Micro-foundations of enterprise risk management (ERM) effectiveness: the roles of ERM-specific transformational leadership, organizational culture, and group potency

To date, scholars have largely drawn on macro finance and accounting models to understand the determinants of effective implementation of enterprise risk management (ERM) in organizations. However, this body of work has largely neglected the role of individuals and teams responsible for implementing ERM systems and the organizational context in which they are nested. Adopting a multidisciplinary approach, the present research tests a multilevel conceptual model that links the leadership of the Chief Risk Officer (CRO), the culture of the risk management unit, and the emergent properties of the risk management team to ERM effectiveness. Based on survey responses from 449 risk managers and executives, we test our hypotheses on both subjective and objective measures of ERM effectiveness. The results indicate that the CRO’s ERM-specific transformational leadership, the consistency of the risk management culture, and the collective performance beliefs (i.e. group potency) of the risk management team have positive direct effects on ERM effectiveness. Mediation analyses show that consistency culture and group potency significantly positively and sequentially mediate the relationship between CRO transformational leadership and ERM effectiveness. Thus, institutions with transformational CROs are more likely to have effective ERM programs because they promote consistent risk management cultures and nurture strong collective performance beliefs in their risk management teams. These insights contribute to the theoretical understanding of ERM and offer practical insight for enhancing its application.