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A HOLISTIC PERSPECTIVE OF ENTERPRISE

RISK MANAGEMENT

XIN LIU

A dissertation submitted in partial fulfillment of

the requirements for the degree of

DOCTOR OF PHILOSOPHY

WASHINGTON STATE UNIVERSITY

College of Business

AUGUST 2011

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In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed,

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To the Faculty of Washington State University:

The members of the Committee appointed to examine the dissertation of XIN

LIU find it satisfactory and recommend that it be accepted.

___________________________________

Bernard Wong-On-Wing, Ph.D., Chair

___________________________________

Steven Thornburg, Ph.D.

___________________________________

John M. Thornton, Ph.D.

___________________________________

Lan Guo, Ph.D.

iii

ACKNOWLEDGEMENT

I would like to express my deepest gratitude to the Chair of my dissertation committee,

Dr. Bernard Wong-On-Wing, for his excellent guidance, caring, patience, and providing me with

an excellent atmosphere for doing research. I would like to thank Dr. Steven Thornburg for his

help on this project as well as my four years of study. I would like to thank Dr. Lan Guo who

patiently corrected my writing and guided me on this project. Special thanks go to Dr. John

Thornton, who was willing to serve on my dissertation committee and share his insightful

comments and suggestions.

I would also like to thank Dr. John Sweeney, who was always willing to help and give his

best suggestions. Many thanks to Michael Yu, Debra Sanders, Siew Chan, Jill Zuber, Richard

Toolson, Robert Greenberg, Susan Gill, Nori Pearson, Lorie Mochel, Nancy Bean for their

tremendous support during my four years of study at Washington State University.

I wish to thank my family for being with me throughout this process. Special thanks are

given to my dearest parents, Zhongming Liu and Jun Chen for their patience, encouragement,

and unconditional love.

Lastly, I would like to thank all my friends in Pullman, for the wonderful time we had

together in the four memorable years of my life.

A HOLISTIC PERSPECTIVE OF ENTERPRISE

RISK MANAGEMENT

Abstract

by Xin Liu, Ph.D.

Washington State University

August 2011

Chair: Bernard Wong-On-Wing

The current research investigates the impact of an organization’s internal environment on

the effectiveness of its Enterprise Risk Management (ERM) program. The investigation focuses

specifically on the effects of an organization’s risk management philosophy as well as its risk

appetite and tolerance on employees’ perceived responsibility for risk management and one form

of proactive behavior (i.e., problem prevention behaviors). Drawing on Construal Level Theory

(CLT, Trope and Liberman 2007), this research provides a unique understanding of how the

organization’s risk management philosophy can enhance the effectiveness of ERM by promoting

a holistic view of risk management. In particular, the current research predicts that a holistic

view can be activated by emphasizing the desirability of ERM in risk management philosophy. A

holistic perspective of risk management will increase employees’ willingness to take more

responsibilities for risk management and more proactive behaviors in risk management. The

current paper further predicts that the influence of risk management philosophy depends on the

presence and expression of Key Risk Indicators (KRIs) in the description of risk appetite and

tolerance.

The above predictions are tested using two experimental studies. Study 1 examines the

joint effect of emphasizing desirability (versus feasibility) in an organization's risk management

philosophy, and presenting KRIs in its risk appetite and tolerance, on employees' proactive

behaviors in risk management. Study 2 examines the joint effect of emphasizing desirability

(versus feasibility) in an organization's risk management philosophy, and using qualitative

(versus quantitative) expressions of KRIs in its risk appetite and tolerance, on employees'

perceived responsibility for risk management and their problem prevention behaviors in risk

management. The results from the two studies in general support the hypothesized propositions.

Implications for both ERM and CLT literatures are discussed.

TABLE OF CONTENTS

Page

ACKNOWLEDGEMENT ................................................................................................. iii

ABSTRACT .................................................................................................................... iv-v

LIST OF TABLES ............................................................................................................. xi

LIST OF FIGURES .......................................................................................................... xii

CHAPTER

1. INTRODUCTION ...................................................................................................1

1.1 Motivation ..........................................................................................................1

1.2 Research Question .............................................................................................4

1.3 Research Method ...............................................................................................5

1.4 Major Findings ...................................................................................................7

1.5 Significance........................................................................................................7

1.6 Overview ..........................................................................................................10

2. LITERATURE REVIEW ......................................................................................11

2.1 Enterprise Risk Management ...........................................................................11

2.1.1 Enterprise Risk ..................................................................................11

2.1.2 ERM Framework ..............................................................................12

2.1.3 Difference between ERM and Traditional Risk Management ..........13

2.1.4 A Holistic Perspective of ERM.........................................................14

2.2 Antecedents of an Effective ERM Program .....................................................16

2.2.1 ERM Components .............................................................................16

vii

2.2.2 Organizational Contextual Factors ...................................................17

2.3 Benefits of an Effective ERM Program ...........................................................18

2.3.1 Risk Ownership .................................................................................19

2.3.2 Perceived Responsibility for Risk Management ...............................20

2.3.3 Proactive Work Behaviors ................................................................22

3. THEORY AND HYPOTHESES DEVELOPMENT.............................................24

3.1 Construal Level Theory ...................................................................................24

3.1.1 Overview ...........................................................................................24

3.1.2 Psychological Distance .....................................................................25

3.1.2.1 Temporal Distance .............................................................26

3.1.2.2 Spatial Distance .................................................................27

3.1.2.3 Social Distance...................................................................27

3.1.3 Priming ..............................................................................................28

3.1.3.1 “Why” to Do versus “How” to Do .....................................28

3.1.3.2 Desirability versus Feasibility............................................29

3.1.4 Consequence of High-Level Construals ...........................................30

3.2 Characteristics of Internal Environment in ERM ............................................32

3.2.1 Risk Management Philosophy ..........................................................32

3.2.2 Risk Appetite and Risk Tolerance ....................................................35

3.2.2.1 Presence of KRIs................................................................37

3.2.2.2 Expression of KRIs ............................................................40

3.2.3 Risk Location ....................................................................................42

viii

3.3 Hypotheses .......................................................................................................43

3.3.1 Study 1 ..............................................................................................43

3.3.2 Study 2 ..............................................................................................45

3.3.3 Mediation Effect ...............................................................................46

3.4 Summary ..........................................................................................................46

4. METHODOLOGY ................................................................................................47

4.1 Study 1 .............................................................................................................47

4.1.1 Design ...............................................................................................47

4.1.2 Experiment Participants ....................................................................47

4.1.3 Experimental Materials .....................................................................48

4.1.4 Independent Variables ......................................................................49

4.1.4.1 Emphasis of Risk Management Philosophy ............................49

4.1.4.2 Presence of KRIs......................................................................49

4.1.4.3 Risk Location ...........................................................................50

4.1.5 Dependent Measures .........................................................................50

4.1.6 Mediator ............................................................................................50

4.1.7 Control Variables ..............................................................................51

4.1.8 Manipulation Check Questions .........................................................51

4.1.9 Pilot Test ...........................................................................................52

4.2 Study 2 .............................................................................................................53

4.2.1 Design ...............................................................................................53

4.2.2 Experiment Participants ....................................................................54

4.2.3 Experimental Materials .....................................................................54

4.2.4 Independent Variables ......................................................................56

4.2.4.1 Emphasis of Risk Management Philosophy ............................56

4.2.4.2 Expressions of KRIs ................................................................56

4.2.4.3 Risk Location ...........................................................................56

4.2.5 Dependent Measures .........................................................................57

4.2.5.1 Perceived Responsibility for Risk Management ......................57

4.1.5.2 Problem Prevention Behaviors ................................................57

4.2.6 Mediator ............................................................................................58

4.2.7 Control Variables and Manipulation Check .....................................58

5. RESULTS ..............................................................................................................59

5.1 Study 1 .............................................................................................................59

5.1.1 Responses to Manipulation Check Questions ...................................59

5.1.2 Hypotheses Testing ...........................................................................60

5.1.2.1 H1 .............................................................................................60

5.1.2.2 H2 .............................................................................................60

5.1.2.3 H3 .............................................................................................62

5.1.3 Mediation Analyses ..........................................................................62

5.2 Study 2 .............................................................................................................64

5.2.1 Factor Analysis .................................................................................64

5.2.2 Responses to Manipulation Check Questions ...................................64

5.2.3 Hypotheses Testing ...........................................................................65

5.2.3.1 H4 .............................................................................................66

5.2.3.2 H5 .............................................................................................68

5.2.4 Mediation Analyses ..........................................................................68

5.3 Summary ..........................................................................................................69

6. DISCUSSION AND CONCLUSION ...................................................................71

6.1 Summary of Results .........................................................................................71

6.1.1 Results of Hypotheses Testing ..........................................................71

6.1.2 Mediating Effects ..............................................................................72

6.2 Conclusions ......................................................................................................73

6.3 Contributions....................................................................................................73

6.4 Limitations .......................................................................................................75

6.5 Future Research ...............................................................................................76

BIBLIOGRAPHY ..............................................................................................................77

APPENDIX

A. EXPERIMENT MATERIALS ..............................................................................99

LIST OF TABLES

1. Differences between ERM and Traditional Risk Management .............................89

2. Study 1 Factor Loadings and Reliability for Proactivity .......................................89

3. Study 1 2 × 2 × 2 ANOVA for Within-Subjects and Between-Subjects Effects ...90

4. Study 1 Cell Mean (Standard Deviation) of Proactivity ........................................90

5. Study 1 Simple Contrasts between Groups ............................................................91

6. Study 1 Factor Analysis for Mediator ....................................................................92

7. Study 2 Factor Analysis for Perceived Responsibility & Proactive Behaviors .....92

8. Study 2 2 × 2 × 2 ANOVA for Within-Subjects and Between-Subjects Effects ...93

9. Study 2 Cell Mean (Standard Deviation) of Perceived Responsibility & Proactive Behaviors ...............................................................................................................94

10. Study 2 Simple Contrasts between Groups ............................................................95

xii

LIST OF FIGURES

1. Figure 1; Connection between Study 1 and Study 2 ..............................................96

2. Figure 2; Study 1 Estimated Marginal Means of Proactivity ................................97

3. Figure 3; Study 2 Estimated Marginal Means of Perceived Responsibility & Proactivity ..............................................................................................................98

CHAPTER ONE

INTRODUCTION

1.1 Motivation

The current financial crisis is viewed as a failure of risk management (Coates Iv 2008;

Minow 2008; Power 2009; Zingales 2009). Flaws in risk management are believed to be a major

contributor to the successive bankruptcy of major financial institutions such as AIG, Citigroup,

Fannie Mae, Freddie Mac, IndyMac, Lehman, and Washington Mutual. A recent survey by

Accenture 1 regarding the risk management approach of executives revealed that 82 percent of the

executives considered the lack of enterprise-wide risk culture as the major cause of managerial

dysfunction and 85 percent of the executives said that they needed to improve their risk

management approach in reaction to the current financial crisis (“New Eye” 2009). Another

survey 2 by the Institute of Internal Auditors (IIA) indicated that more than 40 percent of internal

auditors in the financial services sector said that better risk management practices could improve

the current financial situation (“Internal Auditors” 2009).

Effective risk management is necessary for businesses to achieve their objectives. In

2004, the Committee of Sponsoring Organizations of the Treadway Commission (COSO)

developed an integrated framework to enhance organizations’ Enterprise Risk Management

(ERM). The framework provides key principles and guidance for organizations to effectively

1 Accenture is a global management consulting, technology services and outsourcing company. Two hundred and

sixty chief financial officers, chief risk officers and other executives with risk-management responsibilities at large

companies participated in this survey. 2 This survey polled more than 1,000 internal auditors in Washington D.C., United States, at the IIA’s General Audit

Management Conference.

deal with risks. The goal of a successful ERM is to increase stakeholders’ value by more

effectively managing risks on an enterprise-wide basis.

To date, the ERM framework has been widely adopted by many organizations. Firms

with stronger risk management have been found to acquire more global competitive advantages

(e.g., Frenz 1997) and better business practices (e.g., PricewaterhouseCoopers [PWC] 2008). For

example, a Conference Board report 3 sponsored by Mercer Oliver Wyman which studied US and

European attitudes towards ERM found that companies that have already implemented ERM

reported a “significantly” higher level of value added than those without ERM programs. The

biggest pluses were better-informed decisions (86% with ERM versus 58% without ERM),

greater management consensus (83% with ERM versus 36% without ERM) and increased

accountability (79% with ERM versus 34% without ERM). Additional benefits reported were

better understanding of operational and strategic risks, better strategic planning, and a greater

ability to understand the risk and reward in decision making.

Meanwhile, several obstacles have been observed in practice. For example, a recent

survey by PWC suggests that not all ERM elements are entirely clear to all respondents (as cited

in O'Rourke 2004). For example, no more than two-thirds of the respondents understood the

scope of risk management. Respondents from another survey of Canadian Risk and Insurance

Management Society (RIMS) members described how difficult it was to talk about risk across

departments and noted a general lack of coordination between areas (as cited in Kleffner et al.

2003a). These results suggest that many companies embrace the ERM concept, but struggle with

3 http://www.metricstream.com/solution_briefs/GRC_Based_ERM.htm.

its implementation (Oversight Systems 2006). Although problems are evident, there are

relatively few studies (Beasley et al. 2005; Beasley et al. 2006; Gordon et al. 2009; Kaplan et al.

2009; McWhorter et al. 2006) regarding the conditions necessary for a successful ERM program.

For example, Gordon et al. (2009) found that an effective ERM program depends on the

appropriate match between the ERM program and organizational factors such as the level of

monitoring by the board of directors. Other studies posit that an effective ERM program should

be aligned with performance measurement and incentive systems (e.g., Beasley et al. 2006;

Kaplan et al. 2009).

