.26 (42.41) 3.62 12.33 (16.05) 5.98 (2.34) (5.08) 8.41 15.42 (19.09) (50.52) (12.54) 10.84 2.91 (1.63) 2.27 3.57 3.86 1.06 4.65 3.43 3.58 (1.47) 2.20 1.93 32.61 35.42 28.04 39.40 45.96 56.29 43.48 0.0 0.27 1.33 (0.0) 51.07 61.05 43.98 1.33 1.36 1.36 1.29 6.60 9.32 9.78 9.79 13.04 8.69 12.09 19.24 2.45 2.45 2.43 2.26 16.70 11.97 6.31 11.25 16.89 17.37 16.95 19.23
18.64 35.20 40.97 23.40 20.98 21.15 32.28 36.20 37.86 23.17 33.80 48.0 (22.68) (30.30) (30.16) 0.26 8.56 3.15 7.08 11.11 (18.98) (4.68) 14.73 6.01 30.99 48.86 59.75 54.63 62.89 62.78 59.06 28.83 (19.73) (25.51) 11.06 11.96 18.94 29.48 39.47 14.93 17.08 9.86 1.56 4.89
1.38 2.89 1.77
3.15 3.14 2.10
2.81 24.13 (3.30)
2.64 3.01 2.81 2.25 3.87 2.63 (2.61) (0.52) 3.53 44.83 0.10 58.18 0.94
(303.4) 7.45 28.31 52.11 44.96 0.36 0.15 0.23 1.24 0.0 (415.2) 17.10 34.74 28.83 54.59 0.97
9.81 (53.21) 11.05 16.97
14.10
16.04 19.43 18.64
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As already explained in the previous financial measure, the above table contains actual NPM ratios of ERM companies by length of ERM implementation. The same set of data is used in computing for the index numbers and moving average from the base period, or the year ERM was started. The following table contains regrouped NPM ratios according to the base period. Table 4.31 Index Numbers and Moving Average of Net Profit Margin of ERM Companies from Base Period
Observations Length (ERM of ERM Companies) (years)
Base
24.86 6.85 1.65 17.55 18.64 32.28 (22.68) 7.08 (18.98) 30.99 62.89 (19.73) 18.94 11.38 1.56 90.06 3.43 3.26 (16.05) 8.41 (12.54) 1.38 2.89 1.77 32.61 (303.40) 0.36 (415.20)
Net Profit Margin (%) from Base Period 2 3 4 5 6 7

34.13 22.48 15.79 20.96 17.30 4.20 121.30 118.60 40.97 23.40 37.86 23.17 (30.16) 0.26 7.65 13.48 14.73 6.01 59.75 54.63 59.06 28.83 11.06 11.96 39.47 14.93 14.00 13.63 4.38 1.99 11.36 26.10 9.56 0.07 3.62 12.33 (2.34) (5.08) (19.09) (50.52) 2.81 24.13 (3.30) 28.04 28.31 0.23 34.74 25.37 27.62 16.56 20.98 33.80 8.56 17.06 20.48 30.99 55.50 29.45 17.08 18.94
1 2 3 6 7 8 10 13 14 15 16 17 18 19 20 21 22 23 26 27 29 30 31 32 33 35 37 38
10 8 10 4 10 10 10 6 8 8 8 8 10 4 6 4 4 4 4 4 2 10 10 10 4 10 10 10
31.50 18.26 (2.62) 48.71 35.20 36.20 (30.30) 11.11 (4.68) 48.86 62.78 (25.51) 29.48 14.31 4.89 94.78 (8.71) (42.41) 5.98 15.42 10.84 3.15 3.14 2.10 35.42 7.45 0.15 17.10
28.28 39.85 20.93 23.94 26.55 15.79 25.06 15.55 29.37 (6.11) 5.90 23.54 21.15 5.02 48.00 11.78 3.15 (22.99) 18.03 17.43 18.67 27.74 21.82 57.62 65.57 35.43 (13.02) 9.86 3.16 9.53 3.60 16.23 21.01 14.48 56.76 70.31 9.72 3.00 2.12 34.78 18.12 62.99 37.17 20.20 24.91 36.17
2.64 3.01 2.81 2.91 2.25 3.87 2.63 3.86 (2.61) (0.52) 3.53 3.58 39.40 52.11 44.96 44.83 45.96 1.24 0.0 0.10 0.0 28.83 54.59 58.18 51.07
(1.63) 2.27 1.06 4.65 (1.47) 2.20
3.57 3.43 1.93
56.29 43.48 0.27 1.33 (0.0) 61.05 43.98
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 45 46 47 48 53

6 4 4 4 6 0.97 0.94 6.60 9.32 13.04 8.69 2.45 2.45 9.81 14.10 (12.03) 13.88 0.93 215 1.33 9.78 12.09 2.43 16.70 18.99 16.44 258 1.36 9.79 19.24 2.26 11.97 15.93 17.46 232 1.36 1.29
cxcv 182
Weighted MEAN 2-Year MOVING AVERAGE INDEX NUMBERS
6.31 11.25 20.76 21.09 16.61 20.97 19.05 20.26 18.35 20.93 18.85 18.79 20.01 19.66 273 275 238 274 258 268
100
In computing for index numbers of longitudinal data involving a negative value of financial ratio in the base period, it is important not to be deceived by the formula for simple index numbers for each case of a longitudinal variable as defined under the statistical treatment for analyzing data in Chapter 3. A careful treatment of data should therefore be rendered with respect to the negative number in the base period as in the table above. Since this study wanted to examine or compare relative changes or trends in financial performance over time after ERM was adopted, index numbers become the appropriate statistical tool to use which complements moving average. However, some pitfalls with this descriptive statistical tool should be avoided. For instance, a positive value of a financial ratio in one particular year after the base period when compared against the negative financial ratio in the base period means there was an absolute increase in value over time. Therefore, it is wrong to divide a positive number in one particular year (after the base period) directly by the negative number in the based period, because the quotient will also become negative and it would be very unconscionable to conclude that despite the positive financial ratios that were achieved after the base period, just by dividing them by a negative number in the base period the index numbers will also become negative over time and thus the financial performances of ERM companies have
cxcvi 183
been dwindling at a loss. This never reflects truth in the spirit and law in finance. We should first subtract the negative number in the base period (with its negative sign) from the number of financial ratio in a particular year, in which case the mathematical operation becomes addition, and then we divide it by the actual number in the base period, and so the number should be in positive sign. In so doing, based on the results in the table for NPM, there was a 115% increase in the first year from the time ERM was implemented. This is further supported by stable performances over time from the second year up to the 9th year (present time). Figures from the index numbers tell us that the cumulative aggregate increase in NPM over the 9year period after ERM was implemented is 154.55%. There is therefore a compelling evidence of a positive value added incentive for companies implementing ERM in terms of a much better and more stable Net Profit Margin over time.
2-Year Moving Average, NPM

25.00 20.00 Mean, Net Profit Margin 15.00 10.00 5.00 (5.00) (10.00) (15.00) Years from Base Period 1 2 3 4 5 6 7 8 9 10 Actual Forecast
Figure 7 Moving Average of Net Profit Margin from Base Period
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The moving average graph in the above figure clearly illustrates a sharp increase in NPM on the first year from the base period and exhibits stable performance onwards that is much better than the base period. This moving average fully supports the previous conclusion that having ERM provides a value added incentive for companies in terms of better and stable net profit margin over time.
On Return on Equity The following table contains ROE ratios of ERM companies by length of year they have been implementing ERM. Table 4.32 Return on Equity of ERM Companies by Length of ERM
Observations Length (ERM of ERM 2001 Companies) (years) 1 10 19.85 2 8 3 10 1.12 6 4 7 10 8.51
Return on Equity (%) by Length of ERM (year)

2002 2003 2004 2005 2006 2007 2008 23.00 34.97 (4.69) 12.52 1.42 2009 2010 20.97 19.32 9.52 29.41 33.21 41.20 7.86 25.05 17.70 41.28 49.85 1.34 8.74 1.41 5.27 10.99 15.04 4.62 12.50 13.26 8.61 9.57 10.06 2.29 19.26 18.64 20.86 13.65 34.65 16.95 14.22 6.35 7.14
8 10 13 14 15 16 17 18 19 20 21 22 23 26 27 29
10 10 6 8 8 8 8 10 4 6 4 4 4 4 4 2
11.08 10.92 12.23 11.16 16.19 19.12 (6.41) (8.38) (7.63) 0.00 3.43 1.74 5.44 11.73 (11.63) (4.58) 14.23 7.82 1.62 2.36 12.74 18.53 97.66 98.23 97.73 38.81 (4.70) (1.86) 12.95 12.91 9.06 10.28 13.22 16.93 13.97 6.21 8.30 25.74
5.27 7.01 12.36 28.72 (17.76) 5.71 1.85 1.36 10.58 11.94 14.05 14.74 20.82 15.48 11.76 18.68 37.86 24.18 1.74 9.72 71.08 47.92 62.00 59.96 13.06 10.19 (3.69) 12.67 2.53 22.72 17.43 8.53 10.38 21.68 12.46 9.02 33.41 8.72 33.68 22.33 51.15 55.96 14.30 31.92 8.06 (17.51) 18.26 20.36 3.13 (247.41) 6.54 34.98 (148.32) 99.95 (45.52) (40.20) 11.68 58.28 (48.23) (104.0) (23.40) (15.92)
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 30 31 32 33 35 37 38 45 46 47 48 53

Weighted MEAN 10 10 10 4 10 10 10 6 4 4 4 6 6.97 15.48 15.49 18.39 22.01 19.34 16.98 (14.19) 16.80 15.54 16.97 29.32 22.87 30.05 14.57 29.56 (94.47)362.17 47.14 23.16 19.37 (11.04) (39.28) (56.36) (42.06) 38.33 68.08 51.82 77.31 57.19 100.78 156.79 0.95 0.33 1.00 9.06 0.54 1.12 0.13 4.87 (1,613) 17.58 33.81 72.93 204.04 112.69 102.28 142.76 36.79 33.95 62.16 64.38 7.86 10.60 22.13 14.75 44.46 46.82 45.66 55.56 59.78 54.44 139.95 13.81 11.14 41.07 33.8 26.86 20.39 19.39 7.07 17.89 39.30
cxcviii 185 11.51 40.86 10.41 (36.42) 153.38 14.64 18.31 60.35 11.08 17.02 47.37 38.82 16.60 15.96 37.92 9.54 62.51 (0.80) 48.69 10.49 23.46 45.04 54.32 16.56
Once again, the financial ratios as in the table above will become the basis for determining the relative change in ROE over time after ERM was started. All financial ratios of longitudinal variable will be moved to the left side of the table because the length of ERM expressed in year becomes the basis of the base period or the start of ERM implementation. Mathematically, the negative 1,613 that is conspicuous in the base period of one MNC that started implementing ERM 10 years ago is actually a positive number because when a negative numerator is divided by a negative denominator the result becomes positive. However, the truth behind its performance is the opposite because the company incurred a huge net loss in the amount of P804.9M during that year, due to the unusual operating expenses incurred for its oil exploration project in the Philippines in that year, while its total equity was also in the negative number consisting of advances from its home office account to cover disbursements and charges relating to the branchs exploration and development activities in the Philippines. For purposes of this study, we
cxcix186
shall interpret its performance as an absolute loss in ROE for that year, hence the negative sign in the ratio. Table 4.33 Index Numbers and Moving Average of Return on Equity of ERM Companies from Base Period
Observations Length (ERM of ERM Base Companies) (years)
Return on Equity (%) from Base Period 1 2 3 4 5 6 7

9.52 41.28 1.41 14.22 8.61 11.16 11.94 7.82 18.53 38.81 12.91 16.93 9.02 8.72 31.92 20.36 34.98 (40.20) (104.0) 18.39 16.97 362.17 62.51 51.82 9.06 72.93 64.38 10.49 23.46 45.04 54.44
1 2 3 6 7 8 10 13 14 15 16 17 18 19 20 21 22 23 26 27 29 30 31 32 33 35 37 38 45 46 47 48 53
10 8 10 4 10 10 10 6 8 8 8 8 10 4 6 4 4 4 4 4 2 10 10 10 4 10 10 10 6 4 4 4 6
19.85 20.97 19.32 7.86 25.05 17.70 1.12 1.34 8.74 4.62 12.52 16.95 8.51 12.50 13.26 11.08 10.92 12.23 (6.41) (8.38) (7.63) 5.44 11.73 10.58 (11.63) (4.58) 14.23 1.62 2.36 12.74 97.66 98.23 97.73 (4.70) (1.86) 12.95 9.06 10.28 13.22 10.38 21.68 12.46 8.30 25.74 33.41 51.15 55.96 14.30 8.06 (17.51) 18.26 3.13 (247.41) 6.54 (148.32) 99.95 (45.52) 11.68 58.28 (48.23) (23.40) (15.92) 7.07 15.48 15.49 17.89 16.80 15.54 39.30 29.56 (94.47) (39.28) (56.36) (36.42) (42.06) 38.33 68.08 0.95 0.33 1.00 (1,613) 17.58 33.81 36.79 33.95 62.16 7.86 10.60 11.08 22.13 14.75 17.02 44.46 46.82 47.37 45.66 55.56 59.78
29.41 33.21 41.20 23.00 19.26 49.85 34.97 18.64 20.86 5.27 10.99 15.04 (4.69) 13.65 34.65 9.57 16.19 3.43 14.05 20.82 37.86 71.08 13.06 13.97 10.06 19.12 1.74 14.74 15.48 24.18 47.92 10.19 6.21 2.29 1.42 5.27 7.01 (17.76) 5.71 11.76 1.74 62.00 (3.69) 2.53 6.35 7.14 12.36 28.72 1.85 1.36
18.68 9.72 59.96 12.67 22.72 17.43 8.53
33.68 22.33
22.01 19.34 16.98 (14.19) 11.51 15.96 29.32 22.87 30.05 14.57 40.86 37.92 47.14 23.16 19.37 (11.04) 10.41 9.54 77.31 0.54 204.04 60.35 57.19 100.78 156.79 153.38 1.12 0.13 4.87 14.64 0.0 112.69 102.28 142.76 18.31 48.69
38.82 54.32

Weighted MEAN (42.64) 11.98 13.55 2-Year MOVING AVERAGE (15.33) 12.76 INDEX NUMBERS 100 128 132 30.50 22.03 171 37.99 28.12 24.04 34.25 33.05 26.08 189 166 156
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27.70 26.67 17.98 25.87 27.18 22.32 165 163 142
As in the case of NPM, the number of the base period in the table for ROE contains a negative number, so the solution is the same for both cases. In the table above, the covered MNCs experienced a 28% increase in ROE on the first year from base period, and held its performances relatively stable over the next 8 years, with an increase of 32% in year 2, 71% year 3, 89% year 4, 66% year 5, 56% year 6, 65% year 7, 63% year 8 and 42% year 9. Note that the percentages are compared against the base period. The cumulative average increase on ROE with the index numbers over the 9-year period from ERM implementation is 57%. There is therefore reason to believe that having ERM can significantly increase ROE and stabilize its performance over time.
2-Year Moving Average, ROE

