Abstract
Enterprise risk management (ERM) has arguably become the dominant strategic management focus of organizations primarily due to a combination of factors—stakeholders' aversion to uncertainty, volatility of the current marketplace, and compliance mandates such as the Sarbanes–Oxley Act. The purpose of this study is to develop and test a theory of the impact of ERM on two aspects of organizational performance, strategic flexibility and supply chain performance. The study is designed to examine conflicting views on the effect of increased levels of governance on organizations' flexibility and supply chain performance, and determine whether ERM capability influences the observed differential effects. Building on theories related to the electronic integration perspective of firm agility and the role of knowledge integration on the activation of the link between strategic flexibility and performance, we develop a theory of ERM as an enabler of IT integration, flexibility, and performance. A cross-sectional field study of six companies illustrates the interrelationships and provides preliminary support for the theory. Subsequent testing using data from 155 Chief Audit Executives provides strong support for the theory. The results show that a broad-based, strategic approach to ERM enhances flexibility and strengthens the relationship between flexibility and performance. The results also provide evidence that enhanced IT integration is the mechanism through which ERM strengthens both flexibility and in turn performance.