An important aspect of COSO's ERM framework is its emphasis on the need to adopt a

holistic approach to risk management. In comparison to traditional risk management, which

typically considers each risk independently, COSO's ERM adopts an enterprise-wide approach to

risk management, which requires everyone to take a holistic view of risks. A holistic view of

ERM may lead to employees’ increased risk responsibility, which is their accountability for

managing risk (Fraser and Simkins 2010). This should thus result in a greater tendency to engage

in behaviors such as proactively helping risk co-owners 4 , suggesting risk responses, voicing

one’s opinion, whistle-blowing, and avoiding risky practices, all of which are important for an

ERM program to succeed. The failure to adopt a holistic view can lead employees to ignore

significant risks that they may observe outside their own functional area or business unit. As

suggested by prior research (Cendrowski and Mair 2009; Fraser and Simkins 2010; Hampton

2009; Lam 2003; Olson and Wu 2008), ERM is unlikely to succeed unless people at different

4 A risk owner is a single individual who is responsible for an identified risk (Hampton 2009). Risk Co-owners are

the individuals who share the responsibility of the risk.

levels of an organization adopt a holistic view of risk management. In light of the foregoing, the

purpose of the current research is to investigate how a company’s internal environment (e.g.,

emphasis of risk management philosophy) can promote a holistic view of ERM, and thereby

increase employees’ perceived responsibility for risk management as well as their proactive

behaviors in risk management. The second purpose of the current research is to examine how the

impact of risk management philosophy will be moderated by the characteristics of other ERM

components (i.e., risk appetite and tolerance) or organizational contextual factors (i.e., risk

location).

1.2 Research Question

The present study focuses on the effects of an organization’s internal environment since it

is the basis for all other components of the ERM framework (COSO, 2004, 1: 27). The internal

environment is the starting point for an effective risk management program (Dickhart 2008;

Warrier and Chandrashekhar 2006). Internal environment factors include an entity’s risk

management philosophy, its risk appetite and tolerance, its human resource standards, its board

of directors, etc. (COSO, 2004, vol.1). These factors set the foundation for how risk and control

are viewed and addressed by the entity, and therefore are a vital part of ERM. Based on

Construal Level Theory (CLT, Liberman et al. 2007b; Liberman et al. 2007c; Trope et al. 2007;

Trope and Liberman 2010), the present research posits that specific features of an organization’s

risk management philosophy (i.e. emphasizing the desirability of ERM) can promote a holistic

view of risk among its employees. This successively, will lead the employees to take more

responsibility for managing risks and more proactive behaviors, even when those risks are

seemingly out of their work cycle.

According to CLT, people think more holistically when their minds are construed on a

high (versus low) level (Förster and Higgins 2005). Research evidence in particular suggests that

high-level construals can be activated when individuals focus on the desirability (versus the

feasibility) of an activity or event (Liberman et al. 2007b; Trope et al. 2007). Based on CLT, the

current research posits that when an organization's internal environment components

(specifically its risk management philosophy) reflect the foregoing characteristics, they will

promote higher-level construals among employees, leading them to think more holistically.

Consequently, increased responsibility for risk management and proactive behaviors in risk

management should result. The current paper further proposes that the above-noted effect of risk

management philosophy will depend on the presence or expression of other internal environment

components (i.e., risk appetite and tolerance) and organization’s contextual factors (i.e., whether

the risk occurs within one’s job cycle).

1.3 Research Method

Two experimental studies are designed to test the foregoing propositions. Study 1 first

examines the effect of emphasizing desirability (versus feasibility) in an organization's risk

management philosophy on employees' proactive behaviors in risk management. It is predicted

that when Key Risk Indicators (KRIs) are absent in the description of risk appetite and tolerance,

employees will become more proactive in risk management when an organization’s risk

management philosophy emphasizes the desirability of ERM rather than the feasibility of ERM.

Study 1 further investigates whether the above-noted effect of risk management philosophy

depends on the presence of KRIs in the description of risk appetite and tolerance.

Specifically, this paper proposes that participants will become the most proactive in risk

management when the risk management philosophy emphasizes the desirability (versus

feasibility) of ERM as well as when KRIs are absent (versus present) in the description of risk

appetite and tolerance. In this first study, each participant will respond to two cases each

reflecting a different risk location (i.e., within versus out of one’s job cycle). The current paper

posits that participants’ proactive behaviors will be more enhanced by the emphasis of risk

management philosophy and presence of KRIs when the focal risk issue occurs out of their job

cycle than it occurs within their job cycle.

Study 2 examines the joint effect of emphasizing desirability (versus feasibility) in an

organization's risk management philosophy, and using qualitative (versus quantitative)

expressions to communicate KRIs, on employees' perceived responsibility for risk management

and their proactive behaviors in risk management. It is predicted that employees will perceive the

most responsibility for risk management and become the most proactive when the risk

management philosophy emphasizes the desirability (versus feasibility) of ERM, and when the

KRIs are qualitative (versus quantitative). Each participant will respond to four cases each

reflecting a different risk location (i.e., within versus out of one’s job cycle). Likewise, the

current paper posits that relative to the within-cycle risk, participants’ perceived responsibility

and proactive behaviors will be more enhanced by the emphasis of risk management philosophy

and expression of KRIs when the focal risk issue occurs out of their job cycle.

1.4 Major Findings

The results from the two studies in general suggest the following:

(1) Participants are willing to take more proactive behaviors in risk management when an

organization’s risk management philosophy emphasizes the desirability (versus feasibility)

of ERM and when KRIs are absent (versus present) in the description of risk appetite and

tolerance;

(2) Participants are more likely to perceive responsibilities for risk management and take

proactive behaviors when an organization’s risk management philosophy emphasizes the

desirability (versus feasibility) of ERM and KRIs are communicated in qualitative

(versus quantitative) terms;

(3) Participants’ proactive behaviors in risk management and perceived responsibility for risk

management are significantly influenced by the emphasis of risk management philosophy

and the presence or expression of KRIs, regardless of risk location.

1.5 Significance

This research has implications for both practice and research. From a practical

perspective, the current research may provide insights into how ERM can be implemented to be

more effective. Specifically, the results may suggest how features of internal environment factors

(i.e., risk management philosophy) can promote a holistic perspective of ERM and influence

employees' perceived responsibility for risk management and their proactive behaviors in risk

management. This research question is particularly important to practitioners for two reasons.

First, practitioners have consistently shown that enhancing risk responsibility is crucial for an

effective ERM. For example, according to a survey by KPMG (Risk Management Association

[RMA] 2006), 76% of the enterprises quoted “improved awareness of risk and collaboration” as

one of the major benefits of ERM. Most risk management failure appears to result from

employees’ inability to recognize their responsibility for risk management (Pickett 2005). The

current paper may shed light on approaches to increasing employees’ risk management

responsibility. Second, the internal environment components (e.g., risk management philosophy,

risk appetite, and risk tolerance) are perceived as the important foundation for an effective ERM

program (COSO 2004, vol. 1). However, a recent ERM survey (The Institute of Internal Auditors

Research Foundation [IIARF], 2008) found that a number of companies complained that their

ERM philosophy did not address the key value of their strategic goals. Another ERM survey

(Towers Perrin 2008) found that more than half of the respondents admitted to not having a

documented risk appetite statement in place. Defining risk appetite and tolerances was cited as

the leading short-term ERM priority for 61 percent of the companies surveyed. The current

research can provide insights on the design of the internal environment components under an

ERM framework.

Even facing the severe financial market crisis, almost two thirds of companies in a recent

survey 5 by Ernst & Young do not plan to commit more resources to risk management over the

next 12 to 24 months (“Crisis News” 2009). The survey by PWC indicated that less than two-

thirds of respondents could say they understand ERM terminology, processes, and tools and

technology (as cited in O'Rourke 2004). Even less understood their roles and responsibilities,

5 The survey report is available at www.ey.com.

missions and objectives, and strategies. A holistic managerial approach is needed to clarify

employees’ responsibility for risk management. However, there are few literatures regarding this

issue. This finding suggests that further research is needed to investigate what techniques can be

used to clarify employees’ role in risk management and how employees’ behaviors will be

changed through these techniques. The current study may provide insights to this question.

From a research perspective, the current study responds to the recent call for more studies

on ERM (Berry et al. 2009; Fraser et al. 2008; Nocco and Stulz 2006). This research contributes

to the literature on ERM by examining features of internal environment factors (i.e., risk

management philosophy) that promote a holistic approach to risk management and thus enhance

employees’ perceived responsibility for risk management and their proactive behaviors in risk

management. A review of the existing literature on ERM finds little published research that has

investigated conditions that promote a holistic approach to risk management.

This paper specifically focuses on the holistic view of ERM because an effective ERM

program goes beyond the traditional risk management and takes a holistic view of managing risk

across the entire enterprise. It has gained impetus from regulations such as Basel II, SOX and

Solvency. However, little research has ever investigated the antecedents of a holistic view in risk

management (e.g., Gordon et al. 2009). This paper fills this research gap by considering the

specific characteristics of ERM components.

This paper also has implications for CLT research. This paper provides some preliminary

evidence for employing CLT in management accounting research as it is suggested by Trope et

al. (2007). For example, Trope et al. (2007) suggest that participants’ propensities to make a

sunk-cost error was reduced when their judgments occurred in a distant as opposed to a near

location, suggesting the potential implications of the construal level (i.e., psychological distance)

to management decisions. The results from both study 1 and study 2 in general suggest that the

effect of risk management philosophy depends on the presence or expression of KRIs in an

organization’s risk appetite and tolerance. As far as this is concerned, the results of current paper

may provide supports for the proposition that it is particularly important to address the

interaction among ERM components to achieve the success of an ERM program. These findings

may contribute to CLT literature by shedding lights on the potential moderating effects of the

construal level.

1.6 Overview

The remainder of this research is organized as follows: Chapter Two reviews the ERM

framework and prior literature on the antecedents and possible benefits of an effective ERM

program. Chapter Three presents a theoretical basis (i.e., CLT) for the current research and

develops specific research hypotheses. Chapter Four outlines the design of Study 1 and Study 2.

Chapter Five reports the results, and Chapter Six discusses the conclusion, contributions,

limitations, and future studies for the current research.

CHAPTER TWO

LITERATURE REVIEW

This literature review begins by defining Enterprise Risk Management (ERM) and

discussing the difference between ERM and traditional risk management. It then discusses the

unique feature of ERM-a holistic view of risk management. This chapter further reviews the

extant research on the antecedents and benefits of an effective ERM program.

2.1 Enterprise Risk Management (ERM)

2.1.1 Enterprise Risk

Knight (1921) posits the first modern definition of risk and uncertainty. Risk is generally

defined as the probability of something undesirable happening. Risk is stemmed from

uncertainty 6 (Blackwell and Girshick 1979; Boritz 1990; Elitzur 1991; Knight 1921; Lemon

1987; Mock and Vertinsky 1985). For example, Blackwell and Girshick (1954) define risk as a

function of the combination of a loss function, stemming from uncertainty, and a decision

function. Bortiz (1990)’s definition of risk is similar to Blackwell and Girshick’s definition. Risk

is defined as “the possibility of loss as a result of the combination of uncertainty and exposure

flowing from investment decisions or commitments” (p. 14). Bortiz (1990) further states that the

uncertainty in the context of financial reporting refers to the uncertainty about: the nature and

role of financial statements, the nature of transactions reported, the limitations of the statements,

and the management’s motives and intentions. In short, risk is derived from uncertainty. Every

6 Knight (1921) argues that uncertainty cannot be translated into probability-ties while risk can.

firm faces uncertainty. Uncertainty presents both risk and opportunity, with the potential to

reduce or enhance a firm’s value.

To study ERM, it is necessary to define “enterprise risk”. There is little research

regarding the definition of “enterprise risk”. In an ERM framework, events with a negative

impact represent risks. This ERM framework shifts risk definition from traditional business risk

to enterprise risk which involves increasing values for customers, employees, shareholders, and

society (Shank and Miguel 2009). Hampton (2009) defines “enterprise risk” as the likelihood

that actual results will not match expected results. There are three components for enterprise risk.

The first component is business risk which is the possibility that an organization cannot operate

successfully. The second component is financial risk that a company will fail to meet financial

obligations. The third component of enterprise risk is hazard risk which is defined as exposures

that can cause loss without the possibility of gain. In other words, enterprise risk involves any

risk or hazard in an organization, including business, financial, and hazard risk.

2.1.2 ERM Framework

COSO (1992) first outlines an integrated ERM framework as “a process, effected by an

entity’s 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, and manage

risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of

entity objectives” (p. 4).

Every firm aims at increasing values for its stakeholders. The challenge is to identify how

many risks that the firm is ready to take while at the same time enhancing stakeholders’ value.

This integrated ERM framework is designed to deal with risks and maximize stakeholders’ value

by effectively and efficiently allocating resources in order to achieve an optimal balance between

growth and related risk. The overall goal is not simply manage risks or negative consequences,

but also to view risk positively (i.e., something to seek in order to create value) because a missed

opportunity is usually more risky than business disruption (Hampton 2009).

2.1.3 Difference between ERM and Traditional Risk Management

ERM is characterized as a holistic approach to risk management, as opposed to traditional

risk management. Traditional risk management methods manage risks from a silo-based

perspective, whereas ERM takes a holistic view of risk management (Gordon et al. 2009).

The main difference between ERM and traditional risk management is a holistic view of

enterprise risk and an integrated analysis to manage the total risk (Rodriguez and Edwards 2009).

ERM integrates risks and adopts an enterprise-wide view of risk management for the whole

organization by considering people, processes, and scopes. An enterprise-wide risk management

provides a more effective risk management with lower costs (Barton et al. 2002) because it is

coordinated across the entire enterprise. ERM offers a more holistic approach to lowering the

overall risk and hazard and, in turn, increase the value of an organization.

Recall enterprise risk includes any risk or hazard in an organization. One risk influences

other risks. Interactions among risk categories (e.g., financial risk, operational risk, strategic risk)

may influence the total risk of an organization. Managing risk within one’s own risk scope

without thinking its impact on others may increase the risk for other departments or the whole

company (Hampton 2009). ERM requires management consider various interactions among

different types of risks. Work coordination and interactions (e.g., information sharing, interaction

and involvement in the decision-making) among risk owners or co-owners are important for a

successful ERM program. For example, coordination of risk discussions across the entire entity

may reduce risk owners’ tendency to refuse to share information and hide its negative impact.

These characteristics are not typical in traditional risk management.

Unlike traditional risk management, ERM requires that risk owners are able to detect and

correct potential hazards when they occur and to prevent risks. Therefore, ERM requires risk

owners at the operational level to have considerable knowledge, communication, control, and

authority which are reserved for managers in a traditional risk management system. The relative

roles of risk owners and low-level managers can be critical to the success of ERM. Managers

need to be able to manage risks at the lower level. In other words, ERM makes significantly

different empowerment demands on risk owners and low-level managers than traditional risk

management.