50.00 40.00 Mean, Return on Equity 30.00 20.00 10.00 (10.00) 1 (20.00) (30.00) (40.00) (50.00) Years from Base Period 2 3 4 5 6 7 8 9 10 Actual Forecast
Figure 8 Moving Average of Return on Equity from Base Period
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The moving average graph above also provides evidence of improved financial performance around the time ERM was implemented. Although the line graph is not as attractive as with the net profit margin, the moving average clearly tells us that having ERM can significantly help the firm to lift its performance from a negative ratio and gain a substantial percentage in ROE over time. Interestingly, these convincing results are consistent with the overall significant effect of ERM practices on NPM and ROE from the cross-sectional data in the multiple regression analysis at 5% level of significance. Whereas, the result on ROTA from this longitudinal observation, where having ERM does not in any way enhance or affect return on total assets over time, is also consistent with the results in the multiple regression with respect to ROTA as it is not statistically affected by the ERM practices at the same 5% level of significance.
A beautiful life does not just happen. It is built daily by prayer, humility, sacrifice and love.
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CHAPTER 5 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
This final chapter summarizes the findings of this research study, and presents the conclusions based on the findings, and the recommendations based on the conclusions. The summary of findings follows in sequence according to the research problems stated in Chapter 1.
Summary of Findings
The major findings of this study are recapitulated as follows: 1. On the extent of respondents agreement on the following aspects of enterprise risk management: 1.1 Appointment of a local risk manager 38.33% or 23 out of 60 respondents strongly agree for having a local risk manager within their company, 15% agree that they have a local risk manager, while 5% are uncertain. Whereas 33.33% disagree that they have a local risk manager and 8.33% strongly disagree. Weighted mean is 3.417, which falls within the Agree scale description. 1.2 Risk management inclusion in decision making 46.67% or 28 out of 60 respondents strongly agree for including risk management in decision making, while 53.33% or 32 respondents do agree. Weighted mean is 4.467 which can be interpreted as Strongly Agree.
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1.3 Sufficient guidance and support from the BOD to launch an effective ERM practice 38.44% or 23 out of 60 respondents strongly agree for having guidance and support from their board of directors, while 43.33% do agree and 18.33% more are uncertain. Weighted mean is 4.20, which has a verbal interpretation of Agree. 1.4 Adherence to a common risk terminology and set of standards for managing risks 40% or 24 out of 60 respondents strongly agree for having the said variable, 50% agree and 10% are uncertain. Weighted mean is 4.30, which falls within the scale description of Agree. 1.5 Communication of company objectives, risk appetite and risk tolerances 58.33% of all respondents strongly agree for having the said variable, while 41.67% agree. None said uncertain or disagree. Weighted mean is 4.583, which falls within the Strongly Agree scale description. 1.6 Understanding of ones level of risk management accountability 25% or 15 out of 60 respondents strongly agree for having this variable, while 70% or 42 out of 60 respondents expressed agreement, and 5% were uncertain. Weighted mean is 4.20, which falls within the scale range of Agree. 1.7 Usage of Key Risk Indicators (KRIs) as a tool to help measure and monitor companys risks 45% of the respondents strongly agree that they use Key Risk Indicators, 25% agree, another 25% are uncertain and 5% disagree using this tool. Weighted mean is 4.10 which can be interpreted as Agree. 1.8 Risk management integration within strategic planning process 41.67% or 25 out of 60 respondents strongly agree in integrating risk management within their
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strategic planning process, while 55% agree. 1 respondent is uncertain and another 1 disagree having this ERM practice or variable. Weighted mean is 4.367 which can be interpreted as Strongly Agree. 1.9 Usage of technology to enable risk management process 40% or 24 out of 60 respondents have a strong agreement in using technology to enable risk management process, while 30% agree and 23.33% are uncertain. Only 5% disagree for using this variable and 1.67% or 1 respondent strongly denies using technology for their risk management process. Weighted mean is 4.017 which has a verbal interpretation of Agree. 1.10 Risk management integration across all functions and business units 38.33% of the 60 respondents strongly agree having this variable, while 56.67% also agree only 3.33% are uncertain. 1 respondent disagree having this variable in his company. Weighted mean is 4.317, which has a verbal interpretation of Strongly Agree. 1.11 Basis of developing risk responses/mitigation strategies 38.33% of respondents strongly agree in developing risk responses or mitigation strategies based on a more holistic view taking into account multiple scenarios and potential events, while 50% also agree. 10% are uncertain and 1.67% or 1 respondent disagrees. Weighted mean equals 4.25 which has a verbal interpretation of Strongly Agree. 1.12 Effectiveness of respondent firms in managing the basic elements of risk process (risk identification, risk analysis and quantification, risk treatment/mitigation, risk reporting and monitoring) 41.67% of the respondents are very effective in managing the basic elements of the risk process, while 40% are somewhat
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effective. 18.33% are neutral. None said they are somewhat ineffective with regard to this variable. Weighted mean is 4.233, which falls within the Very Effective descriptive category. 1.13 Effectiveness of respondent firms in identifying, assessing and managing major types of risk 35% of the respondents are very effective in managing major types of risk, while 50% are somewhat effective. 13.33% are neutral and 1.67% or 1 respondent is somewhat ineffective. Weighted mean is 4.183, which falls within Somewhat Ineffective scale range. 1.14 Current stage of respondent firms ERM program 33.33% or 20 out of 60 respondents are in the complete stage of ERM, while 21.67% are in partial stage, 28.33% are still planning to implement ERM. 15% have no decision yet or are still investigating ERM and 1.67% or 1 respondent MNC does not plan to implement ERM. Weighted mean is 3.70, which falls within ERM in partial stage scale description. 1.15 Strength of respondent firms physical risk management program 18.33% of the respondents have excellent physical risk management program within their firms, while 70% have good risk management program, and 8.33% are satisfactory. Only 3.33% or 2 respondents have poor risk management programs. Weighted mean is 4.033 and can be interpreted as Good. Of the companies that are implementing ERM, 36.36% or 12 out of 33 respondents have started ERM more than 8 years ago, while 15.15% started more than 6 years but less than 8 years ago, 12.12% more than 4 years but less than 6 years, and 33.33%
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more than 2 years but less than 4 years. Only 1 respondent has started ERM in the last 2 years. The overall grand mean of the ERM practices of all sample firms is equal to 4.16, which falls within the upper scale range Agree, Somewhat Effective, ERM in partial stage and Good. On the length of ERM of top MNCs, the grand weighted mean is 1.92, which has a verbal interpretation of more than 2 but less than 4 years. 2. On the financial performance of top MNCs-respondents in terms of Return on Total Assets, Net Profit Margin and Return on Equity from 2004 to 2009. 2.1 Return on Total Assets The aggregate weighted mean of top MNCs Return on Total Assets from the four industries in 2004 is 6.81%. They had ROTA of 9.94% in 2005, 7.50% in 2006, 8.26% in 2007, 7.35% in 2008 and 5.21% in 2009. The pharmaceutical industry had the highest ROTA average at 9.76% over the period, while the insurance industry had the lowest average at 3.02%. The cumulative average of the four industries over the period is 7.51%. Meanwhile, 60% of the respondents increased in ROTA from 2004 to 2009, while 40% of them decreased. 2.2 Net Profit Margin Respondent MNCs have an average weighted mean on NPM of 12.96% in 2004, 19.67% in 2005, 18.63% in 2006, 17.36 in 2007, 15.05% in 2008 and 15.18% in 2009. The financial industry garnered the highest NPM average at 36.64% while the insurance industry got the lowest with 6.03% over the period. Total average of net profit margin over the period is 16.47%. Moreover, 60% of the respondents improved in NPM from 2004 to 2009 while 36.67% decreased and only 3.33% remain unchanged.
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2.3 Return on Equity The aggregate weighted mean of 60 sample MNCs Return on Equity is 22.87% in 2004, 21.04% in 2005, 15.96% in 2006, 14.94% in 2007, 2.11% in 2008 and 5.20% in 2009. Total average in ROE over the period is 13.69%. Furthermore, 55% improved in ROE from 2004 to 2009 while 45% gradually declined. 3. On whether ERM practices exert a significant effect, individually and collectively, on the three indicators of financial performance of top MNCs. (Multiple regression analysis) 3.1 On Return on Total Assets and 15 ERM Practices Multiple regression analysis with the ERM practices against ROTA as the dependent variable showed no significant relationship. Using = .05, the p-value (labeled Sig. F Change or Sig. in the ANOVA table) of .253 indicates that we can accept the null hypothesis because the p-value is more than the .05 level of significance, and because the F value of 1.283 does not exceed the critical value of 1.92 with 15 and 44 degrees of freedom. The coefficient of multiple determination, R2, shows that only 30.4% of variability in ROTA can be explained by the linear effect of the set of ERM practices. The adjusted R2 is even much lower at 6.7%. The Durbin-Watson test at 2.265 indicates that there is no evidence of positive autocorrelation among the residuals in the regression with ROTA because it exceeded the upper critical value of D at 2.067 with 60 observations and 15 independent variables at 1% level of significance. This means that the least squares method used is appropriate.
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The VIF has ranged from 2.578 to 9.470. This means that the 15 ERM practices are not highly inter-correlated or collinear with each other. The same VIF values apply for the regression with NPM and ROE because they are regressed against the same set of independent variables. 3.2 On Net Profit Margin and 15 ERM practices The ERM practices collectively have a significant effect on net profit margin as evidenced by the calculated p-value of .024 which is lower than = .05 level of significance, and by the F value of 2.164 which is greater than the critical value of 1.92. The coefficient of multiple determination, R2, shows that 42.5% of variability in NPM can be explained by the linear effect of the 15 ERM practices. The adjusted R2 is 22.8%. The Durbin-Watson test at 1.841 is inconclusive because it is in between the upper critical value of D at 2.067 and the lower critical value at .893 with 60 observations and 15 independent variables at 1% level of significance. Of the 15 independent variables, only RMA and RMF can significantly affect net profit margin. RMA has a p-value of .012 which is lower than = .05, and has a t value of -2.632 which far exceeds the lower critical value of -2.015 at .05 level of significance. However, RMA has a significant negative effect on NPM; a 1 unit standard deviation increase in RMA, holding other variables constant, causes 0.566 decrease of standard deviation in NPM. Whereas, RMF has a p-value of .036 which is also lower than = .05, and has a t value of 2.157 which
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exceeds the upper critical value of 2.015. One unit standard deviation increase in RMF will cause a positive .489 increase in NPM, holding other variables constant. 3.3 On Return on Equity and the 15 ERM practices Regression against ROE shows an overall significant effect of the 15 ERM practices, as evidenced by the calculated p-value of .008 which is lower than = .05 level of significance, and by the F value of 2.572 which is much greater than the critical value of 1.92. The coefficient of multiple determination, R2, shows that 46.7% of variability in ROE can be explained by the linear effect of the 15 ERM practices. The adjusted R2 is 28.6%. The Durbin-Watson test at 2.601 indicates that there is no evidence of positive autocorrelation among the residuals in the regression with ROE because it far exceeds the upper critical value of D at 2.067 with 60 observations and 15 independent variables at 1% level of significance. As with ROTA, this means that the least squares method used is appropriate. Of the 15 independent variables, only RMSP and EMTR can significantly affect return on equity. RMSP has a p-value of .048 which is lower than = .05, and has a t value of -2.031 which exceeds the lower critical value of -2.015 at .05 level of significance. However, RMSP has a significant negative effect on ROE; a 1 unit standard deviation increase in RMSP causes 0.425 decrease of standard deviation in ROE, holding other variables constant. Whereas, EMTR has a p-value of .033 which is also lower than = .05, and has a t value of 2.203 which exceeds the upper critical value of 2.015. One unit standard deviation increase in RMF will
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cause a positive .478 standard deviation increase in ROE when other independent variables are held constant. 4. On whether there is a significant difference on financial performance between firms that explicitly implement ERM and firms that do not. (T-test for Differences in Two (2) Means Assuming Equal Variances) 4.1 On Return on Total Assets The 33 ERM companies garnered 7.23% weighted ROTA mean, while the 27 non-ERM companies got 7.87% ROTA average. The computed t-statistic registered -0.2516, which does not exceed the lower-tail critical value of -2.0017 at 58 degrees of freedom. Also, having a p-value of .802 the null hypothesis is accepted because the p-value is greater than = .05. 4.2 On Net Profit Margin ERM companies register a weighted mean average of 16.52%, while nonERM firms have 16.42% weighted mean in net profit margin from 2004 to 2009. Using the 0.05 level of significance, the null hypothesis that there is no significant difference on NPM between firms that explicitly implement ERM and firms that do not is accepted, because t = .0159 which is lower than the critical value of 2.0017, and the p-value of 0.9874 is also greater than = 0.05 (level of significance). 4.3 On Return on Equity ERM firms have a weighted mean average of 22.17% in return on equity over the period from 2004 to 2009, while non-ERM companies have a meager 3.4% weighted mean in return on equity. The null hypothesis that there is no
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significance difference on ROE between firms that explicitly implement ERM and firms that do not is rejected, because the t value is equal to 2.036, which is greater than the critical value of 2.0017, and because the p-value of .0463 is less than the stated 5% level of significance. 5. On whether firms implementing ERM improve in ROTA, NPM and ROE around the time ERM was adopted. (Index numbers and moving average) 5.1 On Return on Total Assets The 2-year moving average in return on total assets contains 5.73% in the base period, and 6.83% in the first year, 7.23% in the 2nd year, 5.82% in the 3rd year, 6.26% in the 4th year, 7.39% in the 5th year, 7.25% in the 6th year, 7.13% in the 7th year, 6.15% in the 8th year, and 4.31% in the 9th year. Meanwhile, index numbers from the base period onwards are 138 in the 1st year, 114 in the 2nd year, 89 in the 3rd year, 129 in the 4th year, 128 in the 5th year, 124 in the 6th year, 124 again in the 7th year, 90 in the 8th year and 60 in the 9th year. The cumulative average index number on ROTA of ERM companies over the 9-year period from the base period is 111, which means that only 11% is the observable increase in ROTA over the period after ERM was implemented (the base period). 5.2 On Net Profit Margin As with ROTA, a 2-year moving average was computed for net profit margin of ERM companies. The moving average contains a negative 12.03% in the base period, .93% in the first year, 16.44% in the 2nd year, 17.46% in the 3rd year, 18.35% in the 4th year, 20.93% in the 5th year, 18.85% in the 6th year, 18.79% in the 7th year, 20.01% in the 8th year, and 19.66% in the 9th year. Meanwhile, the
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index numbers after the base period are 215 in the 1st year, 258 in the 2nd year, 232 in the 3rd year, 273 in the 4th year, 275 in the 5th year, 238 in the 6th year, 274 again in the 7th year, 258 in the 8th year and 268 in the 9th year. Based on the index numbers, the cumulative aggregate increase in net profit margin of ERM companies over the 9-year period after ERM was adopted is 154.55%, a clear indication of a positive effect of ERM to companies that implement it over time. 5.3 On Return on Equity As with net profit margin, the 2-year moving average for return on equity contains a negative number in the base period, which is -42.67. Moving average ratios of ROE from the base period onwards are -15.35% in the first year, 12.76% in the 2nd year, 22.03% in the 3rd year, 34.25% in the 4th year, 33.05% in the 5th year, 26.08% in the 6th year, 25.87% in the 7th year, 27.18% in the 8th year, and 22.32% in the 9th year. Meanwhile, the index numbers after the base period are 128 in the 1st year, 132 in the 2nd year, 171 in the 3rd year, 189 in the 4th year, 166 in the 5th year, 156 in the 6th year, 165 again in the 7th year, 163 in the 8th year and 142 in the 9th year. The cumulative aggregate increase in return on equity with the index numbers over the 9-year period from ERM implementation is 57%, another reason to believe that ERM can enhance and stabilize return on equity over time.
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Conclusions
Based on the above findings, the following conclusions were formulated: 1. On the extent of ERM practices of top MNCs The extent of current ERM practices of top MNCs-respondents in the Philippines is generally appropriate, somewhat effective, or good. The current stage of their ERM is still in its partial stage, while the average length of time they have been implementing ERM is still in its developing stage having started only in the last 2 to 4 years. 2. On the financial performance of top multinational companies from 2004 to 2009 During the period from 2004 to 2009, when the top MNCs in the Philippines have begun recognizing the importance of enterprise risk management as a strategic tool, the level of financial performance of these MNCs has generally improved, having firms improving in ROTA, NPM and ROE always outnumbering those that declined in performance. 3. On whether the extent of ERM practices by the respondent MNCs exerts a significant effect on their financial performance 3.1 Return on total assets is not in any way significantly affected by the 15 ERM practices of top multinational corporations. 3.2 The combined effect of the 15 ERM practices on net profit margin is significant. Net profit margin is negatively and significantly affected by having a local risk manager around, but positively and significantly affected by risk management integration across all functions and business units.
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3.3 The collective effect of the 15 ERM practices on return on equity is significant. Return on equity is significantly and negatively affected by risk management integration within the strategic planning process, but positively influenced by the degree of effectiveness in identifying, assessing and managing major types of risks. 4. On whether MNCs implementing ERM financially outperform non-ERM MNCs 4.1 Companies implementing ERM do not financially outperform non-ERM companies in the aspect of return on total assets. 4.2 Multinational companies with enterprise risk management also have no significant advantage over non-ERM firms in the aspect of net profit margin. 4.3 Multinational companies implementing ERM significantly outperform non-ERM firms in the aspect of return on equity. 5. On whether firms implementing ERM improve in ROTA, NPM and ROE around the time ERM was adopted 5.1 Multinational companies have no significant increase in return on total assets over time after ERM was implemented. 5.2 Multinational companies experience a significant increase in net profit margin on the first year after ERM was adopted, and have very stable and absolute performance in NPM over the 9-year period. 5.3 Multinational companies also experience a significant increase in return on equity on the first year after ERM was implemented, and have fairly stable performance in ROE over time.
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Recommendations
Addressed to the board of directors and top management of covered MNCs, the following are recommended based on the conclusions: 1. Choose the best practices in enterprise risk management that are applicable to the firm and make it a benchmark of financial performance. 2. Fully adopt ERM when financial performance declines or when it is in an unstable trend, and exploit its competitive advantage once fully developed and functioning. 3. (a) Exert caution in hiring a local risk manager. Do due diligence by evaluating his profile and performing a background check, and refrain from hiring a risk manager when business unit or functional managers are able to deliver their respective duties with respect to managing risks within their respective areas of responsibility, so that net profit margin will not be negatively affected to a significant extent. (b) Fully integrate risk management across all functions and business units, and make business unit line management accept full responsibility for risk management with the support of a centralized risk-management function. The business-unit line management must see that managing risk is an integral part of their mission (for example, manufacturing a product or delivering a service), with risks being linked to business objectives and strategy. The business-unit line managers are thus responsible for identifying, managing, and reporting risk matters upstream through the management hierarchy to the board members. (c) Since RMSP negatively affects ROE, top MNCs should therefore reduce or refrain from integrating risk management within the strategic planning process from
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mission, objectives, situation analysis, strategy formulation, implementation up to control, because the process itself is already value-adding. Instead, they should only include risk management in the strategic planning process when a decision has to be made with respect to the risks that are already identified as significant and serious in any particular stage of the process, or whenever it helps to support a decision on what action must be taken given choices. (d) Standardize the degree of effectiveness in identifying, assessing and managing major types of risk through a standard procedure, process or method so that there will be a consistent effect in managing different major types of risk. 4. Strictly consider implementing ERM when the costs and expenses are not significant enough to cause a decline in net income, or if the implementing costs and expenses will never exceed the long-term benefits of having a fully functioning ERM, in order to reap the benefits of a significantly higher ROE over non-ERM firms during a period of time. ERM should be adopted since the performances on ROTA and NPM between ERM and non-ERM firms are basically the same, which are both not bad, while a significantly better performance in ROE seems to be the much awaited prize for ERM companies. 5. Implement ERM to bounce back from a negative performance and ensure stability of its performance over time through consistent and thorough implementation of all activities within the enterprise risk management program. 6. Since the enterprise-wide risk management approach ensures that the organizations assets are safeguarded, its reputation is protected, and shareholder value is enhanced, with all this accomplished through managing risks, management must link strategy,
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goals and objectives, risks, individual employee performance, and organization performance. 7. Addressed to all universities and other institutes of higher learning, they should offer a post-graduate level course in risk management, with a specialization in enterprise risk management, in order to advance knowledge and professional practice in business.
Recommendations for further study: 1. A separate research on the effects of ERM practices, classified by industry (financial, insurance, oil/gas and pharmaceutical), on the three financial performance indicators will help us understand the differences on the effects of enterprise risk management practice on financial performance between each industry. 2. A similar research study on the effects of ERM practices on the three performance measurements (Return on Investment, Residual Income and Economic Value Added) may also give significant contributions on the relation between ERM and firm value. 3. A comparative study on the risk management practices between ERM and nonERM firms would give explanations on the negligible difference on ROTA and NPM which this study found out. A valid measurement of ERM success may be expected as a result of this recommended further study.
He who has a why to live can bear almost any how. --END--
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ENDNOTES ______________________
1
According to the US Department of the Treasury, Bureau of the Public Debt (September 2011), as of September 9, 2011, the gross debt was $14.71 trillion dollars, of which $10.07 trillion was held by the public and $4.64 trillion was intra-governmental holdings. 2 The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011. 3 Enterprise risk management is synonymous with integrated risk management, holistic risk management, enterprise-wide risk management, and strategic risk management. For consistency, the ERM acronym is used throughout this study. 4 In December 2006 S&P announced its decision to upgrade the rating of Munich Reinsurance from A- to AA- that in part the upgrade reflected a robust enterprise risk management framework. 5 Exceptions are the recent studies of ERM on firm value related to CRO appointments by Beasley, Pagach and Warr (2008) and Pagach and Warr (2008 and 2010), a search of Lexis-Nexis for the existence of CRO or Risk Management Committee by Hoyt & Liebenberg (2010), and the use of S&Ps newly available risk management rating by McShane, Nair and Rustambekov (2010), but none particularly focused on the effects of the extent of enterprise risk management practices on the three financial performance indicators. 6 This is a newly published guidance from The Institute of Risk Management, September 2011; accessible at http://www.theirm.org/publications/documents/IRMRiskAppetiteFullweb.pdf. 7 Based on the outline of A Brief History of Risk Management by Henry Felix Kloman (Chapter 2, ERM Todays Leading Research and Best Practices for Tomorrows Executives). 8 AS/NSZ 4360:2004, first edition published in 1995, is the first guide on ERM that provides practical information. This publication covers the establishment and implementation of the ERM process. 9 The Committee of Sponsoring Organizations of the Treadway Commission (COSO) (September 1992 and September 2004). 10 Group of Thirty, Derivatives: Practices and Principles (Washington, DC: 1993) 11 CoCo (Criteria of Control Board of the Canadian Institute of Chartered Accountants). 12 Where Were the Directors Guidelines for Improved Corporate Governance in Canada, report of the Toronto Stock Exchange Committee on Corporate Governance in Canada (December 1994). 13 Committee on the Financial Aspects of Corporate Governance (Cadbury Committee, final report and Code of Best Practices issued December 1, 2002). 14 NYSE Corporate Governance Rules 7C (iii) (D) www.nyse.com/pdfs/finalcorpgovrules.pdf and Emerging Governance Practices in Enterprise Risk Management, the Conference Board (2007). 15 Mckinsey & Company and Institutional Investor (1996), Corporate Boards: New Strategies for Adding Value at the Top.

16
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Risk management in general has been shown to increase firm value. See Charles Smithson, Rutter Associates and Betty J. Simkins, Does Risk Management Add Value? A Survey of the Evidence, Journal of Applied Corporate Finance, Vol. 17, no. 3 (2005): 8-17. 17 As of March 31, 2011, Generali Pilipinas Life Assurance Co., Inc. is now wholly-owned (99.99% ownership) by a Philippine-based Generali Pilipinas Holding Company, Inc., in which Generali Asia N.V. owns 60% of its shares. 18 As of July 12, 2011, Petron Corp. is now a Philippine-based company, after San Miguel Corp. bought majority of its shares (68.26% in total) and acquired 100% controlling stake in SEA Refinery Corp., which holds 50.1% of ownership in Petron Corp. 19 As of fiscal year ended Dec. 31, 2010, Shell Overseas Investments B.V., a Dutch company incorporated in the Netherlands, now holds majority of stocks (67.12%) and is now the parent company of Pilipinas Shell Petroleum Corporation. 20 According to its 2010 GIS, as of fiscal year ended Dec. 31, 2010, Consolidated Industrial Gases, Inc. is now Linde Philippines, Inc., a wholly-owned subsidiary company of BOC (Phils.) Holdings, Inc. 21 Direct costs may include the costs associated with missing earnings targets and violating debt covenants, and costs incurred in events such as bankruptcy and financial distress when the firm must make outlays to creditors, lawyers and courts. 22 Indirect costs associated with negative earnings and cash flow shocks include the loss of reputation that may affect customer and vendor relationships.
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Williams, T.A., Sweeney, D.J., & Anderson, D.R. (2010). Modern Business Statistics. Philippines: Cengage Learning Asia Pte. Ltd. (Philippine Branch). Williams, T.A., Sweeney, D.J., & Anderson, D.R. (2008). Modern Business Statistics with Microsoft Excel 2E Contemporary Business Statistics. Singapore: Thomson Learning Asia. Academic Research Studies Local Abu Karsh, Sharif M. (1996). Credit risk evaluation practices of selected financial intermediaries in the Philippines. Doctoral Dissertation, PhD. in Commerce. University of Santo Tomas Graduate School, Manila. Bartolome, Imelda B. (1997). The Financial risk management of the Philippine National Oil Company. Masters Thesis, Master in Business Administration. University of Santo Tomas Graduate School, Manila. Camba, Aileen G. (2007). Corporate Governance Principles, Business Risk, Liquidity and Financial Leverage: Impact on Performance of Selected Publicly Listed Companies in the Philippines. Unpublished Doctoral Dissertation, DBA. Polytechnic University of the Philippines Graduate School, Manila. Chua, Vivian U. (1999). Fuel Risk Management for Philippine Airlines. Management Research Report, Master in Business Management. Asian Institute of Management, Makati City. Dapiton, Ethelbert P. (2007). Hedging farm level risk against extreme climate events: Philippine weather derivative market as an alternative risk transfer scheme for rice farmers. Doctoral Dissertation, Ph.D. in Commerce. University of Santo Tomas Graduate School, Manila. Estrera, Marivic T. (1999). Credit risk management practices of selected leasing companies in Metro Manila. Masters Thesis, Master of Business Administration. University of Santo Tomas Graduate School, Manila. Ferrer, Rodiel C. (2010). Financial Performance of Selected Publicly Listed Corporations in the Philippines and the Extent of their Compliance with International Financial Reporting Standards (IFRS): A Test of Ross Signaling Theory. Unpublished Doctoral Dissertation, DBA. Polytechnic University of the Philippines Graduate School, Manila. Lee, Kristine Joyce C. (2005). The Perceived effects of technological innovations on risk management practices of selected top three universal banks in the Philippines. Masters Thesis, Master of Business Administration. University of Santo Tomas Graduate School, Manila.
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Tienggo, Magdalene (2008). Credit risk management practices of selected nongovernmental organization microfinance institutions in Metro Manila in relation to loan collection performance. Masters Thesis, M.A. in Banking & Finance. University of Santo Tomas Graduate School, Manila. Salib, Saroyini Wuryan Rahayu (1997). Risk evaluation practices on client-borrowers of selected commercial banks in Jakarta Indonesia. Masters Thesis, M.A. in Commerce. University of Santo Tomas Graduate School, Manila. Salentes, Virgilio V. (2009). Corporate Governance and Financial Performance of Publicly Listed Companies in the Philippines. Unpublished Doctoral Dissertation, DBA. Polytechnic University of the Philippines Graduate School, Manila. Salonga, Rosalie C. (1991). Risk management in cargo surveying. Masters Thesis, MBA. Colegio De San Juan De Letran, Manila. Sarmiento, Catherine C. (2010). The Effectiveness of risk management practices of special purpose vehicle companies. Masters Thesis, MBA. University of Santo Tomas Graduate School, Manila. Academic Research Studies Foreign Adam, T.R. and C.S. Fernando (2006). Hedging, Speculation and Shareholder Value. Journal of Financial Economics, 81: 283-309. Allayannis, George, and Weston, James P. (2001). The Use of Foreign Currency Derivatives and Firm Value. The Review of Financial Studies, Vol. 14, No. 1: 243276. Bakker, K.C. de, Boonstra, A., and Wortmann, J.C. (2010). Does Risk Management Contribute to IT Project Success? A Meta-Analysis of Empirical Evidence. International Journal of Project Management, 28, 493-503. Beasley, M.S., Clune, R., and Hermanson, D.R. (2005a). ERM: A status report. Internal Auditor, 62 (1): 67 72. Beasley, M.S., Clune, R., and Hermanson, D.R. (2005b). Enterprise risk management: An empirical analysis of factors associated with the extent of implementation. Journal of Accounting and Public Policy, 24 (6): 521 531. Beasley, M.S., Clune, R., and Hermanson, D.R. (2006). The Impact of Enterprise Risk Management on the Internal Audit Function. Institute of Internal Auditors (IIA) Research Foundation. Beasley, Mark S., Pagach, Donald P. and Warr, Richard S. (2008). Information Conveyed in Hiring Announcements of Senior Executives Overseeing Enterprise-Wide Risk Management Processes. Journal of Accounting, Auditing and Finance, 23 (3): 311 332. Electronic copy available at http://ssrn.com/abstract=1010203.
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Blanchard, Danielle and Dionne, Georges (2003). Risk Management and Corporate Governance. Working Paper. Burnaby, P.A., and Hass, S. (2009). Ten Steps to Enterprise Risk Management. Corporate Governance, 9 (5): 539-550. Carter, David A., Pantzalis, Christos and Simkins, Betty J., (January 2001). Firmwide Risk Management of Foreign Exchange Exposure by U.S. Multinational Corporations. Electronic copy available at http://ssrn.com/abstract=255891. Carter, David A.., Rogers, Daniel A., and Simkins, Betty J. (2006). Does hedging affect firm value? Evidence from the US airline industry. Financial Management, Vol. 35, No. 1:53-86. Colquitt, L., Hoyt, R.E., and Lee, R.B. (1999). Integrated risk management and the role of the risk manager. Risk Management and Insurance Review, 2, 43-61. Cornaggia, Jess (April 2011). Does Risk Management Matter? Evidence from the U.S. Agricultural Industry. Published Dissertation. Indiana University Bloomington Kelly School of Business, USA. Available at http://ssrn.com/abstract=1314439. Cumming, C.M. and Hirtle, B.J. (2001). The Challenges of Risk Management in Diversified Financial Companies. Federal Reserve Bank of New York Economic Policy Review, March, 1-17. Desender, Kurt A. (2007). The influence of board composition on enterprise risk management implementation. Working Paper. Available at SSRN http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1025982. Desender, Kurt A. (2007). On the Determinants of Enterprise Risk Management Implementation. IGI Global, 2011. Universidad Carlos III de Madrid Accepted Papers Series. Electronic copy available at: http://ssrn.com/abstract=1025982. El-Masry, Ahmed A. (2006). Derivatives use and risk management practices by UK nonfinancial companies. Managerial Finance, Vol. 32 No. 2: 137-159. Fraser, J.R.S., Schoening-Thiessen, K., and Simkins, B.J. (2008). Who reads what most often? A survey of enterprise risk management literature read by risk executives. Journal of Applied Finance, Vol. 18 (1): 73-91. Gates, S., Nicolas, J.L., and Walker, P.L. (2009). Perceived Value of Enterprise Risk Management. University of Virginia Working Paper. Gordon, Lawrence A., Loeb, Martin P., and Tseng, Chih-Yang (2009). Enterprise risk management and firm performance: A contingency perspective, Journal of Accounting and Public Policy, 28: 301-327. Graham, John, and Rogers, Daniel (2002). Do firms hedge in response to tax incentives? Journal of Finance, 57: 815839.
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Guay, W. and S.P. Kothari (2003). How Much Do Firms Hedge with Derivatives? Journal of Financial Economics, Vol. 70, Issue 3: 423-461. Hoffman, M. (2009). Interest in enterprise risk management is growing. Business Insurance, 18:14. Hoyt, Robert E. and Liebenberg, Andre P. (2006). The Value of Enterprise Risk Management: Evidence from the US Insurance Industry. Working Paper Series. Hoyt, Robert E. and Liebenberg, Andre P. (2008). The Value of Enterprise Risk Management: Evidence from the US Insurance Industry. Society of Actuaries. Working Paper Series. Hoyt, Robert E., and Liebenberg, Andre P. (2010). The Value of Enterprise Risk Management. Journal of Risk and Insurance, Forthcoming. Electronic copy available at: http://ssrn.com/abstract=1440947. Jain, P.K., Yadav, Surendra S., Rastogi, Ashish Kumar (2009). Risk Management Practices of Corporate Firms in India: A Comparative Study of Public Sector, Private Sector Business Houses and Foreign Controlled Firms. Decision, Vol. 36, No. 2. Jin, Yanbo and Jorion, Philippe (2006). Firm value and hedging: Evidence from U.S. oil and gas producers. The Journal of Finance, Vol. 61, No. 2: 893-919. Karim, Saipol Bari Abd; Berawi, Mohammed Ali; Yahya, Imran Ariff; Abdul-Rahman, Hamzah; and Mohamed, Othman (2007). The Integration of Value and Risk Management in Infrastructure Projects: Learning from Others. Quantity Surveying International Conference. Kuala Lumpur, Malaysia. Kleffner, A.E., Lee, R.B., and McGannon, B. (2003a). Stronger Corporate Governance and its Implications on Risk Management. Ivey Business Journal 67 (5): 1. Kleffner, A.E., Lee, R.B., and McGannon, B. (2003b). The Effect of Corporate Governance on the Use of Enterprise Risk Management: Evidence from Canada. Risk Management and Insurance Review 6 (1): 53-73. Liebenberg, A., and Hoyt, R. (2003). The Determinants of Enterprise Risk Management: Evidence from the Appointment of Chief Risk Officers. Risk Management and Insurance Review 6 (1): 37-52. MacKay, Peter and Moeller, Sarah B. (June 2007). The Value of Corporate Risk Management. The Journal of Finance, Vol. 62, Issue 3: 1379-1419. McShane, M.K., Nair, A., and Rustambekov, E. (2010). Does Enterprise Risk Management Increase Firm Value? Accepted and Forthcoming: Journal of Accounting, Auditing and Finance.
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Nguyen, Hoa Thuan (2003). Determinants of Derivative Usage and Risk Management Practices by Australian corporations. Doctoral Dissertation, Doctor of Philosophy, School of Economics and Finance, Royal Melbourne Institute of Technology. Paape, Leen and Spekle, Roland F. (2010). The Adoption and Design of Enterprise Risk Management Practices: An Empirical Study. Nyenrode Business University Working Paper. Electronic copy available at: http://ssrn.com/abstract=1658200. Pagach, Donald P. and Warr, Richard S. (2008a and April 2010). The Characteristics of Firms that Hire Chief Risk Officers. North Carolina State University Working Paper. Electronic copy available at SSRN: http://ssrn.com/abstract=1010200. Pagach, Donald P. and Warr, Richard S. (2008b and April 2010). The Effects of Enterprise Risk Management on Firm Performance. North Carolina State University Working Paper. Electronic copy available at SSRN: http://ssrn.com/abstract=1155218. Rao, Ananth (July 2007). Evaluation of Enterprise Risk Management (ERM) in Dubai An Emerging Economy. Risk Management, Vol. 9. No. 3: 167-187. Tseng, Chih-Yang (2007). Internal Control, Enterprise Risk Management, and Firm Performance. Published Dissertation. University of Maryland Graduate School, Maryland USA. Walker, P.L., Barton, T.L., and Shenkir, W.G. (2002). Enterprise risk management: Pulling it all together. Altamonte Springs, FL: Institute of Internal Auditors (IIA) Research Foundation.
Research Reports and Projects A.M. Best, 2006, A.M. Best Comments on Enterprise Risk Management and Capital Models, World Wide Web: http://www.ambest.com/ratings/methodology/enterpriserisk.pdf Brancato, Carolyn Kay; Tonello, Matteo; and Hexter, Ellen The Conference Board (2006). The Role of U.S. Corporate Boards in Enterprise Risk Management. Research Report. Casualty Actuarial Society, Enterprise Risk Management Committee (May 2003). Overview of Enterprise Risk Management. CFO Research Services (2002). Strategic Risk Management: New Disciplines, New Opportunities. CFO Publishing Corp., March.