2.1.4 A Holistic Perspective of ERM

A significant difference between COSO's ERM and traditional risk management is that

the former adopts a holistic view of enterprise risk and an integrated analysis to manage the total

risk (Rodriguez and Edwards 2009). In contrast to ERM's holistic view of risk management,

traditional risk management methods manage risks from a silo-based perspective (Gordon et al.

2009). Thus, a necessary condition for an effective ERM program is employees' holistic view of

risk management (Barton et al. 2002).

Such a holistic view is important for several reasons. First, companies have traditionally

managed risks in organizational “silos” where each risk is treated separately and often addressed

by different individuals within an institution. However, risks are often related and affect each

other. For example, a recent survey (Economist Intelligence Unit [EIU] 2005) found that 52% of

respondents consider reputation risk as a risk by itself, while 48% of respondents consider it as a

consequence of other risks” such as operational risk (e.g., people, process, system) and external

risks (e.g., compliance, financing). Managing risks within one’s own job scope without thinking

of its impact on other departments or the whole company may increase the total risk for the

entire company. As such, ERM promotes work coordination among risk owners. Interactions

(e.g., information sharing, interaction in the decision-making process, and coordinating risk

mitigation activities) among risk owners are important for a successful ERM program. These

activities are not typical in a traditional risk management system.

Second, ERM encompasses the whole organization and its processes (Lam 2003). The

success of an ERM program is dependent on people at all levels of the organization (Barton et al.

2002). ERM requires commitment by the whole organization from the enterprise level to a

division or subsidiary, to the level of a single business unit’s processes. In particular, ERM

makes significantly more responsibility demands on lower-level managers and employees than a

traditional risk management system (Barton et al. 2002; Olson and Wu 2008; Pickett 2006).

Risks are therefore viewed as “everyone’s responsibility” in the ERM framework rather than as

“not my responsibility” as in the traditional risk management framework (Olson and Wu 2008, p.

5).

Third, a successful ERM program emphasizes both short-term and long-term risks.

Frequently, employees are not concerned about long-term risks as long as short-term profit

targets are being achieved. The process of ERM controls risks from all sources for the purpose of

increasing an organization’s short-term as well as long-term stakeholders’ value (COSO, 2004,

vol. 1). ERM's holistic view enables identification of both a company’s current and forward-

looking risks before these risks negatively impact a company’s future value.

2.2 Antecedents of an Effective ERM Program

2.2.1 ERM Components

According to COSO (2004), ERM consists of eight interrelated components: “internal

environment, objective setting, event identification, risk assessment, risk response, control

activities, information and communication, and monitoring” (1: 22). The internal environment

conveys the tone of an organization and influences people’s risk consciousness. It is therefore the

basis for all other components of ERM (1: 27).

Information is needed at different levels of an organization to make better decisions

regarding risk identification, assessment, and response. The information flows start from the

important components (e.g., risk management philosophy, risk appetite, human resource

standards) of an organization’s internal environment (COSO 2004, vol. 2). Top management

needs to convey a clear message inherent in the organization’s internal environment to all

personnel that ERM responsibility must be taken seriously (COSO 2004, 1: 67). That way,

employees at all levels can have a clear understanding of their role in the implementation of

ERM and how their work activities are related to others’ work. An ERM program can be

effective when the information identified in the components of the internal environment enables

employees at different levels to carry out their responsibilities of risk management and further

encourage them to take proactive actions in risk management.

2.2.2 Organizational Contextual Factors

To date, a limited number of studies have examined the determinants of ERM adoption

and antecedents to an effective ERM program. One stream of prior literature (e.g., Liebenberg

and Hoyt 2003; Wan Daud et al. 2010) suggests that an organization’s adoption of ERM is

influenced by organizational contextual factors.

For example, relative to publicly listed firms, state owned enterprises (SOEs) in New

Zealand were found not very active in adopting risk management due to their stakeholders’

tendency to rely on implicit guarantee from government (Berkman and Bradbury 1998). This

finding suggests that ERM adoption may be more important to privately owned firms.

Liebenberg and Hoyt (2003) found that highly leveraged firms were more willing to appoint

Chief Risk Officers (CROs) in order to obtain greater value by reducing the costs resulting from

potential risks as well as by communicating the firm’s dedication to risk management to outside

stakeholders. Likewise, Wan Daud et al. (2010) conducted a survey on Public Listed Companies

in Malaysia and found a significant positive impact of CROs’ quality on ERM adoption. These

results show that the appointment of CROs is an important contextual factor in the adoption of

ERM.

The second stream of ERM literature has examined the antecedents for a successful ERM

program and suggests that the effectiveness of an ERM program depends on other management

systems in an organization, such as organizational culture (e.g., Kimbrough and Componation

2009), knowledge management (e.g., Rodriguez and Edwards 2009), and the board of directors

(e.g., Gordon et al. 2009). Specifically, organizational culture was found to have a significant

influence in the progress of ERM implementation (Kimbrough and Componation 2009).

Considering risk and knowledge management together gives a much stronger basis for an

organization in order to implement ERM (Rodriguez and Edwards 2009). The above results

suggest that the effectiveness of an ERM program can be improved by enhancing an

organization’s risk management culture and increasing employees’ knowledge on risk

management. Gordon et al. (2009) further suggest that an effective ERM program depends on the

appropriate alignment between the ERM program and organizational factors such as the level of

monitoring by the board of directors. In summary, the above findings in general suggest that

contextual factors embed in an organization may be essential to the effectiveness of an ERM

program.

2.3 Benefits of an Effective ERM Program

Prior analytical and archival studies on ERM mostly focus on the economic consequence

(e.g., firm value) of an effective ERM program. For example, Hoyt and Liebenberg (2011) found

a positive association between firm value and the use of ERM. On the contrary, other researchers

(Beasley et al. 2008a) found no significant market reaction to the practice of risk management

(i.e., hiring CROs) for both financial and nonfinancial service firms. However, Beasley et al.

(2008a) further found that shareholders reacted to firms’ efforts on risk management when the

ERM program can successfully enhance firm value. The above studies consistently suggest that

the implementation of ERM may increase potential economic benefits (e.g., firm value) of an

organization.

This paper contributes to prior research by emphasizing potential behavioral

consequences of an effective ERM program because individuals’ cognitive factors may influence

their responses to ERM components, which consequently influence their work behaviors in an

origination. Consideration of the direct and/or indirect effects of these cognitive factors can

provide important insights into the role of ERM components in influencing employees’

organizational behaviors (e.g., Frederickson 1992). The following section describes potential

behavioral consequences of ERM components.

2.3.1 Risk Ownership

A risk owner 7 is a person or entity responsible for recognizing and monitoring the status

of a specific risk (Pickett 2006). Relative to traditional risk management, ERM suggests that risk

ownership has shifted from store managers to central staffs that make major decisions and with

direct accountability for results (Hampton 2009). A store manager can focus on critical risks and

further break them up into subrisks for lower-level employees. The responsibilities for risk

management are actually included in the job of employees who operate business process at the

front line. It is important to ensure clerks, middle managers, management, and all other related

individuals who receive compensation from the company to be involved in the risk management

process (Spedding and Rose 2008).

7 Beasley et al. (2010) define a risk owner as “the person with primary management responsibility for a given risk”.

Pickett (2005) suggest a risk management process would not be successful if people spent

most of their time avoiding responsibility for doing anything or working out an escape route

when a project they were involved in had some likelihood of failing. Identifying employees’

responsibilities enhances risk management. In an effective ERM framework, every risk needs a

key person with the knowledge, experience, and ability to manage risks. Employees must take

responsibility for managing risks within their own areas as well as some risk outside their

working area (Beasley et al. 2008a; Beasley et al. 2008b; Nadeau 2007; Pickett 2005; Walker

and Shenkir 2008).

It is important to make sure employees feel responsible for managing risks. When

questions arise, then, employees will go directly to prevent the risk instead of reporting to a

committee or multiple individuals. Encouraging employees to hold accountable for managing

risks creates a greater level of risk control (Farrell 2007; Fraser and Simkins 2010). For example,

according to a survey of members as well as telephone interviews with 19 of the respondents

(Kleffner et al. 2003), coordination and interactions across department were enhanced after the

implementation of the ERM program.

2.3.2 Perceived Responsibility for Risk Management

Compared to traditional risk management, ERM benefits a company by enhancing

employees’ perceived responsibility for risk management. For example, Gates (2006) conducted

a survey of 271 risk and financial executives and found that companies with advanced ERM

experience obtained significantly increased management accountability in risk management.

Accountability ensures that the risk is understood, monitored, managed, and reported to the right

levels of management or the board in a timely manner (Hinrichs 2009, p. 163). Every employee

is therefore responsible for managing enterprise risk in an effective ERM framework (Olson and

Wu 2008, p. 5, see Table 1).

[Insert Table 1 Here]

ERM further suggests that risk management responsibility shifts from managers to lower-

level employees who make everyday business decisions (Hampton 2009). First, function staffs

such as managers of production, marketing, and finance must take responsibility for managing

risks within their own areas (Beasley et al. 2008a; Beasley et al. 2008b; Brancato et al. 2006;

Nadeau 2007; Spedding and Rose 2008; Walker and Shenkir 2008). Each manager can further

break the critical risks up into sub-risks for lower-level employees. ERM is enhanced when

everyone knows her/his responsibility for risks. Articulating appropriate responsibilities for risks

creates a greater level of risk control (e.g., Farrell 2007). Therefore, an important intended

benefit of ERM is the increased perceived responsibilities of managers and employees who

operate the business process at the front line. For example, PWC (2008) found that companies

which had fully implemented ERM reported much more increased employee understanding of

accountability in risk management than with those that had not implemented ERM.

ERM also seeks to increase employees' responsibility for managing risks outside of their

work cycle and to coordinate risk mitigation (Pickett 2005). A given risk influences other risks.

As noted earlier, managing risk within one’s own work scope without thinking of other

departments or the whole company may increase total risk for the whole company. Some risks

depend upon collaboration across the silos of the company. In this case, there is no single risk

owner. For example, strategic risk is not likely to have a single risk owner because it crosses

multiple units including manufacturing, marketing, and finance. It is therefore critical for

managers and employees to consider various interactions and coordination among different types

of risks.

Enhancing employees’ perceived responsibility for risk management is vital because

employee’s attitudes and behaviors are found to govern how they identify risks in the work place

(e.g., Specht et al. 2006). Specifically, psychological ownership theory suggest that the

possessive feeling that some object is “mine” or “ours” for an organization has a positive

influence on employee attitudes, motivations, and behaviors such as organizational commitment,

job satisfaction, and organization-based self-esteem (Dirks et al. 1996; Pierce et al. 2009; Van

Dyne and Pierce 2004).

2.3.3 Proactive Work Behaviors

For organizations to benefit from ERM, individuals also need to be proactive in

participating and initiating improvements in risk management. Proactive behaviors are defined as

“self-initiated anticipatory action that aims to change and improve the situation or oneself”

(Parker et al. 2006; Grant and Ashford 2007). Proactive behaviors such as selling critical risk

issues to management (e.g., Dutton and Ashford 1993), proactively solving problems (e.g.,

Parker et al. 2006), and communicating problems to top management (e.g., LePine and Van

Dyne 1998) can improve the effectiveness of ERM.

The current study focuses on one form of proactive work behaviors (i.e., problem

prevention behaviors). Problem prevention behaviors are behaviors undertaken to prevent the re-

occurrence of challenges and barriers at work and to find the root cause of things that go wrong

(Frese and Fay 2001; Parker and Collins 2010). An ERM framework is more likely to be

successful when managers and employees are proactive in preventing the similar risk from

reoccurring and identifying the root causes of these risks.

CHAPTER THREE

THEORY AND HYPOTHESES DEVELOPMENT

This chapter first describes Construal Level Theory (CLT, Liberman et al. 2007b, c;

Trope et al. 2007; Trope and Liberman 2010). It provides a theoretical basis for developing the

research hypotheses, which are subsequently presented.

3.1 Construal Level Theory

3.1.1 Overview

CLT posits that people construe psychologically distant events on a higher level than

psychologically near events (Liberman and Trope 1998; Trope and Liberman 2000; Trope et al.

2007). High-level construals emphasize central and superordinate features, whereas low-level

construals emphasize incidental and subordinate features.

For example, a high-level construal of two children playing catch with a ball in a

backyard might be “having fun”, whereas a low-level construal of this activity might focus on

details such as the age of the children, the color of the ball, and the temperature outside (Trope et

al. 2007). In the ERM context, a high-level construal of paying taxes might be complying with

IRS regulations and avoiding regulation risk, whereas a low-level construal of this activity might

focus on details such as the tax deductions, the tax payments, and the filing deadline.

High-level construals might trigger a holistic thinking process (Liberman and Förster

2009). By considering the big picture, a holistic thinking process broadens options and is less

constrained by details (Guzowski 2007). CLT suggests that the decision making process may

become more holistic as a result of increased level of construals. For example, people were

found to search for more global information and make more global causal attributions in

predicting and explaining psychologically distant (i.e., high level construal) events than near (i.e.,

low level construal) events (Nussbaum et al. 2003). People also tend to consider more global

traits rather than contextualized states when they face psychologically remote (i.e., high level

construal) events than near events (i.e., low level construal), and larger psychological distances

(i.e., level of construal) motivate them to think more holistically (Förster and Higgins 2005).

Construal level can be influenced by various contextual factors (Trope and Liberman

2010). First, construal levels, as suggested above, can be elevated by psychological distance

(Lewin 1951) such as temporal, spatial, and social distance (Trope et al. 2007). High (versus low)

construal levels can also be activated by cognitive procedures such as “why” (versus how”)

priming, and emphasizing the desirability (versus the feasibility) of an event or activity. The

following section reviews dimensions to increase the level of construal in prior research.

3.1.2 Psychological Distance

Psychological distance can be increased through several factors such as temporal distance,

spatial distance, and social distance (Trope et al. 2007). Psychological distance (Lewin 1951) is

egocentric (Trope and Liberman 2010). The reference point of psychological distance is the self

in here and now. Larger psychological distance appears when an object is removed from this

reference point in temporal, spatial, and social distance.

CLT suggests that people psychologically construe objects in distant situations on a

higher level and construe the same objects in near situations on a lower level (Liberman and

Trope 1998; Trope et al. 2007). Liberman and Förster (2009) further suggest that the influence of

psychological distance on the level of construal is bidirectional. According to Trope and

Liberman (2003) and Trope et al. (2007), several dimensions could be used to construe

psychological distance. The following section specifically presents these dimensions which

include temporal, spatial, and social distance.