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Committee of Sponsoring Organizations of the Treadway Commission (COSO). Enterprise Risk Management Integrated Framework: Executive Summary, September 2004. Frigo, Mark L. and Anderson, Richard J. Committee of Sponsoring Organizations of the Treadway Commission (January 2011). Embracing Enterprise Risk Management: Practical Approaches for Getting Started. Hexter, Ellen; Tonello, Matteo; and Bhaumik, Sumon The Conference Board (2008). Assessing the Climate for Enterprise Risk Management in India. Research Report. Tonello, Matteo The Conference Board (2007). Emerging Governance Practices in Enterprise Risk Management. Research Report. Wang, Shaun, and Faber, Robert (August 2006). Enterprise Risk Management for Property-Casualty Insurance Companies. Jointly sponsored research project by Casualty Actuarial Society and Society of Actuaries.
Journal Articles and Working Papers Basak, S., Shapiro, A., and Tepla, L. (2005). Risk Management with Benchmarking. Working Paper Series. D'Arcy, Stephen P. (2001). Enterprise Risk Management. Forthcoming in the Journal of Risk Management of Korea, Volume 12 Number 1. University of Illinois at Urbana-Champaign. Errath, Wolfgang and Grunbichler, Andreas (2007). Enterprise Risk Management A View from the Insurance Industry. Law and Economics of Risk in Finance, p. 111 120. Available at SSRN: http://ssrn.com/abstract=1138211. Fama, Eugene F. (1980). Agency Problems and the Theory of the Firm. Journal of Political Economy, 88: 288:309. Fama, Eugene F. and Jensen, Michael C. (June 1983). Separation of Ownership and Control. Journal of Law and Economics, Vol. 26: 301-325. Hoyt, R.E., B.M. Merkley, and K. Thiessen (2001). A Composite Sketch of a Chief Risk Officer, The Conference Board of Canada, September. Jensen, Michael C. (October 2001). Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Unfolding Stakeholder Thinking, eds. J. Andriof, et al, (Greenleaf Publishing, 2002). Also published in JACF, V. 14, N. 3, 2001, European Financial Management Review, N. 7, 2001 and in Breaking the Code of Change, M. Beer and N. Norhia, eds, HBS Press, 2000. Electronic copy available at SSRN: http://ssrn.com/abstract=220671.
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Jensen, Michael C. and Meckling, William H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, Vol. 3, No. 4: 305-360. Lam, James (2000). Enterprise-wide Risk Management and The Role of the Chief Risk Officer. ERisk, p. 2-3. Lam, J. (2001). The CRO is here to stay, Risk Management, April, 16-20. Markowitz, Harry M. (March 1952). Portfolio Selection. The Journal of Finance, Volume 7 No. 1: 77-91. Meulbroek, Lisa K. (2002). Integrated Risk Management for the Firm: A Senior Managers Guide. Journal of Applied Corporate Finance, 14: 56-70. Nocco, Brian W., and Stulz, Rene M. (2006). Enterprise Risk Management: Theory and Practice. Journal of Applied Corporate Finance, Volume 18 No. 4: 8 20. Working Paper Series. Smithson, C., Associates, R., and Simkins, B.J. (2005). Does Risk Management Add Value? A Survey of the Evidence. Journal of Applied Corporate Finance, Volume 17 Number 3. Research Survey Publications Beasley, M.S., Banson, B.C. & Hancock, B.V. Committee of Sponsoring Organizations of the Treadway Commission (2010). COSOs 2010 Report on ERM: Current State of Enterprise Risk Oversight and Market Perceptions of COSOs ERM Framework. Economist Intelligence Unit (2007). Best Practice in Risk Management: A function comes of age. Sponsored by ACE, IBM and KPMG. KPMG (May 2011). Risk Management A Driver of Enterprise Value in the Emerging Environment. A Survey by KPMG Al Fozan & Al Sadhan. Professional Risk Managers International Association (May 2008). Enterprise Risk Management: A Status Check on Global Best Practices. A Survey by the PRMIA. Protiviti (February 2006). Guide to Enterprise Risk Management: Frequently Asked Questions. Treasury & Risk and Paisley (June 2008). Best Practices in Enterprise Risk Management (ERM Survey). Treasury & Risk (April 2011). 2011 Risk Management Survey. Electronic copy available at http://www.treasuryandrisk.com.
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Electronic Sources
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Philippine Securities and Exchange Commission. Financial statements of covered companies in the study for the years 2005 to 2009. Accessible at https://ireport.sec.gov.ph/iview/login.jsp (SEC i-View: SEC Documents Online). Pacific Bridge Medical, Asia Medical eNewsletter (October 2009). Philippines Reorganize Bureau of Food and Drugs (BFAD) Under Republic Act 9711. Accessible at http://www.pacificbridgemedical.com/newsletter/article.php?id=430 Summary of Internet Websites Accessed www.answers.com www.bfad.gov.ph www.bworldonline.com www.broadleaf.com.au www.bsp.gov.ph www.cica.ca www.cipe.org www.coso.org www.doe.gov.ph www.frc.org.uk www.group30.org www.hm-treasury.gov.uk www.icaew.com www.insurance.gov.ph www.investopedia.com www.iso.org www.nyse.com www.pacificbridgemedical.com www.philstar.com www.sec.gov.ph www.segobit.com www.ssrn.com www.theirm.org www.treasury.gov www.tmx.com www.wikipedia.org Magazine Sources BusinessWorld Top 1000 Corporations in the Philippines, Volume 24, 2010. SECs Philippines 10,000 Corporations, CY 2009 Edition. The BizNews Asia Largest 1000 Companies, Volume 1, No. 51. The BNA 500 Largest Corporations, Vol. 2, No. 40. The BNA 1000 Largest Corporations, Vol. 3, No. 45. The 2006 BNA 1000 Largest Corporations, Vol. 4, No. 42. The Biggest, The BNA 1000 Corporations, Vol. 5, No. 32 & 33 Double Issue.
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The BNA 1000 Largest Companies in 2007 Sales and Profits, Volume 6, No. 36. The BNA 1000, The Largest Companies: Sales, Profits and Assets, Volume 7, No. 38. The BNA 1000, The Largest Companies: Sales, Assets and Profits, Vol. 8, No. 40. Meltdown: The best inside story on the worlds worst financial crisis since the Great Depression. BizNews Asia, Vol. 8 No. 47. The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Financial Crisis Inquiry Commission, USA (January 2011).
Paper Presentation at Conference Warrier, S.R. and Chandrashekar, Preeti Infosys (2006). Enterprise Risk Management: From the boardroom to the shop floor (White Paper). Paper presented in the Asia Pacific Risk and Insurance Conference, Tokyo, Japan. Legal Documents Risk Management & Risk-related Issuances for FIs under BSP Supervision Circular 280: Guidelines on the Adoption of the Risk-based Capital Adequacy Framework Circular 360: Guidelines to Incorporate Market Risk in the Risk-based Capital Adequacy Framework Circular 414: Guidelines for managing large exposures and credit risk concentrations Circular 503: Amendment of Risk-Based Capital Adequacy Framework to Allow Qualification of Hybrid Tier 1 Instruments Circular 510: Guidelines on Supervision by Risk to provide guidance on how financial institutions should identify, measure and control risks Circular 511: Guidelines on Technology Risk Management Circular 538: Revised Risk-Based Capital Adequacy Framework Circular 544: Guidelines on Market Risk Management Circular 545: Guidelines on Liquidity Risk Management Circular Letter: Seminar on Corporate Governance and Risk Management Circular Letter: To achieve an effective risk management of FX positions
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Circular Letter: Risk Management Guidelines for Derivatives
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Circular Letter: Requirement for banks and NBFIs to take appropriate measures, as part of their overall risk management, to fully comply with the provisions specified under Sec. 8 of PD No. 957 (The Subdivision and Condominium Buyers Protective Decree) Memorandum No. M-2007-019: Guidelines on the Use of the Standardized Approach in Computing the Capital Charge for Operational Risks Risk-Related Issuances for All Insurance Companies in the Philippines Circular Letter No. 22-2010: Schedule of Fees and Charges to All Pre-Need Companies, Sales Intermediaries and Others Concerned Department Order No. 19-2006: Minimum Capitalization Requirements for New Life, Non-Life, and Reinsurance Companies, and those to be Rehabilitated, Pursuant to Section 188 in Relation to Section 184 of the Insurance Code, As Amended (for Insurance and Reinsurance Companies Intending to Do Business and to be Rehabilitated) Department Order No. 27-2006: Capitalization Requirements for Life, Non-Life, and Reinsurance Companies Doing Business in the Philippines Insurance Memorandum Circular No. 1-2006: Capitalization Requirements for Insurance Brokers and Reinsurance Brokers Insurance Memorandum Circular No. 2-2006: Increase in the Amount of Guaranty Fund of Mutual Benefit Associations Insurance Memorandum Circular No. 3-2006: Fees and Charges to All Insurance Companies, Insurance Agents, Variable Contract Agents, Insurance and Reinsurance Brokers, Actuaries, Resident Agents, Rating Organizations, Non-life company Underwriters, Adjusters, Mutual Benefit Associations and Trusts for Charitable Uses Insurance Memorandum Circular No. 6-2006: Adoption of Risk-Based Capital Framework for the Philippine Life Insurance Industry Insurance Memorandum Circular No. 7-2006: Adoption of Risk-Based Capital Framework for the Philippine Non-Life Insurance Industry Insurance Memorandum Circular No. 10-2006: Integrating Compliance Standards for Fixed Capitalization under Department Order No. 27-06 and Risk-Based Capital Framework Under Insurance Memorandum Circular Nos. 6-2006 and 7-2006, and Applicable Fines
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Insurance Memorandum Circular No. 11-2006: Adoption of Risk-Based Capital Framework for the Philippine Mutual Benefit Associations Laws and Department Circulars Regulating the Philippine Oil/Gas Industry concerning Risks Department Circular No. DC2011-03-0002: Providing for the Increase of the Minimum Inventory Requirements of All Oil Companies and Bulk Suppliers Operating in the Country Department Circular No. DC2011-03-0004: Enjoining the Strict Compliance of the Downstream Oil Industry Participants to the Reportorial Requirements of Republic Act No. 8479 and Other Related Issuances Presidential Decree No. 1865: Amending Batas Pambansa Blg. 33, entitled An Act Defining and Penalizing Certain Prohibited Acts Inimical to the Public Interests and National Security Involving Petroleum and/or Petroleum Products, Prescribing Penalties Therefor and for Other Purposes, by including Short Selling and Adulteration of Petroleum and Petroleum Products and other Acts in the Definition of Prohibited Acts, Increasing the Penalties Therein and for Other Purposes. Republic Act 6173: An Act Declaring a National Policy on the Petroleum Industry, Regulating the Activities and Relations of Persons and Entities Engaged Therein, Establishing an Oil Industry Commission To Effectuate the Same, and Defining Its Functions, Powers and Objectives, and For Other Purposes. Republic Act 9711: The Food and Drugs Administration Act of 2009 Republic Act 9052: Universally Accessible Cheaper and Quality Medicines Act of 2008 Section 2 of Batas Pambansa Blg. 33: Prohibited Acts involving Petroleum Products SEC Memorandum Circular No. 6, Series of 2009: The Revised Code of Corporate Governance Corporation Code of the Philippines (May 1, 1980) amending the Corporation law or Act No. 1549 (April 1, 1906) Batas Pambansa Blg. 68: Corporation Code of the Philippines PD 218 (June 16, 1973), prescribing incentives for the establishment of regional or area headquarters of multinational companies in the Philippines Securities Regulation Code
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Republic Act No. 7042: the Foreign Investments Act of 1991 Executive Order No. 226: the Omnibus Investments Code of 1987
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Republic Act No. 8756: Regional Headquarters for Multi-National Companies Act, amending certain provisions of EO No. 226
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Appendix A: Profile of Respondents
31-35 No. of Respondents 8
36-40 15
AGE 41-45 46-50 12 13
51-55 56 & above 9 3
Total 60
56 & above 5%
AGE
51-55 15%
31-35 13% 36-40 25% 41-45 20%
46-50 22%
No. of Respondents
GENDER Male Female 29 31
Total 60
Gender
Female 52%
Male 48%
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CURRENT POSITION CEO/President/ Managing Director No. of Respondents 6 CFO/COO/VP Treasurer/Con Risk or /Senior troller/Internal Functional Executive Auditor Manager 14 9 31 Total
60
Position
CEO/Pres./Managing Director CFO/COO/VP/Senior Executive Treasurer/Controller/Internal Auditor Risk or Functional Manager
10%
23% 52%
15%
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Years of Risk Management Experience >0 to 1 year No. of Respondents 1 >1 to 3 years 13 >3 to 5 years 10 >5 to 7 years 18 >7 years 18 Total 60
Years of Risk Management Experience

>0 to 1 year >1 to 3 years >3 to 5 years 1% >5 to 7 years >7 years
30%
22%
17% 30%
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HIGHEST EDUCATIONAL ATTAINMENT Doctorate Masters Degree 22 Passed Board/Bar Licensure Exam 22 First Professional Degree 2 College Degree 14 Total
No. of Respondents
60
Highest Educational Attainment

Doctorate Passed Bar/Board Licensure Exam College Degree 0% Master's Degree First Professional Degree
23% 37% 3%
37%
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COMPANYS RECENT ANNUAL REVENUE (2009) >P1B >P1.5B >P2B >P5B >P10B >P20B >P50B Total but < but but but but but P1.5B <P2B <P5B <P10B <P20B <P50B No. of Respondents 10 10 16 8 8 4 4 60
Company's Recent Annual Revenues (2009)
>P50B 7% >P20B but <P50B 6% >P10B but <P20B 13%
>P1B but < P1.5B 17%
>P1.5B but <P2B 17% >P5B but <P10B 13%
>P2B but <P5B 27%
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COMPANYS INDUSTRY Financial No. of Respondents 17 Insurance 12 Oil and Gas 15 Pharmaceutical 16 Total 60
Company's Industry
Pharmaceutical 27%
Financial 28%
Oil/Gas 25%
Insurance 20%
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan COMPANYS NATIONALITY American Australian Bahamian British Canadian Dutch Filipino French German HK-Chinese Italian Japanese Malaysian Singaporean Spanish Swiss Taiwanese TOTAL
Spanish 2% Singaporean 3% Malaysian 5% Japanese 7% Italian 2% HK-Chinese 3%
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No. of Respondents 15 1 1 9 5 5 2 1 5 2 1 4 3 2 1 2 1 60
Company's Nationality
Swiss Taiwanese 2% 3%
American 25% Australian 2% German 8% Bahamian 2% British 15% Dutch 8% Canadian 8%
French 2% Filipino 3%
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Appendix B
UNIVERSITY OF THE EAST GRADUATE SCHOOL LETTER OF REQUEST October 2011
Name of the Chief Executive Officer/President/Managing Director Name of Top Multinational Company Main Office Address Dear Mr. CEO, I am currently working on my dissertation as a final requirement for a Doctorate degree in Business Administration at the University of the East, Manila. As a financial management major, my research interest would focus on the topic entitled Enterprise Risk Management Practice: Impact on Financial Performance of Top Multinational Companies in the Philippines designed to determine the risk management practices of such companies and its effect, if any, on return on total assets, net profit margin and return on equity. For the above purpose, may I invite you or any of your executive officers as a representative of your company to participate in this survey by answering a set of questionnaire attached herewith. Your kind participation in this survey will enable me to come up with a meaningful assessment and analysis of the foregoing research topic, thereby adding credence to the research findings. Please be assured that your responses will be kept confidential and will be used only for academic purposes. Should you be interested to receive a copy of the results of this study, kindly inform the undersigned. Thank you very much.
Sincerely yours,
Ramon Leo L. Gavan, MBA, DBA (cand.), CTP Researcher Contact Nos.: 09213637934/(02)546-1514 Email: r_leo17@yahoo.com
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Appendix C: Survey Questionnaire

Dear Respondent, This is a survey on enterprise risk management practices of top multinational companies in the Philippines and its effect, if any, on return on total assets, net profit margin and return on equity, for which topic is being conducted by the researcher as a final requirement for the degree of Doctor of Business Administration (Major in Financial Management) at the University of the East, Manila. Since your company is multinational and included in the 2010 BusinessWorlds Top 1000 Corporations in the Philippines, may I request 5 minutes of your time to solicit responses to this survey questionnaire. There is no right or wrong answer. Your objective assessment on each item herein is of utmost importance to support this study and will be used solely for academic purposes, which can give new contributions in (enterprise) risk management that would benefit your company and all other multinational companies. Please be assured that your responses will be kept strictly confidential and will be reported in aggregate only. Thank you for your cooperation. God bless.
The Researcher
Dissertation Title: Enterprise Risk Management Practice: Impact on Financial Performance of Top Multinational Companies in the Philippines
PART I RESPONDENTS PROFILE Name: ______________________________ (optional) Please put a check mark () on the space provided. 1. Age: 25 & below _____ 26 30 _____ 31 35 _____ 36 40 _____ 2. Gender: Male _____ 41 45 _____ 46 50 _____ 51 55 _____ 56 & above _____ Female _____
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 3. Current Position: a) CEO/President/Country Manager b) CFO/COO/VP/Senior Executive c) Treasurer/Controller/Internal Auditor
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_____ _____ _____
d) Risk Manager/Functional Manager (Finance, Operations, IT etc.) _____ 4. Respondents years of experience in Risk Management: No experience > 0 to 1 year > 1 to 3 years > 3 to 5 years > 5 to 7 years > 7 years _____ _____ _____ _____ _____ _____
5. Highest educational attainment: Doctorate Degree (Ph.D., DBA, DPA) Masters Degree (MBA, MS, MA, MPA etc.) Passed Bar/Board Professional Licensure Exam _____ _____ _____
First Professional Degree (LLB, MD, Pharm.D., DMD) _____ College Degree (BS, BSA, BSC, BSBA, AB) Associate Course and below _____ _____
6. Your companys most recent annual revenues in the Philippines: >P1B but <P1.5B >P1.5B but <P2B >P2B but <P5B >P5B but <P10B >P10B but <P20B >P20B but <P50B _____ _____ _____ _____ _____ _____ >P50B _____
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan 7. Your companys industry: Financial Sector Banking Credit Card Activities Holding Company Activities Financing Company Operations Investment Company & House Operations Insurance Sector Life Insurance Non-Life Insurance Reinsurance Pre-need Plans Activities of Insurance Agents & Brokers Energy Sector Petroleum/Oil Gas (LPG, natural gas, nitrogen etc.) Pharmaceutical 8. Your companys nationality: American Canadian British Australian Japanese Italian Dutch _____ _____ _____ _____ _____ _____ _____ Taiwanese German Malaysian _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
ccxliv 231
Singaporean _____ HK-Chinese _____ Spanish Filipino _____ _____
PART II ASSESSMENT FORM Please put a check mark () on the space provided after each statement or item. 1. To what extent do you agree or disagree with each of the following statements regarding enterprise risk management practices applicable to your company?
ccxlv 232
Enterprise Risk Management Practices

a) We have a local risk manager. b) We include risk management in key business processes and decision making to optimize risk-adjusted returns. c) There is sufficient guidance and support from the board of directors (BOD) to launch an effective ERM practice. d) We have a common risk terminology and use a set of standards for managing risk. e) Company objectives, risk appetite and risk tolerances are clearly communicated and monitored across the enterprise. f) Everyone in the organization understands his/her level of accountability with respect to managing risk. g) We use Key Risk Indicators as a tool to help measure and monitor companys risks. h) Risk management is fully integrated within our strategic planning process. i) Technology is used to enable our risk management process. j) Risk management is fully integrated across all functions and business units. k) We develop risk responses or mitigation strategies based on a more holistic view taking into account multiple scenarios and potential events.
Strongly Agree Uncertain Disagree Strongly Agree 4 3 2 Disagree 5 1
2. How effective is your company in managing the following basic elements of the risk process? Risk Management Process Risk Identification Risk Analysis and Quantification Risk Response/Treatment Risk Reporting and Monitoring
Very Somewhat Neutral Somewhat Not at All Effective Effective (3) Ineffective Effective (5) (4) (2) (1)
ccxlvi 233
3. How effective is your company in identifying, assessing and managing the following major types of risk? Very Somewhat Neutral Somewhat Effective Effective (3) Ineffective (5) (4) (2) Not at All Effective (1)
Types of Risk Commodity Price Risk Compliance Risk Credit Risk Financial Risk Foreign Exchange Risk Hazard Risk Interest Rate Risk Liquidity Risk Market Risk Operational Risk Reputational Risk Strategic Risk Technology Risk
4. What is the current stage of your (ERM)? ERM in complete stage ERM in partial stage Planning to implement ERM Investigating ERM; no decision yet No plans to implement ERM
companys Enterprise Risk Management _____ (5) _____ (4) _____ (3) _____ (2) _____ (1)
5. How would you rate the overall physical risk management program in your organization? Excellent (5) Good (4) Satisfactory (3) Poor (2) Very Poor (1)
6. If your company currently implements ERM program, how long has it been in place? >8 yrs. >6 but <8yrs. >4 but <6yrs. >2 but <4yrs. >1 but <2yrs. (5) (4) (3) (2) (1)
THANK YOU VERY MUCH!
ccxlvii 234
Appendix D: Extent of ERM Practices of Top MNCs
Obser vatio R ns
EXTENT OF ERM PRACTICES OF TOP MNCs