3.1.2.1 Temporal Distance

Temporal distance is one dimension of psychological distance and has been examined in

extant literatures (e.g., Bar-Anan et al. 2006; Eyal et al. 2004; Eyal et al. 2008; Eyal et al. 2009;

Fujita et al. 2008; Kyeongheui et al. 2008; Liberman and Trope 1998; Nussbaum et al. 2003;

Trope and Liberman 2000, 2003). These studies repeatedly suggest that decisions in a near future

(e.g., tomorrow) are represented on a low-level construal and decisions in a distant future (e.g.,

one year later) are represented on a high-level construal.

These results of above literature suggest that temporal distance activates a decision

maker’s construal level. Trope and Liberman (2000) conclude that decision makers might put

more weight on high-level construal values in the distant future than in the near future. As a

consequence, decision making might be more influenced by the values associated with high-level

(versus low-level) construals in a distant (versus proximal) future (Liberman and Trope 1998).

The results overall suggest that temporal distance influences decision makers’ representation of

the construal level which consequently impact their judgment of decision making.

3.1.2.2 Spatial Distance

Spatial distance could also influence a decision maker’s construal level (e.g., Bar-Anan et

al. 2006; Bar-Anan et al. 2007; Fujita et al. 2006b; Henderson et al. 2006a; Krishna et al. 2008;

Williams and Bargh 2008).

CLT suggests that increasing spatial distance of an event may also lead decision maker to

focus on high-level construals of the event. For example, Fujita et al. (2006a) find that

participants use more abstract (i.e., high-level construal) languages to recall spatially distant

events (e.g., NYU’s study-abroad location in Florence, Italy) than spatially near events (e.g.,

NYU’s Washington Square campus in New York City). Their finding suggests that increasing

the spatial distance can shift raters’ attention from the concrete (i.e., low-level construal) aspects

to the abstract (i.e., high-level construal) aspects of the event (Trope et al. 2007).

3.1.2.3 Social Distance

According to CLT, elevated power increases the psychological distance which in turn

leads to more holistic information processing (e.g., Smith and Trope 2006).

Smith and Trope (2006) suggest that elevated power broaden the vision of management.

Power (i.e., having control over other people’s outcomes or having others control one’s own

outcomes) affects the way one’s view of the world. Elevated power is essentially linked to

holistic thinking. The powerful can process information more holistically than the powerless.

The powerful are able to integrate information to extract the essence and detect patterns and

relationships (Smith et al. 2008a, b). People with higher power are able to use their holistic

thinking and integrate many activities of an organization into one single and organized task,

whereas people with lower power only focus on carrying out the details restricted within the

larger plan.

Smith and Trope (2006, p. 78) conclude that merely activating the concept of power

should cause people to view stimuli in terms of the “big picture”, to focus on the gist and

categorize broadly, even if these stimuli are unrelated to power itself.

3.1.3 Priming

3.1.3.1 “Why” to Do versus “How” to Do

Another approach to activate individuals’ construal level is to prime them with “how”

versus “why” question (e.g., Eyal et al. 2004; Freitas et al. 2004; Fujita et al. 2006a; Labansat et

al. 2007; Liberman and Trope 1998; Liberman et al. 2007a; Nussbaum et al. 2003; Trope and

Liberman 2003; Trope et al. 2007).

Specifically, these studies influence participants’ construal level by asking them “why”

actions are performed versus “how” actions are performed. The results indicate that thinking

about “why” an action is performed is effective in activating high-level construals, while

thinking about “how” an action is performed is effective in activating low-level construals

(Liberman et al. 2007a).

Vallacher and Wegner (1987) suggest that “why” aspects of an action are associated with

more abstract features on the high-level construal; whereas “how” aspects of an action are

associated with more concrete features on the low-level construal. Put another way, a high-level

construal conveys abstract features which describe “why” the action should be done, whereas a

low-level construal conveys concrete features which describe “how” the action could be done

(Vallacher and Wegner 1985, 1987; Trope and Liberman 2000; Trope et al. 2007). For example,

a high-level construal of attending a conference may reflect “why” to attend (e.g., to open

horizons), but a low-level construal may reflect “how” to attend (e.g., by taking a plane).

Several prior studies prime the construal level by asking participants “why” actions are

performed versus “how” actions are performed. These studies suggest that thinking about “why”

triggers the implications of actions rather than thinking about “how” (Liberman et al. 2007a).

Consequently, the “why” priming activates high-level construals and a more holistic thinking

process. Following prior studies in CLT, this paper uses the similar manipulation to activate

participants’ high-level versus low-level construals.

3.1.3.2 Desirability versus Feasibility

Another way to elevate the level of construal is to emphasize the desirability (versus

feasibility) of an activity (e.g., Kim et al. 2009; Liu 2008; Thompson et al. 2008; Zhao et al.

2007). The desirability of an activity is concerned with the value of the action’s end state,

whereas the feasibility of an activity is concerned with the means used to reach the end state

(Trope and Liberman 2010). The value of the end state is construed on a higher level, and the

means of reaching the end state is construed on a lower level (Liberman and Trope 1998; Trope

et al. 2007; Trope and Liberman 2010). Therefore, communicating the desirability of an activity

(e.g., the significance of performing the activity) is more likely to activate the high-level

construal, while communicating the feasibility of the activity (e.g., how convenient the activity is

to perform) is more likely to activate the low-level construal.

Trope and Liberman (2010) further suggest the effect of desirability versus feasibility

priming is the same as the effect of “why” versus “how” priming because “why” to implement an

action emphasizes on the desirability of the action, whereas “how” to implement an action

addresses the feasibility of the action.

3.1.4 Consequences of High-Level Construals

Prior study found that the increased level of construal is associated with the increased

weight of global aspects, more global thinking process (e.g., Carrillat and Legoux 2008; Fujita et

al. 2006a; Giacomantonio et al. 2010; Liberman et al. 2007b; Nussbaum et al. 2003), greater

global attribution (e.g., Nussbaum et al. 2003), greater moral concern (e.g., Eyal et al. 2008),

more cooperation in social dilemmas (e.g., Liu and Shu 2009; Sanna et al. 2009).

CLT suggests that the decision making process becomes more holistic as a result of

increased psychological distance (Förster and Higgins 2005; Liberman and Förster, 2009). For

example, people are found to search for more global information and make more global causal

attributions in predicting and explaining psychologically distant events than proximal events

(Henderson et al. 2006a; Nussbaum et al. 2003). People also tend to consider more global traits

rather than contextualized states when they face psychologically remote events than proximal

events (Förster and Higgins, 2005). In the negotiation context, participants with a distant

perspective approach the negotiation in a more global, structured manner than those with a

proximal perspective (Henderson et al. 2006b).

CLT further suggests that people with a high-level construal are sensitive to the abstract

aspect of an event, whereas people with a low-level construal are sensitive to the concrete aspect

of an event (e.g., Cantor and Macdonald 2009; Clark and Semin 2008; Fujita and Han 2009;

Fujita et al. 2006a; Goldsmith 2008; Kim and John 2008; Kim et al. 2009; McCrea et al. 2008;

Naufel and Beike 2009; Spassova and Lee 2008; Zhao et al. 2007). These studies generally find

that high-level construals are associated with more abstract language (e.g., Fujita et al. 2006a),

more abstract dispositional traits (e.g., Nussbaum et al. 2003), and a tendency to represent a task

more abstractly (e.g., McCrea et al. 2008). McCrea et al. (2008) further suggest that “this mental

association between level of abstractness and temporal distance is proposed to be a bidirectional

relationship” (p. 1308). The above findings suggest that when people’s minds are construed on a

higher level, they are more likely to focus on the abstract aspect of an activity. Conversely, when

people’s minds are construed on a lower level, they are more likely to focus on the concrete

aspect of an activity.

In summary, high-level construals promote an attention to global information, whereas

low-level construals inhibit a global focus and promote an attention to local information

(Liberman and Förster 2009). Consequently, high-level construals activate a global thinking

process which focuses on the abstract aspects of an event, and low-level construals activate a

local thinking process which focuses on the concrete aspects of an event (Trope and Liberman

2003). 8

8 Prior research also found that people who engage in an abstract thinking process tend to focus on the desirability of

the alternatives, while people who engage in a concrete thinking process tend to focus on the feasibility of the

alternatives (Liberman and Trope 1998; Thompson et al. 2008).

3.2 Characteristics of Internal Environment in ERM

The above section discusses a theoretical basis for developing hypotheses which suggests

that certain characteristics of ERM components and their interactions may influence the holistic

nature of ERM. The following section posits the features inherent in ERM components will

impact the effectiveness of ERM through increased holism by employees.

Based on the foregoing, the present research posits that specific features of the

components (i.e., it risk management philosophy) of an organization’s internal environment can

promote a more holistic view of risks among its employees, and consequently, increase their

perceived responsibility for risk management and proactive behaviors in risk management. The

present research further posits that the impact of an organization’s risk management philosophy

may depend on its interaction with other ERM components or contextual factors. The remainder

of this section develops the hypotheses related to those components of an organization’s internal

environment in ERM.

3.2.1 Risk Management Philosophy

An organization's risk management philosophy reflects its culture of risk control and its

top management’s operating style. It captures an organization’s beliefs and attitudes towards risk

management and sets the tone of top management regarding its views of risk control. This in turn

impacts the implementation of other ERM components (COSO, 2004, vol. 1).

Top management clarifies an organization's risk management philosophy in order for

employees to know its risk capacity (Walker and Shenkir 2008). Employees and managers are

increasingly seeking help from top management’s ERM philosophy to make better risk control

decisions (Harris 2008). The ERM philosophy can be defined as “effective” if it effectively

encourages employees to manage the organization’s risks, and it efficiently and economically

increases the likelihood that established objectives will be met (e.g., Gillani 1996; Jablonowski

2006). To ensure compliance with strategic goals, a clear and consistent ERM philosophy from

the top must permeate the organization. Once companies develop the ERM philosophy, it must

be promoted companywide and embraced by employees in order to encourage them to integrate

risk into their decision making (“Capital Gains” 2006). When the risk management philosophy is

well developed, understood, and embraced by its personnel, the entity is positioned to effectively

recognize and manage risk (COSO 2004, 1: 28).

Very often, the ERM philosophy focuses on the approaches, policies, and procedures for

risk management (IIARF 2008). For example, participants polled in the IIARF’s (2008) survey

identified the elements making up their risk management philosophy. These components reflect

policies and procedures put in place by top management to promote compliance with rules. The

most identified elements include:

Identifying, documenting, and evaluating risks.

Creating policies and procedures, a risk management charter or framework, and

risk management plan that are based on risk assessments.

Assigning accountability and resources at every organizational level, as well as

risks to corporate goals and key processes.

Creating an ERM framework.

Managing and mitigating identified risks.

Creating a legal, risk, or compliance group or committee at the board level to

review and manage identified risks.

Providing reports to senior management on how the organization is managing

risks.

Establishing the right tone at the top to promote a top-down approach regarding

risk management. (p. 4)

These components mentioned above are mostly related to “how” to implement an ERM

rather than “why” to implement an ERM. According to CLT, the feasibility (i.e., “how” to

implement ERM) of the ERM philosophy is construed at the lower level which activates concrete

thinking, whereas the desirability (i.e., “why” to implement ERM) is construed at the higher

level which triggers abstract thinking.

Emphases on the approaches and procedures (i.e., feasibility) of risk management in the

ERM philosophy are not fully consistent with the holistic nature of ERM. When the ERM

philosophy does not focus on the significance and meaning (i.e., desirability) of risk management,

it may be very difficult for employees to see the “big picture” of risk management. For example,

a number of the surveyed companies pointed out that their ERM philosophy does not address the

key value of their strategic goal (“Many Firms Unprepared” 2009). Many companies focus on

loss control philosophy rather than strategic goals of the company (e.g., Henri and Giasson 2006;

Hofmann 2007). From a holistic perspective of ERM, the loss control should not be the sole

focus of risk management (Jablonowski 2006); achieving strategic objectives is the ultimate goal

of ERM.

Based on CLT, the current paper proposes that the holistic view of risk management can

be activated by emphasizing the desirability rather than the feasibility of ERM in the risk

management philosophy. A holistic view of risk management, may consequently enhances

employees’ perceived responsibility for risk management and proactive behaviors in risk

management.

The remainder of this section examines how the emphasis on desirability (versus

feasibility) in a company's risk management philosophy interacts with other elements of the

internal environment to affect employees’ perceived responsibility for risk management and

proactive behaviors in risk management.

3.2.2 Risk Appetite and Risk Tolerance

Risk appetite and risk tolerance are also important components of the internal

environment in an effective ERM program. Risk appetite is defined as “the amount of risk, on a

broad level, an entity is willing to accept in pursuit of value”, and it reflects the enterprise’s risk

management philosophy (COSO 2004, 1: 28). In practice, there is some confusion about the

concepts of “risk tolerance” and “risk appetite” (Fraser and Simkins 2007). According to COSO

(2004), risk tolerance is defined as “the acceptable level of variation relative to achievement of a

specific objective,” (1: 20).

IIA suggests that both risk appetite and risk tolerance set boundaries of how much risk an

entity is willing to accept take. The main difference is seemingly that “risk tolerance” is

measurable “acceptable variations” from objectives, whereas risk appetite is the “broad-based”

amount of risk, that a company is willing to accept in pursuit of its objective (Fraser and Simkins

2007). In other words, risk appetite (e.g., the company does not accept risks that could result in a

significant loss of its revenue) is the higher level statement that considers broadly the levels of

risks that an entity is willing to accept in pursuit of value (COSO 2004, vol. 1), whereas risk

tolerance (e.g., the company does not accept risks that could cause revenue to decline by more

than 10%) is a narrower level than risk appetite and sets the acceptable level of variation around

objectives (COSO 2004, vol. 1; Institute of Management Accountants [IMA] 2007).

Risk tolerances are aligned with risk appetite (COSO 2004, vol. 1). Operating within risk

tolerances helps ensure that entity remains within its risk appetite. ERM requires that the

organization’s risk appetite is communicated to employees so that risks are managed within a

desirable risk tolerance level (KPMG 2008). Risk tolerance provides management greater

assurance that the entity remains within its risk appetite (COSO 2004, 1: 40).

In practice, the understanding of risk appetite and its implications has been relatively

insufficient compared to that of other ERM elements. For example, Towers Perrin’s (2008)

Survey found that more than half of the respondents admitted not having a documented risk

appetite statement in place. Defining risk appetite and tolerance was cited as the leading short-

term ERM priority for 61 percent of the companies surveyed. The current financial crisis is also

believed to be attributable to the “intellectual failure” to accurately grasp the concept of “risk

appetite” (Power 2009). Defining risk appetite and risk tolerance was cited as the leading short-

term ERM priority for 61 percent of the companies surveyed.

An organization’s risk appetite and tolerance are usually communicated through Key

Risk Indicators (KRIs) (Beasley et al. 2010). The following sections discuss the characteristics of

KRIs that may influence the effect of an organization’s risk management philosophy.

3.2.2.1 Presence of KRIs

According to a survey of 271 risk and financial executives, KRIs were ranked as the most

frequently used techniques/tools to measure strategic and operating risks among the companies

with advanced ERM (Gates 2006). KRIs 9 are “metrics used by organizations to provide an early

signal of increasing risk exposures in various areas of the enterprise” (Beasley et al. 2010, p. 1).

A successful set of KRIs provides timely principal indicators about potential risks rising from

internal operation and external events that may have a significant impact on accomplishing the

organization’s objectives (Beasley et al. 2010).

The design of a set of KRIs is an important element of an organization’s ERM framework.

Ideally, KRIs are developed consistent with the overall risk appetite of the organization

(Newman and Novoselov 2009). Andersen and Schroder (2010) suggest that KRIs identify the

suitable thresholds for action at different levels within the organization. By using KRI measures

to identify risk appetite and tolerance levels, KRIs can be effective tool for better communicating

an organization’s risk appetite and tolerance at different levels. It will be important to provide

one example or two to help the employees at different levels to understand an organization’s risk

appetite and tolerance (Beasley et al. 2010).

The development of KRIs is significant to employees at different levels because KRIs

provide them a set of predictive indicators which allow them to have a better risk oversight in

their daily work (Newman and Novoselov 2009). Mapping KRIs to in risk management

encourages employees to identify each critical risk and respond proactively to risk events

9 Key Performance Indicators (KPIs) are also metrics used to monitor operating risks. KPIs reflect historical

performance and provide information of a risk event in the past, while KRIs help identify future potential risks

(Beasley et al. 2010).

accordingly (Beasley et al. 2010). The current research therefore investigates to what extent the

presence of KRIs may influence the effect of risk management philosophy on employees’

proactive behaviors in risk management.

Based on CLT, a high-level construal conveys abstract features which describe “why”

(i.e., desirability) the action should be done, whereas a low-level construal conveys concrete

features which describe “how” (i.e., feasibility) the action could be done (Trope and Liberman

2000; Vallacher and Wegner 1985, 1987). Liberman and Trope (1998) further suggest that

people’s minds are construed on a higher level when they are informed the desirability of an

event versus feasibility of an event.

According to Trope et al. (2007), people are more likely to focus on abstract aspects of an

event when their minds are on a high-level construal. For example, Fujita et al. (2006a) find that

participants use more abstract languages to recall spatially distant events (e.g., NYU’s study-

abroad location in Florence, Italy) than spatially near events (e.g., NYU’s Washington Square

campus in New York City). They suggest that spatially near events activate participants’ low-

level construals which make them focus on concrete aspects. Increasing the spatial distance can

shift individual’s attention from the concrete aspects to the abstract aspects with the increased

level of construals. Similarly, people with increased social distance are also found to engage in

more abstract information processing (Smith and Trope 2006) and tend to favor more abstract

views (Magee et al. 2009). These findings consistently suggest that people with higher level

construals tend to focus on the abstract aspect of an event, whereas people with lower level

construals tend to focus on the concrete aspect of the same event (Smith et al. 2008a; Smith et al.

2008b).

Recall the current research first posits that employees are more likely to engage in a

holistic view in risk management when they are informed the desirability (versus feasibility) of

ERM. According to Förster and Higgins (2005), individuals may focus on concrete surroundings

in a local perspective, and rely on more abstract aspects in a global perspective. With the

increased level of construals, individuals would go beyond the given information and be inclined

to process information in a more global manner.

Förster and Higgins (2005) further suggest that rules and responsibilities are usually

described in a rather concrete fashion, and growth and achievements are usually described in a

more abstract fashion. Therefore, a person who construes a business dinner as a responsibility

might concentrate on concrete details (e.g., being on time, drinking in moderation), whereas a

person who construes a business dinner as an achievement might concentrate on abstract goal

fulfillment (e.g., drawing a big picture of his or her overall vision for the company).

In the ERM context, the purpose of the KRIs is actually to show employees the concrete

example of risk events. According to the above-noted propositions, employees are less likely to

focus on the concrete example of KRIs when risk management philosophy emphasizes the

desirability of ERM. Therefore, the current paper posits that participants will become more

proactive when the risk management philosophy emphasizes the desirability of ERM in risk

management with the absence of KRIs.

3.2.2.2 Expression of KRIs

Risk appetite and risk tolerance can be expressed in qualitative or quantitative terms

(COSO 2004, vol. 2). Quantitative measures may include financial targets, whereas qualitative

measures may refer to reputational impact, management effort, and regulatory compliance.

The survey conducted by IBM Financial Services in 2008 suggests that 40 percent of the

respondents report that their risk appetite is communicated on both qualitative and quantitative

basis, 20 percent of the respondents report their risk appetite is moderately quantitative, and 40

percent of the respondents report their risk appetite is moderately, rather, or mostly qualitative. A

large number of respondents currently expressed risk appetite on a qualitative basis. All

respondents to the survey anticipate a shift toward more quantitative measures in the coming

year (IBM Financial Services 2008, p.15). They believe that efforts to quantify risk appetite can

sometimes produce an illusion of precision (KPMG 2008). Likewise, KRIs can also be

communicated in quantitative or qualitative terms. For example, KPMG (2008) found that a

majority of respondents (over 70%) implemented quantified risk tolerance indicators (e.g., KRIs),

while KRIs are also viewed as qualitative tools (Tarantino and Cernauskas 2011, p. 79) in risk

management.

Gates (2006, p. 85) found that 19% of the companies with advanced ERM agree that

“quantify key risks to the best extent possible”. However, he also suggested that the most

commonly quantified risk was financial risk and it was difficult to quantify softer risks such as

reputation using KRIs. James Lam and Associates (2006) and Gates (2006) suggest that

quantifying these softer risks is as important as for financial risk and may be a major barrier and

challenge to the implementation of an effective ERM program. COSO (2006) suggest that

quantifying critical risks does not mean that quantitative KRIs are more important than

qualitative one, and an effective ERM program should achieve a balance in using quantitative

and qualitative KRIs. The current research attempts to investigate how the quantitative versus

qualitative KRIs would influence employees’ perceived responsibility for risk management and

their proactive behaviors in risk management.

The current research also responds to Wright’s (2005) call for more research on the

quantification effect. In prior accounting research, quantitative information has been found to

enhance persuasive power of financial and managerial accounting information (e.g., Anderson et

al. 2004; Kadous et al. 2005; Fleming 2009). However, Kadous et al. (2005) also found that

quantification is more likely to be criticized for the detailed (i.e., concrete) information, thereby

reducing the persuasion effect in some conditions (i.e., when the managerial accounting proposal

is subjective and the preparer has incentives to mislead). Based on Kadous et al.’s (2005) study,

Wright (2005) suggests more studies about quantification such as investigating when and how

quantification might lead to undesirable persuasion or examining the quantification effect in

other settings where persuasion is not the primary objective. Wright (2005, p. 690) further

suggests to examine nonquantified (e.g., qualified) information which may be important in

forming a causal connection in a person’s mind on how various events or cues may lead to a

certain outcome.

According to Crutch et al. (2009), quantitative information is a concrete representation

that carries the physical resemblance of the object, whereas qualitative information is an abstract

representation that carries the essence of the object. The qualitative versus quantitative

distinction has been found to be the fundamental difference between abstract and concrete

messages (Crutch et al. 2009). Thus, the concreteness is perceived as the major difference

between qualitative and quantitative information (Crutch et al. 2009). Recall high-level

construals activate a focus on abstract aspects (e.g., qualitative information); whereas low-level

construals activate a focus on concrete aspects (e.g., quantitative information).

Putting the above-mentioned two lines of reasoning together, the current research

proposes that employees are more likely to focus on the qualitative (versus quantitative)

expression of KRIs when the risk management philosophy emphasizes the desirability (versus

feasibility) of ERM. It is thus expected that the impact of management’s emphasis (desirability

versus feasibility) in its ERM philosophy (as discussed earlier) on employees’ risk management

behaviors would depend on the expression (qualitative versus quantitative) of KRIs in the

description of risk appetite and risk tolerance. Specifically, employees will be more likely to take

responsibility for risk management and proactive behaviors in risk management when the risk

management philosophy the desirability of ERM with a qualitative expression of KRIs.

3.2.3 Risk Location

The impact of risk management philosophy and risk appetite might also be moderated by

the risk location (i.e., within vs. out of one’s job cycle). Everyone is responsible for enterprise

risk under an ERM framework (Olson and Wu 2008) because interactions among risk categories

may influence the total risk to the organization. Insignificant risks may interact with other risks

to cause great damage (Casualty Actuarial Society [CAS] 2003). ERM thus requires risk owners

to consider various interactions among different types of risks. It is important to make sure risk

owners are responsible for managing risk exposure both within their job cycle and out of their

job cycle.

The current paper posited that employees are more likely to take responsibility for risk

management and become proactive in risk management if the risk event occurs within their job

cycle rather than outside of their job cycle. Thus, it is predicted that the effect of the risk

management philosophy and KRIs will greatly enhance participants’ perceived responsibility for

risk management and their proactive behaviors in risk management when the risk is out of their

work cycle than when it is within their work cycle.

3.3 Hypotheses

Based on the foregoing discussion, six testable hypotheses are developed. This section

summarizes the hypotheses tested in Study 1 and Study 2.

3.3.1 Study 1

The first three hypotheses (H1, H2, and H3) are tested in Study 1. Based on the main

findings in CLT research, the first hypothesis predicts that emphasizing the desirability of ERM

is more likely to enhance participants’ holistic view of risk management, and thus their proactive

behaviors than emphasizing the feasibility of ERM. H1 is therefore as follows.

H1: When the KRIs are absent in the description of risk appetite and tolerance, participants will

be more willing to engage in problem prevention behaviors when the risk management

philosophy emphasizes the desirability of ERM than when it emphasizes the feasibility of ERM.

CLT further suggests that people’s minds are construed on a higher level when they are

informed the desirability of an event versus feasibility of an event (Liberman and Trope 1998).

People are more likely to focus on abstract (versus concrete) aspects of the event when their

minds are on a high-level (versus low-level) construal (Förster and Higgins 2005; Trope et al.

2007). The presence of KRIs represents risk management rules and responsibilities which are in

a rather concrete format (Förster and Higgins 2005). Therefore, employees are more likely to be

proactive in risk management when the risk management philosophy emphasizes the desirability

(versus feasibility) of ERM with the absence of KRIs. Applying the above literature to ERM

research, this paper proposes the following hypothesis with regard to the interaction effect

between the presence of KRIs and the emphasis of risk management philosophy.

H2: Participants will be most willing to engage in problem prevention behaviors when the risk

management philosophy emphasizes the desirability (versus feasibility) of ERM and the KRIs

are absent (versus present) in the description of risk appetite and tolerance.

Individuals are more likely to be proactive in risk management when a risk event occurs

in their job because they are the risk owner. It is posited that participants’ proactive behaviors in

risk management are more likely to be enhanced by the emphasis of risk management philosophy

and the presence of KRIs when the focal risk is out of their job cycle. Thus, this paper proposes

H3 as follows.

H3: Participants will be most willing to engage in problem prevention behaviors when the risk

management philosophy emphasizes the desirability (versus feasibility) of ERM, the KRIs are

absent (versus present) in the description of risk appetite and tolerance, and the focus of the risk

is within (versus out of) their job cycle.

3.3.2 Study 2

The next two hypotheses (H4 and H5) are tested in study 2. Mainly based on the

propositions postulated for the second hypothesis, this current research predicts that participants

are more likely to be influenced by the qualitative information which is more abstract (Crutch et

al. 2009) when the risk management philosophy emphasizes the desirability of ERM. Thus, H4 is

as follows.

H4: Participants will be willing to assume the most responsibility for risk management and take

the most problem prevention behaviors when the risk management philosophy emphasizes the

desirability (versus feasibility) of ERM and the KRIs are qualitative (versus quantitative).

Following Study 1, Study 2 posits that participants’ perceived responsibility for risk

management and their proactive behaviors in risk management are more likely to be enhanced by

the emphasis of risk management philosophy and the expression of KRIs when the focal risk is

out of their job cycle. Thus, H5 is as follows.

H5: Participants will be willing to assume the most responsibility for risk management and take

the most problem prevention behaviors when the risk management philosophy emphasizes the

desirability (versus feasibility) of ERM, the KRIs are qualitative (versus quantitative), and the

focus of the risk is within (versus out of) their job cycle.

3.3.3 Mediation Effect

The last hypothesis is tested in both Study 1 and Study 2. Based on prior research on CLT

(Trope and Liberman 2007), the current paper predicts that the emphasis of risk management

philosophy influences participants’ perceived responsibility for risk management and proactive

behaviors in risk management through the increased holistic view (i.e., level of construals) of

risk management.

H6: A holistic view of risk management will mediate the effect of the emphasis of risk

management philosophy on participants’ perceived responsibility for risk management and their

problem prevention behaviors in risk management.

3.4 Summary

This paper applies CLT to ERM research, and argues that characteristics of ERM

components can encourage employees’ proactive behaviors in risk management and increase

their perceived responsibility for risk management. Those characteristics include but are not

restricted to the risk management philosophy, risk appetite, and risk tolerance. Six testable

hypotheses are developed. In Chapter 4, two studies are presented to test the hypotheses.

CHAPTER FOUR

METHODOLOGY

This chapter presents two experiments designed to test the hypotheses developed in

Chapter 3. Study 1 was designed to test H1, H2, H3, and H6; Study 2 was designed to test H4, H5,

and H6.