RM DM SB O D TR M S CO RA UR M A K R Is R M SP TR MP R M F R R S EM RP EM TR SE R M SP RM Ex Pos t An aly sis 5 4 5 0 0 2 5 5 0 5 0 0 3 4 4 4 4 5 2 3 2 2 2 0 AVER AGE
M A
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
5 5 5 2 1 5 5 4 2 4 1 1 5 5 5 5 5 5 5 5 5 5 4 2
5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 4 5 5 4 5 4
5 5 5 4 4 5 5 5 4 4 3 3 5 5 5 5 5 5 5 4 4 4 4 3
5 5 5 4 3 5 5 5 4 4 3 3 4 5 5 4 5 5 5 5 5 4 4 3
5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 5 5 4 4 4 4
5 5 5 4 4 5 4 4 4 4 4 3 4 5 4 4 4 5 4 4 4 4 4 4
5 5 5 2 2 5 5 5 3 4 3 3 5 5 5 4 5 5 5 5 5 4 5 4
5 5 5 4 4 5 5 5 5 4 4 4 4 5 4 4 4 5 4 4 4 4 5 4
5 5 5 2 2 5 5 5 4 4 3 3 5 5 5 4 4 5 4 5 5 4 5 3
5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 4 5 4 5 4 4 4 3
5 5 5 4 4 5 5 5 5 5 4 4 4 5 4 4 4 5 4 5 5 4 4 3
5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 5 5 5 4 5 4 5 3
5 5 5 4 4 5 4 4 4 4 4 4 4 5 4 4 4 5 5 4 5 4 5 2
5 5 5 2 2 5 5 5 3 5 3 3 4 5 4 5 5 5 4 5 4 4 4 3
4 5 4 4 4 4 4 4 4 4 4 4 4 5 4 4 4 4 5 4 4 4 5 2
4.937 5 4.937 5 4.937 5 3.25 3.125 4.75 4.812 5 4.75 3.625 4.312 5 3.25 3.187 5 4.437 5 4.937 5 4.437 5 4.312 5 4.5 4.937 5 4.375 4.5 4.375 3.937 5 4.312 5 2.937
ccxlviii 235
5
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56
1 5 5 2 4 5 5 4 2 2 2 2 5 2 2 2 3 2 2 2 5 5 4 4 2 2 5 2 2 1 2 3
4 4 5 4 5 5 5 5 5 4 5 4 5 5 4 4 4 4 4 4 5 5 4 4 4 4 5 4 4 4 4 4
3 5 4 4 4 5 5 5 5 4 5 4 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 4 4 3 3 3
3 5 5 3 4 5 5 5 5 4 5 4 5 5 4 4 4 4 4 4 5 5 4 4 4 4 4 4 4 4 4 4
4 5 4 4 4 5 5 5 5 5 5 4 5 5 4 4 5 5 4 4 5 5 5 4 5 5 5 5 5 4 5 4
3 4 4 4 4 5 5 5 5 4 5 3 5 5 4 4 4 4 4 4 5 4 4 4 5 4 4 4 4 4 4 4
3 5 5 2 5 5 5 5 5 4 5 3 5 5 3 3 4 3 3 3 5 5 3 4 3 4 4 4 3 3 4 4
2 4 4 3 5 5 5 5 5 5 5 4 5 5 4 5 4 4 4 4 5 5 4 5 4 5 4 4 5 4 4 4
1 4 5 2 5 5 5 5 5 4 5 4 5 5 3 3 4 3 3 3 5 5 4 4 3 4 4 3 3 4 4 3
2 4 4 3 5 5 5 5 5 4 5 4 5 5 4 4 4 4 4 4 5 4 4 5 4 5 4 4 4 4 4 4
2 4 5 4 5 5 5 5 5 4 5 3 5 5 3 4 4 4 3 4 4 5 4 4 4 5 4 3 4 4 4 4
3 5 5 4 5 5 5 5 5 4 5 3 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 3 4 3 4 3
3 5 5 3 5 5 5 5 5 5 5 4 5 5 3 4 4 3 4 3 4 5 4 4 3 4 4 3 4 4 3 4
1 4 4 3 4 5 5 5 4 3 5 2 5 5 2 2 3 3 3 3 5 5 4 4 3 3 3 3 4 2 3 2
2 5 4 3 4 5 5 5 4 4 5 4 5 5 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 4 4
0 2 2 0 1 5 5 5 2 0 5 0 5 5 0 0 0 0 0 0 3 2 2 2 0 0 0 0 3 0 0 0
2.312 5 4.375 4.375 3 4.312 5 5 5 4.937 5 4.5 3.75 4.812 5 3.25 5 4.812 5 3.187 5 3.437 5 3.687 5 3.312 5 3.25 3.25 4.687 5 4.625 3.875 4 3.5 3.812 5 3.875 3.375 3.812 5 3.187 5 3.5 3.375

57 58 59 60 GRAN D MEAN 4 3 4 2 3. 41 67 4 4 4 4 4.4 66 67 4 3 4 4 4. 2 4 4 4 4 4. 3 4 4 4 4 4.5 83 33 4 4 4 4 4. 2 4 3 4 4 4. 1 4 4 4 4 4. 36 67 4 3 4 3 4.0 16 67 5 4 5 4 4. 31 67 4 4 4 3 4. 2 5 4 3 4 3 4.2 33 33 4 4 4 4 4.1 83 33 3 2 3 2 3. 7 4 3 4 3 4.0 33 33 0 0 0 0 1.9 2
ccxlix 236
3.75 3.25 3.75 3.25 4.017 7083 33
ccl 237
Appendix E: Return on Total Assets Ratios of Respondent MNCs, 20042009

09 GR Rank 50 90 188 228
TOP MULTINATIONAL COMPANY

Citibank, N.A. Hongkong and Shanghai Banking Corp. Ltd., The Standard Chartered Bank Philippine Telecommunications Investment Corp. Sithe Philippines Holdings, Inc. ING Bank N.V. Chinatrust (Philippines) Commercial Bank Corp. Deutsche Bank AG Chevron Holdings, Inc. Maybank Philippines, Inc. Lisbon Star Philippines Holdings, Inc. Ayala DBS Holdings, Inc. Toyota Financial Services Philippines Corp. HSBC Savings Bank (Philippines), Inc. Mizuho Corporate Bank Ltd. Citicorp Financial Services and Insurance Brokerage Philippines, Inc. JPMorgan Chase Bank, N.A. Manila Branch Philippine American Life and General Insurance Co., The Sun Life of Canada (Philippines), Inc. Philippine AXA Life Insurance Corp. Manufacturers Life Insurance Co. (Phils.), Inc., The Pru Life Insurance Corp. of U.K. PhilPlans First, Inc.
RETURN ON TOTAL ASSETS %

2004 1.48 1.68 0.23 65.46 2005 2.12 1.32 1.20 49.25 2006 2.40 1.76 1.44 3.05 2007 3.27 2.83 2.09 4.72 2008 1.72 2.15 (0.58) 9.15 2009 1.67 1.20 0.67 7.88 AVERAGE 2.11 1.82 0.84 23.25
275 400 482 490 508 560 619 630 742 789 899 931
18.07 2.75 1.77 1.23 6.09 0.00 (0.50) 12.32 0.69 (0.29) 1.34 86.34
26.63 4.12 1.81 2.68 7.68 0.60 45.07 14.15 0.86 0.86 2.49 85.72
18.87 5.78 1.76 2.25 7.97 0.24 19.90 13.23 1.09 0.38 3.14 32.68
18.45 1.08 0.57 0.47 10.09 (1.85) 25.86 14.30 0.85 1.37 1.48 61.31
9.03 2.90 0.26 0.65 13.76 0.51 17.92 10.01 1.55 0.96 1.27 43.57
(0.72) 5.12 1.41 1.66 0.94 0.24 8.06 12.99 1.74 0.84 0.50 23.31
15.06 3.63 1.26 1.49 7.76 (0.04) 19.39 12.83 1.13 0.69 1.70 55.49
974 38
(1.28) 3.94
0.86 3.89
1.08 2.03
1.75 0.72
1.26 4.66
(0.30) 4.64
0.56 3.31
75 121 221
3.77 0.26 4.43
4.17 0.60 5.11
2.00 2.34 3.48
1.98 2.41 50.19
2.95 0.49 55.02
2.42 2.59 2.52
2.88 1.45 20.13
240 246
2.57 (2.84)
7.03 0.43
13.09 0.00
1.51 0.64
(2.84) (7.18)
2.75 0.52
4.02 (1.40)

345 652 693 823 853 932 2 3 11 41 51 64 105 148 338 344 402 674 712 721 887 18 35 77 80 157 158 226 359 363 382 Generali Pilipinas Life Assurance Co., Inc. Danvil Plans, Inc. Sun Life Financial Plans, Inc. Manulife Financial Plans, Inc. Mapfre Insular Insurance Corp. Chartis Philippines Insurance, Inc. Petron Corp. Pilipinas Shell Petroleum Corp. Chevron Philippines, Inc. Chevron Malampaya LLC Total (Philippines) Corp. Shell Philippines Exploration B.V. Liquigaz Philippines Corp. Shell Gas Eastern, Inc. Shell Philippines LLC Unioil Petroleum Phils., Inc. Petronas Energy Philippines, Inc. BP Philippines, Inc. Air Liquide Phils., Inc. Consolidated Industrial Gases, Inc. Ingasco, Inc. Zuellig Pharma Corp. United Laboratories, Inc. Wyeth Philippines, Inc. Metro Drug, Inc. GlaxoSmithkline Philippines, Inc. Abbott Laboratories Pfizer, Inc. Roche (Philippines), Inc. Boehringer Ingelheim (Philippines), Inc. AstraZeneca Pharmaceuticals (Phils.), Inc. Novartis Healthcare Philippines, Inc. (7.17) 0.59 0.00 3.60 3.84 11.39 6.29 5.96 (6.90) 7.80 (5.54) 4.60 3.58 4.52 10.16 0.17 1.49 (13.03) 8.27 3.87 1.74 1.84 5.97 38.50 7.92 13.83 16.79 7.83 13.82 15.16 18.40 (5.00) 12.14 (0.46) 5.73 2.24 3.42 8.31 10.89 (1.67) 14.49 2.40 7.24 2.97 0.22 30.23 0.27 2.21 11.38 9.24 (0.70) 12.10 2.49 5.18 27.00 7.18 14.66 19.02 4.40 3.36 18.55 15.44 (2.76) 7.64 (1.74) (1.55) 4.61 2.11 6.96 7.30 10.35 11.22 (4.10) 8.10 1.52 0.55 32.72 2.22 0.73 11.06 9.07 4.39 6.40 2.69 5.59 23.01 6.71 5.13 16.54 (0.90) 5.97 28.33 19.19 (4.71) (4.66) (6.78) 2.18 5.55 3.24 5.98 10.61 10.46 15.01 4.30 19.29 2.94 0.00 36.93 4.82 1.08 17.13 3.84 2.15 6.59 3.95 5.38 15.47 7.03 11.93 13.76 10.52 11.09 28.20 16.95 (4.08) (8.51) 1.94 3.85 6.31 (2.02) (4.00) 4.14 (4.95) 20.99 (10.04) 34.33 0.48 0.73 60.76 (6.07) 4.03 14.10 2.92 3.33 9.48 4.07 7.83 9.41 7.43 8.32 12.06 3.27 9.74 21.09 11.04 (2.53) 9.95 (0.50) (3.70) 6.53 (5.42) 3.63 11.40 5.19 14.05 1.59 24.85 6.65 2.96 8.56 4.09 (4.74) 20.56 28.34 4.76 2.21 4.12 7.94 11.76 8.18 0.81 4.08 (20.33) 10.18 11.01
ccli 238
(4.38) 2.86 (1.26) 1.69 4.85 2.12 4.53 8.38 2.08 13.93 (1.90) 16.40 3.02 1.50 29.89 0.92 0.80 10.20 10.28 2.97 6.42 3.19 6.32 20.86 7.41 9.11 13.71 0.80 9.03 20.39
0.84 13.64
421
(18.26)
10.06
10.35
(9.83)
9.65
2.11 0.68

424 635 669 953 993 Bayer Philippines, Inc. Merck Sharp & Dohme (I.A.) Corp. Merck, Inc. Schering-Plough Corp. Eli Lilly (Philippines), Inc. TOTAL GRAND MEAN - ROTA 3.71 (2.46) 20.62 (0.79) 10.92 408.54 6.81 6.74 17.26 25.80 6.35 16.68 596.47 9.94 10.04 14.34 24.71 2.68 19.04 450.18 7.50 5.22 0.17 16.23 5.54 12.12 495.77 8.26 3.83 3.39 15.69 6.45 10.95 441.13 7.35 8.89 (1.71) 26.19 9.16 8.53 312.84 5.21
cclii239
6.41 5.17 21.54 4.90 13.04 450.82 7.51
ccliii 240
Appendix F: Net Profit Margin Ratios of Respondent MNCs, 2004-2009

09 GR Rank 50 90

Citibank, N.A. Hongkong and Shanghai Banking Corp. Ltd., The Standard Chartered Bank Philippine Telecommunications Investment Corp. Sithe Philippines Holdings, Inc. ING Bank N.V. Chinatrust (Philippines) Commercial Bank Corp. Deutsche Bank AG Chevron Holdings, Inc. Maybank Philippines, Inc. Lisbon Star Philippines Holdings, Inc. Ayala DBS Holdings, Inc. Toyota Financial Services Philippines Corp. HSBC Savings Bank (Philippines), Inc. Mizuho Corporate Bank Ltd. Citicorp Financial Services and Insurance Brokerage Philippines, Inc. JPMorgan Chase Bank, N.A. Manila Branch Philippine American Life and General Insurance Co., The Sun Life of Canada (Philippines), Inc.
NET PROFIT MARGIN %

2004 22.48 18.26 2005 25.37 15.79 2006 28.28 20.96 2007 39.85 27.62 2008 20.93 26.55 2009 23.94 15.79 AVERAGE 26.81 20.83
188 228
4.20 99.99
16.56 99.84
15.55 99.84
29.37 99.88
(6.11) 99.84
5.90 99.80
10.91 99.87
275 400 482
68.58 23.28 23.40
103.07 52.29 20.98
96.97 65.87 21.15
84.40 17.55 5.02
54.30 48.71 3.60
(88.56) 121.30 16.23
53.13 54.83 15.06
490 508 560 619
23.17 6.01 0.26 0.00
33.80 7.39 8.56 93.64
48.00 7.80 3.15 91.48
11.78 6.02 (22.99) 97.32
14.48 7.44 9.72 98.79
56.76 0.86 3.00 84.60
31.33 5.92 0.28 77.64
630 742
99.98 6.45
99.98 7.08
99.98 11.11
99.97 7.65
99.97 13.48
99.96 17.06
99.97 10.47
789 899 931
(4.68) 48.86 62.78
14.73 59.75 59.06
6.01 54.63 28.83
20.48 30.99 55.50
17.43 27.74 57.62
18.67 21.82 65.57
12.11 40.63 54.89
974
(25.51)
11.06
11.96
29.45
35.43
(13.02)
8.23
38
14.93
17.08
9.86
3.16
20.20
24.91
15.02
75
12.79
15.10
8.99
11.38
14.31
14.00
12.76

121 221 Philippine AXA Life Insurance Corp. Manufacturers Life Insurance Co. (Phils.), Inc., The Pru Life Insurance Corp. of U.K. PhilPlans First, Inc. Generali Pilipinas Life Assurance Co., Inc. Danvil Plans, Inc. Sun Life Financial Plans, Inc. Manulife Financial Plans, Inc. Mapfre Insular Insurance Corp. Chartis Philippines Insurance, Inc. Petron Corp. Pilipinas Shell Petroleum Corp. Chevron Philippines, Inc. Chevron Malampaya LLC Total (Philippines) Corp. Shell Philippines Exploration B.V. Liquigaz Philippines Corp. Shell Gas Eastern, Inc. Shell Philippines LLC Unioil Petroleum Phils., Inc. Petronas Energy Philippines, Inc. BP Philippines, Inc. Air Liquide Phils., Inc. Consolidated Industrial Gases, Inc. Ingasco, Inc. Zuellig Pharma Corp. United Laboratories, Inc. Wyeth Philippines, Inc. 0.91 15.13 1.56 18.66 4.89 15.59 4.38 90.06 1.99 94.78 18.94 11.36
ccliv 241
5.45 40.93
240 246 345 652 693 823 853 932 2 3 11 41 51 64 105 148 338 344 402 674 712 721 887 18 35 77
4.81 (7.58) (32.84) 1.53 0.00 10.61 9.58 19.00 2.64 2.25 (2.61) 26.65 (2.37) 52.11 1.06 1.24 28.83 0.00 2.38 (0.08) 21.67 5.46 2.92 0.65 8.22 21.63
14.09 1.42 (19.93) 29.93 (6.85) 20.68 7.02 30.55 3.01 3.87 (0.52) 39.74 0.64 44.96 1.02 0.00 54.59 0.00 3.28 4.38 24.27 (1.16) 14.02 0.97 7.10 14.50
26.69 0.11 (11.32) 21.97 (21.39) (6.41) 11.62 19.94 2.81 2.63 3.53 32.04 (1.00) 44.83 0.62 0.10 58.18 0.91 1.11 3.90 24.15 8.47 11.00 0.94 7.59 15.42
3.43 3.26 (17.98) (24.06) (16.05) 8.41 9.05 18.60 2.91 3.86 3.58 32.61 1.27 45.96 1.02 0.00 51.07 1.88 1.45 8.45 7.33 20.79 9.84 1.33 6.60 13.04
(8.71) (42.41) (15.44) (109.57) 5.98 15.42 13.92 (4.68) (1.63) 1.06 (1.47) 35.42 (2.00) 56.29 0.13 0.27 61.05 (2.00) 3.79 6.63 5.18 6.88 15.74 1.36 9.32 8.69
9.56 3.62 (6.53) 39.57 (2.34) (19.09) 14.77 (12.54) 2.27 4.65 2.20 28.04 0.46 43.48 2.24 1.33 43.98 1.18 (3.91) 8.76 62.07 8.70 4.97 1.36 9.78 12.09
8.31 (6.93) (17.34) (6.77) (6.77) 4.94 10.99 11.81 2.00 3.05 0.79 32.42 (0.50) 47.94 1.02 0.49 49.62 0.33 1.35 5.34 24.11 8.19 9.75 1.10 8.10 14.23