4.1 Study 1

4.1.1 Design

To test H1, H2, H3, and H6, a 2 (emphasis of risk management philosophy: feasibility vs.

desirability) × 2 (presence of KRIs: absent vs. present) × 2 (risk location: within-job-cycle vs.

out-of-job-cycle) mixed factorial design was conducted. The first two independent variables

were the between-subjects factors and the third independent variable was a within-subjects factor.

Participants were randomly assigned to one of the four between-subjects conditions.

4.1.2 Experiment Participants

Sixty-five accounting undergraduate students and graduate students enrolled in a business

class participated in this experiment 10

. The participants completed the experiment and received

extra credit for their participation. On average, these students were twenty-two years old, had an

average of one year full-time work experience, forty-nine percent were male, and seventy-seven

Five percent were junior, eighty-three percent were senior, and twelve percent were graduate students. There was

no significant difference in responses due to demographics.

percent were born in US. This population was chosen because of the similarity of participants to

the population of interest, entry-level employees.

4.1.3 Experimental Materials

The experimental materials described a hypothetical corporation (LXC), which was a

large manufacturer of electronic products. The company recently adopted an ERM program to

manage its risks. After reading background information about the company, participants were

provided with the company’s risk management philosophy and a description of its risk appetite

and tolerance.

Participants were then instructed to assume the role of an accountant in the Accounting

Department of LXC Corporation. Each participant was provided with two cases that described

the potential risk in different locations (i.e., within-cycle vs. out-of-cycle). The cases were

adapted from Hampton (2009) and COSO (2004, vol.2). Case 1 described a risk situation that

occurred within one’s job cycle, and Case 2 described a risk situation that occurred outside one’s

job cycle.

In case 1, participants were informed that there was an unusually large invoice that

caused the customers balance to exceed the maximum credit limit allowed in the accounting

system. In case 2, participants were informed a potential breach of confidential vendor

information in the Purchasing Department. The order of the two cases was alternated. For each

case, participants indicated their propensity to engage in one type of proactive behaviors (i.e.,

problem prevention behaviors). At the end of the experiment, manipulation checks were

performed and demographic information was collected.

4.1.4 Independent Variables

4.1.4.1 Emphasis of Risk Management Philosophy

The emphasis of risk management philosophy was manipulated following Liberman and

Trope (1998). In the desirability condition, the company’s risk management philosophy

emphasized the desirability (e.g., significance and meaning) of ERM. In the feasibility condition,

the company’s risk management philosophy emphasized the feasibility (e.g., policies and

procedures) of ERM. The risk management philosophy statements were adapted from COSO

(2004, vol.2) and IIARF’s (2008) survey. The two statements were comparable in length and

understandability. To increase the strength of the manipulation and to ensure that participants

understand the risk management philosophy, participants were asked to indicate their opinions

about why (i.e., desirability) versus how (i.e., feasibility) their company should adopt an ERM

program. This priming procedure was similar to that used in Freitas et al. (2001) in CLT

literature.

4.1.4.2 Presence of KRIs

The first study manipulated the presence of KRIs. Specifically, in the present condition,

participants received the KRIs in the description of risk appetite and tolerance. In the absent

condition, participants did not receive the KRIs in the description of risk appetite and tolerance.

These KRIs were adapted from COSO (2004, vol. 2) and Association of Insurance and

Risk Managers (AIRMIC 2009). An example of the KRIs indicators was “interest charged on

past due accounts”.

4.1.4.3 Risk Location

As described earlier, the risk locations in the two cases represented the two levels of the

within-subjects factor. In the within-job-cycle condition (i.e., case 1), the participants faced a risk

situation within their job cycle. In the out-of-job-cycle condition (i.e., case 2), the participants

faced the risk situation out of their job cycle.

4.1.5 Dependent Measures

The dependent variable measured participants’ propensity to engage in problem

prevention behaviors. The 3-item scale of problem prevention behaviors was adapted from

Parker and Collins’s (2010) study. The Cronbach alpha scores were above 0.85 for both cases,

which exceeded the generally accepted threshold of 0.70 (e.g., Bamber et al. 1989; Brazel et al.

2010; Hatcher 1994; Nunnally 1978; Peterson 1994). A sample item was “spend time planning

how to prevent the re-occurrence of this problem”.

4.1.6 Mediator

Following prior research on CLT (e.g., Nussbaum et al. 2003), this paper proposes that

participants will perceive the consequence of the risk event in a more holistic way when the risk

management philosophy emphasizes the desirability (versus feasibility) of ERM, and when the

KRIs are absent. Thus, the current research developed a four-item scale to measure how

participants perceive the impact of the focal risk on the whole company. These items were

adapted from Nussbaum et al. (2003). One sample item was the potential risk “has significant

impacts on other areas of the company”.

One item was deleted due to the low factor loading. EFA yielded one factor with

eigenvalue greater than 1. The results (see Table 6) show that the three items loaded on one

factor, which accounted for 79.59 and 84.79 percent of the variance, respectively for Case 1 and

Case 2. All factor loadings were above 0.85, and the Cronbach alphas were 0.87 and 0.90,

respectively for Case 1 and Case 2.

4.1.7 Control Variables

Two trait variables, holistic tendency and risk preference, were measured as control

variables. Upon completion of the cases, participants first completed a scale that measured their

holistic tendency (Choi et al. 2003; Wong-On-Wing and Lui 2007). Subsequently their risk

preference was assessed in two ways. First, following Schisler (1994) and William and

Narendran (1999), participants were asked to indicate their risk preference compared to their

classmates. Second, following Young (1985) and Kim (1992), they were asked to indicate their

willingness to place a bet.

4.1.8 Manipulation Check Questions

Manipulation check questions were performed at the end of the experiment. Specifically,

the first manipulation check question asked participants to select the role they assumed (i.e., an

accountant) in LXC out of three choices.

The second manipulation check question asked participants to indicate the extent to

which they agreed with the statement that LXC’s risk management philosophy emphasized

procedures and steps for managing risks more than the importance and significance of managing

risks (-5: strongly disagree; 5: strongly agree).

Also, participants were asked to indicate on a separate 11-point scale the

understandability, the perceived realism, and the level of difficulty of the cases, and their

familiarity with the ERM prior to the experiment.

4.1.9 Pilot Test

A pilot test was conducted prior to the formal experiment to gather information about

each test measure, to assess the reliability of the items, and to revise measures for the actual

experiment. Participants were asked to participate in the pilot test to indicate their responses on

each dependent measure created for each case. Based on the results, revised cases and measures

were chosen for the actual experiment.

Forty-seven undergraduate students from business school participated in the pilot study.

The participants from different majors consisted of nineteen students in accounting, eight

students in finance, two students in marketing, two students in management, and sixteen students

in other majors. Twenty-five of them were born in the US, and the rest were outside the US.

There were thirty-one male students and sixteen female students. Two of forty-seven were

freshman; six of them were sophomore; twenty-two of them were junior; fifteen of them were

senior; two of them were graduate students. Their average age was twenty-two years old, and

their average years of working experience were two years.

For each case, the participants were asked to indicate their responses on dependent

measures on 11-point Likert scales. The participants were also provided opportunities to freely

comment on the test items. It took approximately 30 minutes to answer all the questions. The

pilot test process incorporated participants’ feedback to ensure the content validity and reliability

of measures. The pilot test also enabled to select items with high factor loading.

According to the participants in the pilot test, some cases were not sensible in the context.

There were also some comments about the situations as not being relevant or appropriate in the

context. Based on the findings, a number of revisions were made. Revised measures were

selected for the following experiment.

4.2 Study 2

Study 1 investigates the joint effect of the emphasis of risk management philosophy and

presence of KRIs in the description of risk appetite and tolerance. KRIs, however, are usually

presented to employees in reality. It might be meaningful to examine the expression of KRIs

when they are present in the description of risk appetite and tolerance. Thus, Study 2 investigates

the joint effect of the emphasis of risk management philosophy and expression of KRIs in the

description of risk appetite and tolerance. The connection between Study 1 and Study 2 is shown

in Figure 1.

[Insert Figure 1 Here]

4.2.1 Design

To test H4, H5, and H6, a 2 (emphasis of risk management philosophy: feasibility vs.

desirability) × 2 (expression of KRIs: quantitative vs. qualitative) × 2 (risk location: within-job-

cycle vs. out-of-job-cycle) mixed factorial design was conducted. The first two independent

variables were between-subjects factors and the third independent variable was a within-subjects

factor. Again, participants were randomly assigned to one of the four between-subjects

conditions. Four different cases were developed because the two cases used in Study 1 were

more appropriate for accounting students. The cases used in Study 2 were chosen because they

were more generic for business students.

4.2.2 Experiment Participants

Ninety-one undergraduate students 11

enrolled in business classes participated in this

experiment. The participants completed the experiment and received extra credit for their

participation. On average, these students were twenty-one years old, had two years of full-time

work experience, sixty-four percent were male, and eighty-nine percent were born in US. This

population was chosen because of the similarity of participants to the population of interest,

entry-level employees.

4.2.3 Experimental Materials

The experimental materials of Study 2 were similar to that used in Study 1. After being

presented with the risk management philosophy, participants were presented with the risk

appetite and tolerance, which presented the KRIs. Participants were then instructed to assume the

role of a production worker in the Circuit Board Manufacturing division of LXC Corporation.

Four new cases were developed specifically for Study 2.

Thirty-one percent were sophomore, fifty-five percent were junior, eleven percent were senior, and one percent

was graduate students. Eighty-two percent were business major. There was no significant difference in responses

due to demographics.

Each participant was provided with four cases that described the potential risk in different

locations (i.e., within-job-cycle vs. out-of-job-cycle). The cases were adapted from Hampton

(2009) and COSO (2004, vol. 2).

Case 1 and 3 described a risk situation that occurred within the worker’s job cycle. In

case 1, participants were informed that a fire occurred in his/her manufacturing area and was

quickly extinguished. Trays of wafers were destroyed in the fire and production was interrupted.

In case 3, participants were informed a customer complaint about the low-quality product.

Case 2 and 4 described a risk situation that occurred outside the worker’s job cycle. In

case 2, participants were informed that LXC Corporation has set up a health and safety program.

One objective of that program was to “package and label dangerous materials safely in

accordance with regulations.” One day, when the participant was passing by the storeroom of

another manufacturing unit, he/she noticed that a flammable material was misplaced in the

wrong storage area. In case 4, participants were informed a potential breach of confidential

information.

Again, the order of these four cases was alternated. For each case, participants indicated

their perceived responsibility for risk management and their propensity to engage in one type of

proactive behaviors (i.e., problem prevention behaviors). At the end of the experiment,

manipulation checks were performed and demographic information was collected.

4.2.4 Independent Variables

4.2.4.1 Emphasis of Risk Management Philosophy

The risk management philosophy was manipulated the same way as it is manipulated in

Study 1.

4.2.4.2 Expression of KRIs

Following Kadous et al. (2005), the KRIs were manipulated by varying the numerical

target and acceptable tolerance range provided. Participants were informed that LXC’s risk

appetite and tolerance was communicated through its KRIs. These KRIs were adapted from

COSO (2004) and AIRMIC (2009). A sample key risk indicator was “ethical training fail rate”.

In the qualitative condition, participants were presented the major KRIs without

numerical targets and acceptable tolerance range. In the qualitative condition, participants were

presented the major KRIs with numerical targets and acceptable tolerance range.

4.2.4.3 Risk Location

As described earlier, the risk locations in the four cases represented the two levels of the

within-subjects factor. In the within-job-cycle condition (i.e., case 1, case 3), the participants

faced the risk situation within their job cycle. In the out-of-job-cycle condition (i.e., case 2, case

4), the participants faced the risk situation out of their job cycle.

4.2.5 Dependent Measures

4.2.5.1 Perceived Responsibility for Risk Management

Study 2 measured two dependent variables. The first set of dependent variables measured

employees' perceived responsibility for the risk in each case using a five-item 11-point scale

developed from Morrison and Phelps (1999). Higher ratings indicated higher perceived

responsibility for the focal risk in each case. A sample item for this scale was “I feel a personal

sense of responsibility to address potential risks that may result from the above situation”.

The Cronbach alpha scores were 0.86, 0.75, 0.87, 0.87, respectively for Case 1, 2, 3, and

4. These scores exceeded the generally accepted threshold of 0.70 (e.g., Bamber et al. 1989;

Brazel et al. 2010; Hatcher 1994; Nunnally 1978; Peterson 1994). CFA revealed significant

factor loadings (p < 0.001) for the five items of participants’ perceived responsibility for risk

management. All factor loadings were above 0.45 which was above the acceptable minimum

limit of 0.30 (e.g., Hatcher 1994; Hair et al. 1998; Hirst et al. 2007; Wakefield 2008).

4.2.5.2 Problem Prevention Behaviors

Participants’ problem prevention behaviors were measured the same way as it was in

Study 1. In addition, CFA revealed significant factor loadings (p < 0.001) for the three items of

participants’ problem prevention behaviors. All factor loadings were above 0.54. The Cronbach

alpha scores were 0.69, 0.81, 0.84, 0.87, respectively for Case 1, 2, 3, and 4.

4.2.6 Mediator

Study 2 employed a different measure of mediator. Following prior research on CLT (e.g.,

Liberman and Trope 1998, Fujita et al. 2006a), participants were required to complete the

Behavioral Identification Form (BIF) questionnaire to measure their level of construal. There

were 25 items in the questionnaire. For each item, participants read about an action (e.g.,

"voting") and were required to select between high-level identification (e.g., "influencing the

election") and low-level identification (e.g., "marking a ballot"). The low-level identification was

scored as 0, and the high-level identification was scored as 1. Participant's responses were

summed and averaged to provide a BIF score.

4.2.7 Control Variables and Manipulation Check

Study 2 measured the same control variables. The first manipulation check question

asked participants to select the role they assumed (i.e., an employee in the Circuit Board

Manufacturing division) in LXC out of four choices. The second manipulation check question

was the same as that used in Study 1. Consistent with Kadous et al. (2005), no manipulation

check was conducted for the quantitative/qualitative manipulation. Again, participants were

asked to indicate on a separate 11-point scale the understandability, the perceived realism, and

the level of difficulty of the cases, and their familiarity with the ERM prior to the experiment.

CHAPTER FIVE

RESULTS

5.1 Study 1

Confirmative Factor Analysis (CFA) was used because the scales were adapted from

prior studies (e.g., Hatcher 1994; Sharma 1996; Jackson 2008). CFA revealed significant factor

loadings (p < 0.001) for the three items of participants’ problem prevention behaviors. All factor

loadings were above 0.66. The Cronbach’s alpha scores were all above 0.88 (see Table 2). Data

analyses were therefore performed using this one factor.

[Insert Table 2 Here]

5.1.1 Responses to Manipulation Check Questions

Fifty-nine students correctly selected the role they assumed. The data analyses reported

below exclude the participants who failed the manipulation check question. Compared to

participants in the desirability condition (Mean = -1.76, SD = 2.88), participants in the feasibility

condition (Mean = -0.31, SD = 3.12) agreed to a greater extent that LXC's risk management

philosophy emphasized procedures and steps for managing risks more than the importance and

significance of managing risks. The mean responses were significantly different across

conditions (p < 0.03, one-tailed).

Other check questions asked whether participants agreed that the cases were easy to

understand, it was difficult to answer questions in each case, the cases were very realistic, and

they were familiar with ERM prior to the study (-5: strongly disagree; 5: strongly agree). There

were no significant differences between the means across conditions on the understandability,

difficulty, realism, or familiarity question (all p > 0.10). Overall, participants agreed that the

cases were easy to understand (Mean = 3.91, SD = 1.27), it was not difficult to answer questions

(Mean = -1.71; SD = 2.64), the cases were realistic (Mean = 3.63; SD = 1.53), and they were not

familiar with ERM prior to this study (Mean = 0.81, SD = 2.99).

5.1.2 Hypotheses Testing

5.1.2.1 H1

The first hypothesis predicts when the KRIs are absent in the description of risk appetite

and tolerance, participants will be more willing to take problem prevention behaviors when the

risk management philosophy emphasizes the desirability of ERM than the feasibility of ERM. To

test H1, a 2 (philosophy) × 2 (location) Analysis of Variance (ANOVA) for repeated measures

was performed when the KRIs were absent. The result found a significant main effect (p = 0.037,

one-tailed) of risk management philosophy. Specifically, participants were willing to take

significantly more problem prevention behaviors in risk management when the risk management

philosophy emphasized the desirability of ERM (Mean = 1.77, SD = 2.00) than the feasibility of

ERM (Mean = 0.19, SD = 2.66). H1 thus was supported.

5.1.2.2 H2

To test the second and third hypotheses, a 2 (philosophy) × 2 (KRIs) × 2 (location)

Analysis of Variance (ANOVA) for repeated measures was performed (see Table 3) 12

. Emphasis

of risk management philosophy and presence of KRIs were the two between-subjects factors, and

Two covariates (i.e., participants’ holistic tendency and their risk preference) were excluded from data analyses

because the regression model was not significant when the dependent variables were regressed on these two

variables. The results were not affected by the inclusion of two covariates.

risk location was the within-subjects factor. The dependent variable was participants’ problem

prevention behaviors. The tests of H2 are presented below.

The second hypothesis predicts that employees will be most willing to take problem

prevention behaviors in risk management when the risk management philosophy emphasizes the

desirability (versus feasibility) of ERM, and when the KRIs are absent (versus present).

The 2 × 2 × 2 ANOVA results (see Table 3 Panel B and Figure 2) indicated that there

was a significant two-way interaction (p = 0.026, one-tailed) between the emphasis of risk

management philosophy and presence of KRIs.

[Insert Table 3 and Table 4 Here]

[Insert Figure 2 Here]

To further understand the interaction effect, simple-effects contrasts were conducted.

Analyses of simple-effects contrasts (see Table 5) suggest that participants were significantly

more willing to take problem prevention behaviors when the risk management philosophy

emphasized the desirability of ERM with the absence of KRIs (Mean = 1.77, SD = 2.00) than

when the risk management philosophy emphasized the desirability of ERM with the presence of

KRIs (Mean = 0.20, SD = 1.79, p < 0.001), when the risk management philosophy emphasized

the feasibility of ERM with the presence of KRIs (Mean = 0.74, SD = 1.64, p = 0.004), and when

the risk management philosophy emphasized the feasibility of ERM with the absence of KRIs

(Mean = 0.19, SD = 2.66, p < 0.001). Therefore, H2 was in general supported.

[Insert Table 5 Here]

5.1.2.3 H3

The third hypothesis predicts that employees’ problem prevention behaviors in risk

management will be more enhanced by the desirability of ERM and presence of KRIs when the

risk is out of their job cycle than when the risk is within their job cycle. As shown in Table 3

Panel A, the results revealed no significant (p = 0.897) two-way interaction between job cycle

and the emphasis of risk management philosophy, and no significant (p = 0.429) two-way

interaction between job cycle and presence of KRIs. These results suggest that the effect of the

emphasis risk management philosophy and the presence of KRIs do not differ between within-

job-cycle and out-of-job-cycle risk. Thus, H3 was not supported.

5.1.3 Mediation Analyses

An exploratory factor analysis (EFA) was first conducted to confirm the measure

developed specifically for the study. The principal-component method of factor analysis was

used. One item was deleted due to the low factor loading (0.40 for Case 1 and 0.43 for Case 2).

EFA yielded one factor with eigenvalue greater than 1. The results (see Table 6) show that the

three items loaded on one factor, which accounted for 79.59 and 84.79 percent of the variance,

respectively. All factor loadings were above 0.85, and the Cronbach alphas were 0.87 and 0.90,

respectively. This measure was then used to conduct the mediation analyses. Note the mediation

analyses were conducted for the condition in which the KRIs were absent.

Specifically, using the steps proposed by Kenny et al. (1998) and MacKinnon et al. (2007)

the current research examined whether the mediator accounted for the effect of risk management

philosophy on participants’ proactive behaviors in risk management. The mediation analyses

were conducted separately for Case 1 and Case 2.

[Insert Table 6 Here]

In Case 1, the mediation analyses start by regressing the measure of participant’s

proactive behaviors on the emphasis of risk management philosophy. The result indicated no

significant (p = 0.112) effect of risk management philosophy on participants’ proactive behaviors.

However, Kenny et al. (1998) suggest that this first step is not required to demonstrate a

mediation effect. The current research then regressed the mediator on the emphasis of risk

management philosophy. Again, the result indicated no significant (p = 0.289) effect of risk

management philosophy on the mediator. Since the second step is essential in establishing

mediation effect (Kenny et al. 1998). Thus, no mediation effect was found for Case 1.

The same steps were repeated for Case 2 by first regressing the measure of participant’s

proactive behaviors on the emphasis of risk management philosophy. The result indicated no

significant (p = 0.665) effect of risk management philosophy on participants’ proactive behaviors.

Again, the result from the regression of mediator on participants’ proactive behaviors indicated

no significant (p = 0.837) effect of risk management philosophy on the mediator. Thus, no

mediation effect was found for Case 2 either.

The results from mediation analyses suggest that measure of a holistic view was not

significantly mediating the effect of risk management philosophy on participants’ proactive

behaviors. H6 thus was not supported for Study 1.

5.2 Study 2

5.2.1 Factor Analysis

CFA 13

revealed significant factor loadings (p < 0.001) for the five items of participants’

perceived responsibility for risk management. All factor loadings were above 0.45 which was

above the acceptable minimum limit of 0.30 (e.g., Hatcher 1994; Hair et al. 1998; Hirst et al.

2007; Wakefield 2008). In addition, CFA revealed significant factor loadings (p < 0.001) for the

three items of participants’ problem prevention behaviors. All factor loadings were above 0.54.

Because participants’ perceived responsibility for risk management was highly correlated

with their problem prevention behaviors (all r > 0.63), I combined the two variables and

conducted CFA with one factor. With one exception all other factor loadings were above 0.50 14

(see Table 7). The fit index was above the acceptable level 15

. The Cronbach’s alpha scores were

all above 0.83 (see Table 7). Data analyses were therefore performed using this one factor.

[Insert Table 7 Here]

5.2.2 Responses to Manipulation Check Questions

Seventy-four students correctly selected the role they assumed. The data analyses

reported below exclude the participants who failed the manipulation check question. Participants

CFA revealed that Comparative Fit Index (CFI) was above 0.85 across four cases, which was indicative of an

acceptable fit for our overall construct (e.g. Kline 2004). The two factors explained more than 62% of the variances

in the measures across four cases. 14

One item has a factor loading 0.39. Accordingly, this item was excluded from the subsequent analyses (e.g.,

Koonce et al. 2010). The results were not affected by this exclusion. 15

CFA provided an adequate fit for Case 1 (Chi-squre [df=20 ] = 34.279, p = 0.02; CFI = 0.926; TLI = 0.896;

RMSEA = 0.098; SRMA = 0.071), Case 2 (Chi-squre [df=20] = 54.576, p < 0.0001; CFI = 0.775; TLI = 0.685;

RMSEA = 0.164; SRMA = 0.087), Case 3 (Chi-squre [df=20] = 54.576, p < 0.0001; CFI = 0.862; TLI = 0.807;

RMSEA = 0.153; SRMA = 0.083), and Case 4 (Chi-squre [df=20] = 53.815, p = 0.0001; CFI = 0.894; TLI = 0.852;

RMSEA = 0.151; SRMA = 0.064).

then indicated that they agreed that LXC's risk management philosophy emphasized procedures

and steps for managing risks more than the importance and significance of managing risks in the

feasibility condition (Mean = 1.06, SD = 2.79) than in the desirability condition (Mean = -0.92,

SD = 2.67). The mean responses were significantly different across conditions (p = 0.003).

Other check questions asked whether participants agreed that the cases were easy to

understand, it was difficult to answer questions in each case, the cases were very realistic, and

they were familiar with ERM prior to the study (-5: strongly disagree; 5: strongly agree). There

were no significant differences between the means across conditions on the understandability,

difficulty, realism, or familiarity question (all p > 0.10). Overall, participants agreed that the

cases were easy to understand (Mean = 3.27, SD = 2.00), it was not difficulty to answer

questions (Mean = -1.72; SD = 2.80), the cases were realistic (Mean = 3.04; SD = 2.03), and they

were not familiar with ERM prior to this study (Mean = -1.80, SD = 3.17).

5.2.3 Hypotheses Testing

To test the hypotheses, a 2 (philosophy) × 2 (KRIs) × 2 (location) Analysis of Variance

(ANOVA) for repeated measures was first performed (see Table 8) 16

. Emphasis of risk

management philosophy and expression of KRIs were the two between-subjects factors, and risk

location was the within-subjects factor. The dependent variable was the combined score of

participants’ perceived responsibility for risk management and their problem prevention

behaviors. The combined score of Case 1 was significantly (r = 0.60, p < 0.001) correlated with

Two covariates (i.e., participants’ holistic tendency and their risk preference) were excluded from data analyses

because the regression model was not significant when the dependent variables were regressed on these two

variables. The results were not affected by the inclusion of two covariates.

that of Case 3, and the combined score of Case 2 was significantly (r = 0.27, p = 0.021)

correlated with that of Case 4. The combined scores on the two within-cycle cases (i.e., Case 1

and Case 3) were averaged, and the combined scores on the two out-of-cycle cases (i.e., Case 2

and Case 4) were averaged. The test of each hypothesis is presented below.

[Insert Table 8 and Table 9 Here]

5.2.3.1 H4

The fourth hypothesis predicts that employees will perceive the most responsibility for

risk management and take the most problem prevention behaviors in risk management when the

risk management emphasizes the desirability (versus feasibility) of ERM, and when the KRIs are

qualitative (versus quantitative).

The first result (see Table 8 Panel B) emerging from the 2 × 2 × 2 ANOVA was a

significant two-way interaction effect (p = 0.012) between the emphasis of risk management

philosophy and expression of KRIs on participants’ perceived responsibility and problem

prevention behaviors in risk management (see Figure 3).

[Insert Figure 3 Here]

Analyses of simple-effects contrasts (see Table 10) showed that participants significantly

assumed more responsibility for risk management and took more problem prevention behaviors

in risk management when the risk management philosophy emphasized the desirability of ERM

with qualitative KRIs (Mean = 2.64, SD = 1.05) than when the risk management philosophy

emphasized the desirability of ERM with quantitative KRIs (Mean = 1.83, SD = 1.43, p = 0.012),

and when the risk management philosophy emphasized the feasibility of ERM with qualitative

KRIs (Mean = 1.94, SD = 1.14, p = 0.032). The results suggest that participants were more

willing to take responsibility for risk management and problem prevention behaviors when the

emphasis of risk management philosophy emphasized the desirability (versus feasibility) and

when the KRIs were qualitative (versus quantitative). H4 were in general supported.

However, analyses of simple-effects (see Table 10) contrasts showed participants did not

significantly assume more responsibility for risk management and take more problem prevention

behaviors in risk management when the risk management philosophy emphasized the desirability

of ERM with qualitative KRIs (Mean = 2.64, SD = 1.05) than when the risk management

philosophy emphasized the feasibility of ERM with quantitative KRIs (Mean = 2.51, SD = 0.87,

p = 0.682). The above findings are actually consistent with the evidence found by Kim et al.

(2009). They found that abstract, “why”-laden appeals were more persuasive than concrete,

“how”-laden appeals when participants’ decision was temporally distant (i.e., high-level

construal), whereas concrete, “how”-laden appeals were more persuasive than abstract, “why”-

laden appeals when participants’ decision was temporally imminent (i.e., low-level construal).

They suggested that these effects seemed to be driven by a match between temporal distance (i.e.,

the level of construal) and the abstractness of the message. They proposed that matched

messages were easier to process and thus more persuasive. Following this rationale, the above

effect found in the present study may be driven by an alignment between the emphasis of risk

management philosophy and expression of KRIs.

[Insert Table 10 Here]

5.2.3.2 H5

The fifth hypothesis predicts that employees’ perceived responsibility and problem

prevention behaviors in risk management for risk management will be more enhanced by the

emphasis of risk management philosophy and expression of KRIs, when the focal risk is out of

their job cycle than when the focal risk is within their job cycle.

As shown in Table 8 Panel A, the 2 × 2 × 2 ANOVA revealed participants assumed

significantly (p < 0.001) more responsibility and problem prevention behaviors for the within-

job-cycle risk (Mean = 3.02, SD = 1.44) than out-of-job-cycle risk (Mean = 1.40, SD = 1.57).