80 157 158 226 359 363 Metro Drug, Inc. GlaxoSmithkline Philippines, Inc. Abbott Laboratories Pfizer, Inc. Roche (Philippines), Inc. Boehringer Ingelheim (Philippines), Inc. AstraZeneca Pharmaceuticals (Phils.), Inc. Novartis Healthcare Philippines, Inc. Bayer Philippines, Inc. Merck Sharp & Dohme (I.A.) Corp. Merck, Inc. Schering-Plough Corp. Eli Lilly (Philippines), Inc. TOTAL 2.73 12.54 10.92 5.49 9.94 7.57 2.30 12.95 11.32 3.52 2.26 9.81 2.27 5.16 11.33 (1.15) 3.92 14.10 2.45 11.59 9.45 10.05 7.28 16.70 2.45 9.27 7.53 3.36 6.42 11.97 2.43 0.75 2.53 (22.61) 7.37 6.31
cclv242
2.44 8.71 8.85 (0.22) 6.20 11.08
382
10.21
9.18
14.14
12.07
7.91
0.68
9.03
421 424 635 669 953 993
(12.33) 5.60 (1.16) 12.94 (0.56) 14.79 777.71 12.96
5.51 6.56 10.39 13.95 4.43 15.02 1,180.13 19.67
5.13 10.67 7.93 14.94 2.67 17.32 1,117.77 18.63
(5.69) 4.96 0.00 10.54 3.68 12.01 1,041.58 17.36
5.47 3.14 2.17 8.89 4.94 9.06 903.00 15.05
1.33 6.60 (0.96) 12.48 6.62 7.71 910.80 15.18
(0.10) 6.26 3.06 12.29 3.63 12.65 988.50 16.47
GRAND MEAN - NPM
cclvi 243
Appendix G: Return on Equity Ratios of Respondent MNCs, 2004-2009

09 GR Rank 50 90

Citibank, N.A. Hongkong and Shanghai Banking Corp. Ltd., The Standard Chartered Bank Philippine Telecommunications Investment Corp. Sithe Philippines Holdings, Inc. ING Bank N.V. Chinatrust (Philippines) Commercial Bank Corp. Deutsche Bank AG Chevron Holdings, Inc. Maybank Philippines, Inc. Lisbon Star Philippines Holdings, Inc. Ayala DBS Holdings, Inc. Toyota Financial Services Philippines Corp. HSBC Savings Bank (Philippines), Inc. Mizuho Corporate Bank Ltd. Citicorp Financial Services and Insurance Brokerage Philippines, Inc. JPMorgan Chase Bank, N.A. Manila Branch Philippine American Life and General Insurance Co., The Sun Life of Canada (Philippines), Inc.
RETURN ON EQUITY %
2004 9.52 25.05 2005 29.41 17.70 2006 33.21 41.28 2007 41.20 49.85 2008 23.00 34.97 2009 19.26 18.64 AVERAGE 25.93 31.25
188 228
1.41 65.47
5.27 49.36
10.99 3.05
15.04 4.72
(4.69) 9.15
13.65 7.88
6.95 23.27
275 400 482
18.07 9.99 8.61
26.63 27.26 9.57
18.93 23.70 10.06
18.46 4.62 2.29
9.03 12.52 1.42
(0.72) 16.95 6.35
15.07 15.84 6.38
490 508 560 619
11.16 156.61 0.00 (2.63)
16.19 69.04 3.43 70.09
19.12 56.04 1.74 23.71
5.27 14.58 (17.76) 25.86
7.01 20.14 5.71 24.66
12.36 1.40 1.85 10.72
11.85 52.97 (0.84) 25.40
630 742
12.32 3.42
14.15 5.44
13.23 11.73
14.30 10.58
10.01 11.94
12.99 14.05
12.83 9.53
789 899 931
(4.58) 2.36 98.23
14.23 12.74 97.73
7.82 18.53 38.81
20.82 37.86 71.08
15.48 24.18 47.92
11.76 1.74 62.00
10.92 16.24 69.30
974
(1.86)
12.95
12.91
13.06
10.19
(3.69)
7.26
38
16.93
13.97
6.21
2.53
22.72
17.43
13.30
75
25.95
19.84
9.20
10.38
21.68
12.46
16.59

121 221 Philippine AXA Life Insurance Corp. Manufacturers Life Insurance Co. (Phils.), Inc., The Pru Life Insurance Corp. of U.K. PhilPlans First, Inc. Generali Pilipinas Life Assurance Co., Inc. Danvil Plans, Inc. Sun Life Financial Plans, Inc. Manulife Financial Plans, Inc. Mapfre Insular Insurance Corp. Chartis Philippines Insurance, Inc. Petron Corp. Pilipinas Shell Petroleum Corp. Chevron Philippines, Inc. Chevron Malampaya LLC Total (Philippines) Corp. Shell Philippines Exploration B.V. Liquigaz Philippines Corp. Shell Gas Eastern, Inc. Shell Philippines LLC Unioil Petroleum Phils., Inc. Petronas Energy Philippines, Inc. BP Philippines, Inc. Air Liquide Phils., Inc. Consolidated Industrial Gases, Inc. Ingasco, Inc. Zuellig Pharma Corp. United Laboratories, Inc. Wyeth Philippines, Inc. Metro Drug, Inc. 5.20 27.90 8.30 23.46 25.74 12.18 33.41 51.15 8.72 55.96 33.68 14.30
cclvii 244
19.18 30.83
240 246 345 652 693 823 853 932 2 3 11 41 51 64 105 148 338 344 402 674 712 721 887 18 35 77 80
15.73 (9.08) (133.27) 10.55 0.10 45.57 8.25 32.28 18.39 16.97 362.17 41.28 (24.84) 51.82 6.34 9.06 72.93 1.27 3.38 28.45 10.98 14.33 3.00 25.36 7.23 60.75 43.92
39.18 3.79 (156.84) 92.62 (8.99) 29.96 4.60 5.31 22.01 29.32 47.14 (104.99) 8.13 77.31 6.01 0.54 204.04 2.05 5.74 23.51 12.12 (3.38) 19.64 36.79 6.38 40.80 38.07
53.30 0.00 (45.58) 43.17 (30.42) (6.55) 10.54 3.51 19.34 22.87 23.16 (42.52) (16.44) 57.19 3.56 1.12 112.69 17.24 2.35 18.79 11.59 20.21 9.22 33.95 8.40 32.39 39.72
8.06 3.13 (85.24) (39.60) (148.32) 11.68 11.35 5.33 16.98 30.05 19.37 (39.28) 15.54 100.78 7.61 0.13 102.28 23.50 4.30 48.33 4.98 6.09 9.20 62.16 7.86 22.13 44.46
(17.51) (247.41) 62.41 (177.68) 99.95 58.28 13.39 (6.19) (14.19) 14.57 (11.04) (56.36) (37.29) 156.79 1.13 4.87 142.76 (612.97) 14.76 29.96 3.50 9.63 16.16 64.38 10.60 14.75 46.82
18.26 6.54 (568.08) 64.94 (45.52) (48.23) 13.92 (23.40) 11.51 40.86 10.41 (36.42) 5.53 153.38 15.98 14.64 18.31 67.23 (21.46) 39.72 34.02 14.84 4.12 60.35 11.08 17.02 47.37
19.50 (40.50) (154.43) (1.00) (22.20) 15.12 10.34 2.81 12.34 25.77 75.20 (39.72) (8.23) 99.55 6.77 5.06 108.84 (83.61) 1.51 31.46 12.87 10.29 10.22 47.17 8.59 31.31 43.39

157 158 226 359 363 382 GlaxoSmithkline Philippines, Inc. Abbott Laboratories Pfizer, Inc. Roche (Philippines), Inc. Boehringer Ingelheim (Philippines), Inc. AstraZeneca Pharmaceuticals (Phils.), Inc. Novartis Healthcare Philippines, Inc. Bayer Philippines, Inc. Merck Sharp & Dohme (I.A.) Corp. Merck, Inc. Schering-Plough Corp. Eli Lilly (Philippines), Inc. TOTAL GRAND MEAN - ROE 17.60 22.54 15.57 20.92 38.39 24.23 17.24 24.85 9.15 5.27 45.66 21.14 6.49 22.79 (1.77) 9.48 55.56 27.23 14.49 18.23 17.21 16.81 59.78 22.18 10.60 16.95 5.89 13.85 54.44 13.23 1.04 5.82 (52.69) 15.90 38.82 1.05
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11.24 18.53 (1.11) 13.71 48.78 18.18
421 424 635 669 953 993
(37.45) 4.28 0.98 41.67 (1.48) 12.87 1,372.17 22.87
17.68 9.86 9.28 42.13 13.14 19.15 1,262.17 21.04
15.27 15.82 (64.62) 41.15 6.05 22.90 957.34 15.96
(16.26) 16.38 (0.87) 40.16 12.12 13.87 896.26 14.94
13.99 10.12 (30.95) 36.94 12.92 12.91 126.68 2.11
3.39 17.36 (13.55) 55.14 18.10 9.88 312.24 5.20
(0.56) 12.30 (16.62) 42.87 10.14 15.26 821.14 13.69
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Appendix H: Data set construction of joint observations between ERM practices and ROTA
Obser vatio ns
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 AVER AGE ROTA 2.11 1.82 0.84 23.25 15.06 3.63 1.26 1.49 7.76 -0.04 19.39 12.83 1.13 0.69 1.70 55.49 0.56 3.31 2.88 1.45 20.13 4.02 -1.40 -4.38 2.86 -1.26 1.69 4.85 2.12 4.53 8.38 2.08 13.93 -1.90 16.40 3.02 1.50
Data Set Construction of Joint Observations between ERM Practices and ROTA
RM A 5 5 5 2 1 5 5 4 2 4 1 1 5 5 5 5 5 5 5 5 5 5 4 2 1 5 5 2 4 5 5 4 2 2 2 2 5 RM DM 5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 4 5 5 4 5 4 4 4 5 4 5 5 5 5 5 4 5 4 5 SB O D 5 5 5 4 4 5 5 5 4 4 3 3 5 5 5 5 5 5 5 4 4 4 4 3 3 5 4 4 4 5 5 5 5 4 5 4 5 TR M S 5 5 5 4 3 5 5 5 4 4 3 3 4 5 5 4 5 5 5 5 5 4 4 3 3 5 5 3 4 5 5 5 5 4 5 4 5 CO RA 5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 5 5 4 4 4 4 4 5 4 4 4 5 5 5 5 5 5 4 5 UR M A 5 5 5 4 4 5 4 4 4 4 4 3 4 5 4 4 4 5 4 4 4 4 4 4 3 4 4 4 4 5 5 5 5 4 5 3 5 K R Is 5 5 5 2 2 5 5 5 3 4 3 3 5 5 5 4 5 5 5 5 5 4 5 4 3 5 5 2 5 5 5 5 5 4 5 3 5 RM SP 5 5 5 4 4 5 5 5 5 4 4 4 4 5 4 4 4 5 4 4 4 4 5 4 2 4 4 3 5 5 5 5 5 5 5 4 5 TR MP 5 5 5 2 2 5 5 5 4 4 3 3 5 5 5 4 4 5 4 5 5 4 5 3 1 4 5 2 5 5 5 5 5 4 5 4 5 R M F 5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 4 5 4 5 4 4 4 3 2 4 4 3 5 5 5 5 5 4 5 4 5 R R S 5 5 5 4 4 5 5 5 5 5 4 4 4 5 4 4 4 5 4 5 5 4 4 3 2 4 5 4 5 5 5 5 5 4 5 3 5 EM RP 5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 5 5 5 4 5 4 5 3 3 5 5 4 5 5 5 5 5 4 5 3 5 EM TR 5 5 5 4 4 5 4 4 4 4 4 4 4 5 4 4 4 5 5 4 5 4 5 2 3 5 5 3 5 5 5 5 5 5 5 4 5 SE R M 5 5 5 2 2 5 5 5 3 5 3 3 4 5 4 5 5 5 4 5 4 4 4 3 1 4 4 3 4 5 5 5 4 3 5 2 5 SPR M 4 5 4 4 4 4 4 4 4 4 4 4 4 5 4 4 4 4 5 4 4 4 5 2 2 5 4 3 4 5 5 5 4 4 5 4 5

38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 GRAN D MEAN 29.89 0.92 0.80 10.20 10.28 2.97 6.42 3.19 6.32 20.86 7.41 9.11 13.71 0.80 9.03 20.39 13.64 0.68 6.41 5.17 21.54 4.90 13.04 7.513 6965 58 2 2 2 3 2 2 2 5 5 4 4 2 2 5 2 2 1 2 3 4 3 4 2 3.4 166 67 5 4 4 4 4 4 4 5 5 4 4 4 4 5 4 4 4 4 4 4 4 4 4 4.4 666 67 5 4 4 4 3 3 3 5 5 4 4 4 4 4 4 4 3 3 3 4 3 4 4 4. 2 5 4 4 4 4 4 4 5 5 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4. 3 5 4 4 5 5 4 4 5 5 5 4 5 5 5 5 5 4 5 4 4 4 4 4 4.5 833 3 5 4 4 4 4 4 4 5 4 4 4 5 4 4 4 4 4 4 4 4 4 4 4 4. 2 5 3 3 4 3 3 3 5 5 3 4 3 4 4 4 3 3 4 4 4 3 4 4 4. 1 5 4 5 4 4 4 4 5 5 4 5 4 5 4 4 5 4 4 4 4 4 4 4 4.3 666 67 5 3 3 4 3 3 3 5 5 4 4 3 4 4 3 3 4 4 3 4 3 4 3 4.0 166 7 5 4 4 4 4 4 4 5 4 4 5 4 5 4 4 4 4 4 4 5 4 5 4 4.3 16 7 5 3 4 4 4 3 4 4 5 4 4 4 5 4 3 4 4 4 4 4 4 4 3 4. 2 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 3 4 3 4 3 4 3 4 3 4.2 333 33 5 3 4 4 3 4 3 4 5 4 4 3 4 4 3 4 4 3 4 4 4 4 4 4.1 833 33
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5 2 2 3 3 3 3 5 5 4 4 3 3 3 3 4 2 3 2 3 2 3 2 3. 7 5 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 4 4 4 3 4 3 4.0 333 33
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Appendix I: Data set construction of joint observations between ERM practices and NPM
Obser vatio ns
AVER AGE NPM
Data Set Construction of Joint Observations between ERM Practices and NPM
RM A 5 5 5 2 1 5 5 4 2 4 1 1 5 5 5 5 5 5 5 5 5 5 4 2 1 5 5 2 4 5 5 4 2 2 2 2 RM DM 5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 4 5 5 4 5 4 4 4 5 4 5 5 5 5 5 4 5 4 SB O D 5 5 5 4 4 5 5 5 4 4 3 3 5 5 5 5 5 5 5 4 4 4 4 3 3 5 4 4 4 5 5 5 5 4 5 4 TR M S 5 5 5 4 3 5 5 5 4 4 3 3 4 5 5 4 5 5 5 5 5 4 4 3 3 5 5 3 4 5 5 5 5 4 5 4 COR A 5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 5 5 4 4 4 4 4 5 4 4 4 5 5 5 5 5 5 4 UR M A 5 5 5 4 4 5 4 4 4 4 4 3 4 5 4 4 4 5 4 4 4 4 4 4 3 4 4 4 4 5 5 5 5 4 5 3 K R Is 5 5 5 2 2 5 5 5 3 4 3 3 5 5 5 4 5 5 5 5 5 4 5 4 3 5 5 2 5 5 5 5 5 4 5 3 RM SP 5 5 5 4 4 5 5 5 5 4 4 4 4 5 4 4 4 5 4 4 4 4 5 4 2 4 4 3 5 5 5 5 5 5 5 4 TR MP 5 5 5 2 2 5 5 5 4 4 3 3 5 5 5 4 4 5 4 5 5 4 5 3 1 4 5 2 5 5 5 5 5 4 5 4 RM F 5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 4 5 4 5 4 4 4 3 2 4 4 3 5 5 5 5 5 4 5 4 R R S 5 5 5 4 4 5 5 5 5 5 4 4 4 5 4 4 4 5 4 5 5 4 4 3 2 4 5 4 5 5 5 5 5 4 5 3 EM RP 5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 5 5 5 4 5 4 5 3 3 5 5 4 5 5 5 5 5 4 5 3 EM TR 5 5 5 4 4 5 4 4 4 4 4 4 4 5 4 4 4 5 5 4 5 4 5 2 3 5 5 3 5 5 5 5 5 5 5 4 SE R M 5 5 5 2 2 5 5 5 3 5 3 3 4 5 4 5 5 5 4 5 4 4 4 3 1 4 4 3 4 5 5 5 4 3 5 2 SPR M 4 5 4 4 4 4 4 4 4 4 4 4 4 5 4 4 4 4 5 4 4 4 5 2 2 5 4 3 4 5 5 5 4 4 5 4
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
26.81 20.83 10.91 99.87 53.13 54.83 15.06 31.33 5.92 0.28 77.64 99.97 10.47 12.11 40.63 54.89 8.23 15.02 12.76 5.45 40.93 8.31 -6.93 -17.34 -6.77 -6.77 4.94 10.99 11.81 2.00 3.05 0.79 32.42 -0.50 47.94 1.02

37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 GRAN D MEAN 0.49 49.62 0.33 1.35 5.34 24.11 8.19 9.75 1.10 8.10 14.23 2.44 8.71 8.85 -0.22 6.20 11.08 9.03 -0.10 6.26 3.06 12.29 3.63 12.65 16.47 4989 82 5 2 2 2 3 2 2 2 5 5 4 4 2 2 5 2 2 1 2 3 4 3 4 2 3.4 166 67 5 5 4 4 4 4 4 4 5 5 4 4 4 4 5 4 4 4 4 4 4 4 4 4 4.4 666 7 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 4 4 3 3 3 4 3 4 4 4. 2 5 5 4 4 4 4 4 4 5 5 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4. 3 5 5 4 4 5 5 4 4 5 5 5 4 5 5 5 5 5 4 5 4 4 4 4 4 4.5 833 33 5 5 4 4 4 4 4 4 5 4 4 4 5 4 4 4 4 4 4 4 4 4 4 4 4. 2 5 5 3 3 4 3 3 3 5 5 3 4 3 4 4 4 3 3 4 4 4 3 4 4 4. 1 5 5 4 5 4 4 4 4 5 5 4 5 4 5 4 4 5 4 4 4 4 4 4 4 4.3 666 7 5 5 3 3 4 3 3 3 5 5 4 4 3 4 4 3 3 4 4 3 4 3 4 3 4.0 166 67 5 5 4 4 4 4 4 4 5 4 4 5 4 5 4 4 4 4 4 4 5 4 5 4 4.3 166 67 5 5 3 4 4 4 3 4 4 5 4 4 4 5 4 3 4 4 4 4 4 4 4 3 4. 2 5 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 3 4 3 4 3 4 3 4 3 4.2 333 33 5 5 3 4 4 3 4 3 4 5 4 4 3 4 4 3 4 4 3 4 4 4 4 4 4.1 833 33
cclxii 249
5 5 2 2 3 3 3 3 5 5 4 4 3 3 3 3 4 2 3 2 3 2 3 2 3. 7 5 5 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 4 4 4 3 4 3 4.0 333 33
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Appendix J: Data set construction of joint observations between ERM practices and ROE
Obser vatio ns
AVER AGE ROE
Data Set Construction of Joint Observations between ERM Practices and ROE
RM A 5 5 5 2 1 5 5 4 2 4 1 1 5 5 5 5 5 5 5 5 5 5 4 2 1 5 5 2 4 5 5 4 2 2 2 2 RM DM 5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 4 5 5 4 5 4 4 4 5 4 5 5 5 5 5 4 5 4 SB O D 5 5 5 4 4 5 5 5 4 4 3 3 5 5 5 5 5 5 5 4 4 4 4 3 3 5 4 4 4 5 5 5 5 4 5 4 TR M S 5 5 5 4 3 5 5 5 4 4 3 3 4 5 5 4 5 5 5 5 5 4 4 3 3 5 5 3 4 5 5 5 5 4 5 4 CO RA 5 5 5 4 4 5 5 5 4 5 4 4 5 5 5 5 5 5 5 5 4 4 4 4 4 5 4 4 4 5 5 5 5 5 5 4 UR M A 5 5 5 4 4 5 4 4 4 4 4 3 4 5 4 4 4 5 4 4 4 4 4 4 3 4 4 4 4 5 5 5 5 4 5 3 K R Is 5 5 5 2 2 5 5 5 3 4 3 3 5 5 5 4 5 5 5 5 5 4 5 4 3 5 5 2 5 5 5 5 5 4 5 3 RM SP 5 5 5 4 4 5 5 5 5 4 4 4 4 5 4 4 4 5 4 4 4 4 5 4 2 4 4 3 5 5 5 5 5 5 5 4 TR MP 5 5 5 2 2 5 5 5 4 4 3 3 5 5 5 4 4 5 4 5 5 4 5 3 1 4 5 2 5 5 5 5 5 4 5 4 RM F 5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 4 5 4 5 4 4 4 3 2 4 4 3 5 5 5 5 5 4 5 4 R R S 5 5 5 4 4 5 5 5 5 5 4 4 4 5 4 4 4 5 4 5 5 4 4 3 2 4 5 4 5 5 5 5 5 4 5 3 EM RP 5 5 5 4 4 5 5 5 4 4 4 4 5 5 4 4 5 5 5 4 5 4 5 3 3 5 5 4 5 5 5 5 5 4 5 3 EM TR 5 5 5 4 4 5 4 4 4 4 4 4 4 5 4 4 4 5 5 4 5 4 5 2 3 5 5 3 5 5 5 5 5 5 5 4 SE R M 5 5 5 2 2 5 5 5 3 5 3 3 4 5 4 5 5 5 4 5 4 4 4 3 1 4 4 3 4 5 5 5 4 3 5 2 SPR M 4 5 4 4 4 4 4 4 4 4 4 4 4 5 4 4 4 4 5 4 4 4 5 2 2 5 4 3 4 5 5 5 4 4 5 4
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
25.93 31.25 6.95 23.27 15.07 15.84 6.38 11.85 52.97 -0.84 25.40 12.83 9.53 10.92 16.24 69.30 7.26 13.30 16.59 19.18 30.83 19.50 -40.50 -154.43 -1.00 -22.20 15.12 10.34 2.81 12.34 25.77 75.20 -39.72 -8.23 99.55 6.77

37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 GRAN D MEAN 5.06 108.8 4 -83.61 1.51 31.46 12.87 10.29 10.22 47.17 8.59 31.31 43.39 11.24 18.53 -1.11 13.71 48.78 18.18 -0.56 12.30 -16.62 42.87 10.14 15.26 13.68 5727 33 5 2 2 2 3 2 2 2 5 5 4 4 2 2 5 2 2 1 2 3 4 3 4 2 3.4 16 67 5 5 4 4 4 4 4 4 5 5 4 4 4 4 5 4 4 4 4 4 4 4 4 4 4.4 666 67 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 4 4 3 3 3 4 3 4 4 4. 2 5 5 4 4 4 4 4 4 5 5 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4. 3 5 5 4 4 5 5 4 4 5 5 5 4 5 5 5 5 5 4 5 4 4 4 4 4 4.5 83 33 5 5 4 4 4 4 4 4 5 4 4 4 5 4 4 4 4 4 4 4 4 4 4 4 4. 2 5 5 3 3 4 3 3 3 5 5 3 4 3 4 4 4 3 3 4 4 4 3 4 4 4. 1 5 5 4 5 4 4 4 4 5 5 4 5 4 5 4 4 5 4 4 4 4 4 4 4 4.3 66 67 5 5 3 3 4 3 3 3 5 5 4 4 3 4 4 3 3 4 4 3 4 3 4 3 4.0 166 67 5 5 4 4 4 4 4 4 5 4 4 5 4 5 4 4 4 4 4 4 5 4 5 4 4.3 166 67 5 5 3 4 4 4 3 4 4 5 4 4 4 5 4 3 4 4 4 4 4 4 4 3 4. 2 5 5 5 4 4 4 3 3 3 5 5 4 4 4 4 4 3 4 3 4 3 4 3 4 3 4.2 333 33 5 5 3 4 4 3 4 3 4 5 4 4 3 4 4 3 4 4 3 4 4 4 4 4 4.1 833 33
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5 5 2 2 3 3 3 3 5 5 4 4 3 3 3 3 4 2 3 2 3 2 3 2 3. 7 5 5 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 4 4 4 3 4 3 4.0 333 33
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DR. RAMON LEO L. GAVAN, MBA, DBA, CTP

2400E Agata St., San Andres Bukid, Manila, Philippines 1017 Contact Nos.: (632)562-9778 * (632)546-1514 * 0921-3637934 Email: rlgproperties@gmail.com, r_leo17@yahoo.com Website: http://rlgproperties.sulit.com.ph Professional Summary: Doctor of Business Administration U.S. Certified Treasury Professional (CTP) Master in Business Administration (With Thesis) BS in Commerce (4-year full scholar) Licensed Real Estate Broker (PRC Lic. No. 574) Licensed Life & Non-Life Insurance Agent Informatics Certified Internet Professional Career Service Professional & Sub-professional Main Author: Implementing Rules and Regulations of R.A. No. 9646 Educational Background: University of the East, Manila Doctor of Business Administration (Nov. 2008 Nov. 2011) Area of Concentration: Financial Management Written Comprehensive Examination: 91% (November 12, 2010) Dissertation Title: Enterprise Risk Management Practice: Impact on Financial Performance of Top Multinational Companies in the Philippines (November 26, 2011) [Grade: Highly Satisfactory] Extra-curricular Activities: Served as judge in the Business Plan Proposal and Case Study Analysis Competition during the 2-day Inter-Campus Skills Olympics 2010 with the theme Conquering the Challenges towards Academic Excellence at Asian College of Science and Technology. International Academy of Management & Economics, Makati City Master in Business Administration (With Thesis) (Oct. 2003 Feb. 2005) Masters Thesis: Professionalization and Transfer of Real Estate Brokers, Appraisers & Consultants Licensure Exams from DTI-BTRCP to PRC: An Assessment (September 2008) [archived in the National Library of the Philippines] Note: This thesis strongly supported the erstwhile RESA (Real Estate Service Act) Bill, became a useful reference and was vindicated when that Bill became a law. San Beda College, Manila BS in Commerce, Major in Computer Applications & Information Science (19992003) Go Kim Pah Scholar for 4 years (full scholarship from Equitable PCI Bank)
UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan Deans Lister Intramurals Chess Champion for 4 years
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Professional Licenses/Certifications: Certified Treasury Professional (CTP) Association for Financial Professionals Licensed Real Estate Broker [PRC Lic. No. 574] Professional Regulation Commission Informatics Certified Internet Professional Informatics Computer Institute Licensed Life & Non-Life Insurance Agent Insurance Commission Civil Service Professional & Sub-Professional Civil Service Commission Professional Affiliations: Member Association for Financial Professionals, USA Member Global Association of Risk Professionals, USA Member Real Estate Brokers Association of the Philippines Member Philippine Council of Management Present Occupation: Full-time Independent Real Estate Broker (February 2006 present) Originally drafted the Implementing Rules and Regulations of the Real Estate Service Act of the Philippines (R.A. No. 9646) c/o REBAP National. Personally sold over Php200M worth of properties since 2006. Officially accredited with major real estate developers & builders. Successfully maintains a handful of direct listings of prime properties for sale including income-generating commercial buildings, and rare to find residential house & lots in posh subdivisions such as Forbes Park & Dasmarias Village. Personal Background: Civil Status: Married (with 2 children) Birth Date: October 27, 1982 Present Age: 29 Religion: Roman Catholic Father: Atty. Cenesio C. Gavan

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UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L.

UNIVERSITY OF THE EAST GRADUATE SCHOOL

RAMON LEO L. GAVAN November 26, 2011

University of the East

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

APPROVAL SHEET University of the East

(Sgd.) REYNALDO D. BANZON, DBA

(Sgd.) VIRGILIO V. SALENTES, DBA

(Sgd.) ROBERTO F. VILLARROEL, DBA

(Sgd.) MICHELLE H. CONCEPCION, DBA

(Sgd.) MELITO A. BACCAY, D.Eng.

(Sgd.) ROBERTO P. GABIOLA, Ph.D.

(Sgd.) AVELINA A. DE LA REA, Ph.D.

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

University of the East

(Sgd.) RAMON LEO L. GAVAN, CTP

Candidate November 26, 2011

(Sgd.) REYNALDO D. BANZON, DBA

Adviser November 26, 2011

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

RAMON LEO L. GAVAN

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

Researcher Degree School Date of Completion Adviser

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

105 107 108 117 119 121

132 143 150 166 174

189 200 202 205

221 228 229 234

237 240 243 246 248 250 252

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

CHAPTER 1 RESEARCH PROBLEM

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

CHAPTER 2 THEORETICAL FRAMEWORK

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan

UNIVERSITY OF THE EAST GRADUATE SCHOOL - R.L. Gavan