However, there was no significant (p = 0.284) three-way interaction effect among the emphasis

of risk management philosophy, expression of KRIs, and risk location.

The above results suggest that the interaction effect between the emphasis of risk

management philosophy and expression of the KRIs did not differ between for the within-job-

cycle and out-of-job-cycle condition. Regardless of the risk location, participants’ perceived

responsibilities for risk management and problem prevention behaviors in risk management were

more increased by the desirability (versus feasibility) of ERM when the KRIs were qualitative

(versus quantitative). H5 was thus not supported.

5.2.4 Mediation Analyses

To provide insights into the process by which the internal environment factors influence

the dependent measures, a mediation analysis was performed. Following prior studies (e.g.,

Fujita et al. 2006a; Liberman and Trope 1998; Trope and Liberman 2000; Vallacher and Wegner

1985, 1987), this current research calculated each participant’s response on BIF scale. This

measure was then used to conduct the mediation analyses.

More specifically, the procedure outlined by Kenny et al. (1998) and MacKinnon et al.

(2007) was followed to test the mediation effect of the BIF score on the relationship between the

effect of risk management philosophy and participants’ perceived responsibility for risk

management and problem prevention behaviors in risk management. The mediation analyses

were conducted separately for within-cycle versus out-of-cycle case.

The regression of BIF scores on the emphasis of risk management philosophy showed no

significant (p = 0.591) effect of risk management philosophy on BIF scores. Since this step is an

essential step to verify mediation effect (Kenny et al. 1998). H6 was thus not supported for Study

2. Participants’ responses on BIF score was not significantly mediating the effect of risk

management philosophy on participants’ perceived responsibility for risk management and

problem prevention behaviors in risk management.

5.3 Summary

Overall, these results supported H1, H2, and H4. The results of Study 1 suggest that

participants were more likely to take proactive behaviors in risk management when the risk

management philosophy emphasized the desirability (versus feasibility) of ERM, and when the

KRIs were absent (versus present). The above results did not differ between within-job-cycle and

out-of-job-cycle risk.

The results of Study 2 further suggest that participants were more likely to perceive their

responsibility for risk management and take proactive behaviors in risk management when the

risk management philosophy emphasized the desirability (versus feasibility) of ERM, and when

the KRIs were qualitative (versus quantitative), regardless of risk location.

CHAPTER SIX

DISCUSSION AND CONCLUSION

6.1 Summary of Results

6.1.1 Results of Hypotheses Testing

The current research drew upon prior literatures on Construal Level Theory (e.g.,

Liberman et al. 2007a, b, c; Trope et al. 2007; Trope and Liberman 2010) and examined the

impact of an organization’s internal environment (i.e., risk management philosophy, risk appetite,

and risk tolerance) on employees’ perceived responsibility for risk management and proactive

behaviors in risk management. Overall, the results may provide insights into features of

components of the internal environment that influence employees’ perceived responsibility for

risk management and one form of proactive behaviors in risk management.

Specifically, the present study investigated (1) the extent to which participants’ perceived

responsibility for risk management and proactive behaviors in risk management were influenced

by the emphasis (feasibility vs. desirability) of risk management philosophy, the presence

(absent vs. present) of the KRIs, and the expression (quantitative vs. qualitative), and (2) the

extent to which the effect of the emphasis of risk management philosophy and the

presence/expression of the KRIs on participants’ perceived responsibility for risk management

and proactive behaviors in risk management diverges between within-cycle and out-of-cycle

risks.

As hypothesized in Study 1, participants were becoming more proactive in risk

management when the risk management philosophy emphasized the desirability (versus

feasibility) of ERM and when the KRIs were absent (versus present). Likewise, the results from

Study 2 found that participants perceived more responsibility for risk management and were

becoming more proactive in risk management when the risk management philosophy

emphasized the desirability (versus feasibility) of ERM when the KRIs were qualitative (versus

quantitative).

The predicted moderating effect of risk location was not obtained. Apparently,

participants automatically assumed more responsibility for the within-job-cycle risk than for the

out-of-job-cycle risk, as it was showed in Study 1. The results indicated that participants’

perceived responsibility for risk management and proactive behaviors in risk management were

significantly enhanced by emphasizing the desirability (versus feasibility) of ERM with the

absence (versus presence)/qualitative (versus quantitative) of the KRIs, regardless of the risk

location.

6.1.2 Mediating Effects

The mediating effect was not obtained from data analyses. The results from mediation

analyses suggest that the 3-item measure of a holistic view was not significantly mediating the

effect of risk management philosophy on participants’ proactive behaviors in risk management in

Study 1; and BIF score was not significantly mediating the effect of risk management philosophy

on participants’ perceived responsibility and problem prevention behaviors in risk management

in Study 2. Unfortunately, this result makes it is difficult to draw a conclusion. Future research

may attempt to find a better measure to show the effect.

6.2 Conclusions

The current research applies CLT in the study of ERM. Specifically, the current paper

proposes and tests whether the components of ERM influence employees’ perceived

responsibility for risk management and their proactive behaviors in risk management. In

particular, this paper predicts that the emphasis of risk management philosophy and the

presence/expression of KRIs will affect their perceived responsibility for risk management and

proactive behaviors in risk management.

Together, the above results are important in attempting to understand the antecedents of

an effective ERM program. Specifically, the findings of the present study suggest that the

emphasis of risk management philosophy and presence/expression of KRIs are important to

increase employees’ perceived responsibility for risk management and their proactive behaviors

in risk management. In addition, the alignment between the emphasis of risk management

philosophy and expression of KRIs in an organization’s risk appetite and tolerance may be also

important for enhancing employees’ efforts in risk management. The foregoing findings are

particularly significant for designing ERM components in the implementation of ERM.

6.3 Contributions

The results of this study are expected to have both practical and theoretical implications.

ERM has been adopted widely throughout the world in the last decade, yet many observers note

that expected benefits of ERM are limited. It is conjectured that the poor understanding of ERM

explains the lack of success of ERM as it is suggested by the findings from field surveys (e.g.,

IIARF 2008; RMA 2006; Towers Perrin 2008). To date, limited research has investigated ERM

effectiveness from a holistic perspective (e.g., Gordon et al. 2009). Lack of a holistic view may

cause lack of coordination, miscommunication, misunderstanding, poor morale, and poor

motivation, which, in turn, should lead to poor performance (as cited in O'Rourke 2004 and

Pickett 2005). The current research investigates the effective implementation of an ERM

program in an organization from a holistic perspective.

The results indicate that it may be possible to enhance employees’ proactive behaviors in

risk management by emphasizing the desirability of ERM rather than the feasibility of ERM.

These results have potential implications to the extent that they suggest that a possible way to

enhance employees’ perceived responsibility even when the risk is not related to their job. In an

effective ERM program, preventing similar problems from reoccurring may reduce potential

business risk, and consequently, fulfill the strategic goal of an organization. This is consistent

with the objective of ERM (COSO 2004, vol. 1). The above findings suggest that the effect of

ERM components on employees’ behaviors may be cognitive in addition to motivational (e.g.,

Power 2009). An integration of cognitive and motivational considerations within the

implementation of an ERM framework will help understand a variety of risk management

choices which are driven by various considerations (e.g., Frederickson 1992).

The results also indicate that the alignment among ERM components may be important

for an effective ERM program (e.g., Gordon et al. 2009). It is important to note the implications

of the present findings for other components of ERM. If as observed in the present study, the

alignment between risk management philosophy and KRIs in the description of risk appetite and

tolerance is important for enhancing employees’ perceived responsibility for risk management, it

can be expected that alignment among other ERM components would be even more important if

the benefits of ERM are to be achieved.

Overall, the results provided insights into features of components of the internal

environment that influence employees’ perceived responsibility for risk management and one

form of proactive behaviors in risk management. The present study also contributes to research

on ERM and responds to the recent call for more ERM studies (e.g., Berry et al. 2009; Fraser et

al. 2008; Nocco and Stulz 2006).

6.4 Limitations

The current study has some limitations. First, the present experimental study does not

allow an examination of the longitudinal impact of the internal environment on employees’

behaviors. The long-term influences can be studied in future research.

Second, since the mediation effect was not found, one may feel less confident in drawing

causal inferences of the holistic perspective from the results. The insignificant mediation effect

of the holistic measure in Study 1 and BIF score in Study 2 may be due to the long measurement

used in both studies. Future research may find better measures.

Third, using self-reported measures to determine participants’ work motivation (i.e.,

perceived responsibility for risk management and proactive behaviors in risk management) can

be problematic (Kunz and Pfaff 2002). Participants might not actually be proactive in reality

even if they indicated in an experimental setting.

Finally, the present study uses student participants to examine entry-level employees’

behaviors. Future studies can investigate whether the results still hold for actual employees.

6.5 Future Research

The current study only investigates two components of ERM as potential antecedents to

an effective ERM program. According to COSO (2004, vol. 1), there are eight components in an

ERM framework. Future research can examine the characteristics of other ERM components.

According to the results of the current research, the interactions among ERM components may

be also significant on the success of an ERM program. Future research can examine the

interactions among ERM components.

In addition, future research can investigate other characteristics of risk management

philosophy, risk appetite, and risk tolerance. Specifically, the current paper focuses on the use of

KRIs to communicate an organization’s risk appetite and risk tolerance. Future research on the

characteristics of other metrics (e.g., Key Performance Indicators) may have implications for

both theory and practice.

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Table 1

Differences between ERM and Traditional Risk Management

Traditional risk management ERM

Risk as individual hazards Risk viewed in context of business strategy

Risk identification and assessment Risk portfolio development

Focus on discrete risks Focus on critical risks

Risk mitigation Risk optimization

Risk limits Risk strategy

Risks with no owners Defined risk responsibilities

Haphazard risk quantification Monitoring and measurement of risks

“Risk is not my responsibility” “Risk is everyone’s responsibility”

Table 2

Study 1 Factor Loadings and Reliability for Proactivity

Item Case1 Case2

Proactivity1 0.891 0.903

Proactivity2 0.832 0.759

Proactivity3 0.983 0.851

Cronbach's Alpha 0.937 0.888

Table 3

Study 1 2 × 2 × 2 ANOVA for Within-Subjects and Between-Subjects Effects

Panel A: ANOVA Results for Within-Subjects Contrasts

Source of Variation Dependent

Variables

df Sum of

squares

Mean

squares

F p-value

(two-tailed)

Location Proactivity 1 11.76 11.76 2.52 0.118

Location × Philosophy Proactivity 1 0.08 0.08 0.02 0.897

Location × KRIs Proactivity 1 2.96 2.96 0.64 0.429

Location × Philosophy

× KRIs Proactivity 1 0.61 0.61 0.13

0.719

Error(Location) Proactivity 55 256.12 4.66

Panel B: ANOVA Results for Between-Subjects Contrasts

Source of Variation Dependent

Variables

df Sum of

squares

Mean

squares

F p-value

(two-tailed)

Intercept Proactivity 1 62.18 62.18 7.40 0.009

Philosophy Proactivity 1 7.93 7.93 0.94 0.336

KRIs Proactivity 1 7.57 7.57 0.90 0.347

Philosophy × KRIs Proactivity 1 33.12 33.12 3.94 0.052

Error Proactivity 55 462.42 8.41

Table 4

Study 1 Cell Mean (Standard Deviation) of Proactivity

Panel A: Case 1

(within-cycle) Feasibility Desirability Total

KRI: absent 0.62 (2.35) 2.29 (2.17) 1.51 (2.86)

KRI: present 1.00 (2.20) 0.26 (2.78) 0.64 (2.48)

Total 0.82 (2.77) 1.34 (2.64) 1.08 (2.70)

Panel B: Case 2

(out-of-cycle) Feasibility Desirability Total

KRI: absent -0.24 (2.87) 1.25 (2.82) 0.56 (2.89)

KRI: present 0.49 (2.12) 0.14 (1.83) 0.32 (1.96)

Total 0.14 (2.49) 0.73 (2.44) 0.44 (2.46)

Table 5

Study 1 Simple Contrast between Groups

Group I Group J

Mean

Differences (I-J)

Standard

Error

P-Value

(Two-tailed)

Desirability &

Absent

Feasibility &

Present 1.026 0.359 0.004

Feasibility &

Absent 1.580 0.366 p < 0.001

Desirability &

Present 1.569 0.366 p < 0.001

Feasibility &

Present

Feasibility &

Absent 0.554 0.372 0.136

Desirability &

Present 0.542 0.372 0.145

Feasibility &

Absent

Desirability &

Present -0.012 0.378 0.975

Table 6

Study 1 Factor Analysis for Mediator (N=59)

Item Case1 Case2

Holism1 0.88 0.92

Holism2 0.88 0.95

Holism3 0.92 0.90

Eigenvalue 2.39 2.54

Percentage of Variance

Explained 79.59% 84.79%

Cronbach's Alpha 0.87 0.90

Table 7

Study 2 Factor Loadings of the Perceived Responsibility &

Proactive Behaviors (N=74)

Item Case1 Case2 Case3 Case4

Item1 0.705 0.496 0.938 0.824

Item2 0.907 0.546 0.887 0.885

Item3 0.919 0.628 0.961 0.770

Item4 0.763 0.617 0.724 0.556

Item5 0.387 0.557 0.549 0.564

Item6 0.508 0.789 0.661 0.793

Item7 0.605 0.670 0.640 0.778

Item8 0.561 0.714 0.640 0.863

Cronbach's Alpha 0.851 0.833 0.911 0.914

Table 8

Study 2 2 × 2 × 2 ANOVA for Within-Subjects and Between-Subjects Effects

Panel A: ANOVA Results for Within-Subjects Contrasts

Source of Variation Dependent

Variables

df Sum of

squares

Mean

squares

F p-value

(two-tailed)

Location

Responsibility

&Proactivity 1 94.42 94.42 52.92

< 0.001

Location × Philosophy

Responsibility

&Proactivity 1 0.03 0.03 0.02

0.893

Location × Expression

Responsibility

&Proactivity 1 0.02 0.02 0.01

0.925

Location × Philosophy

× Expression

Responsibility

&Proactivity 1 2.08 2.08 1.17

0.284

Error(Location)

Responsibility

&Proactivity 70 124.89 1.78

Panel B: ANOVA Results for Between-Subjects Contrasts

Source of Variation Dependent

Variables

df Sum of

squares

Mean

squares

F p-value

(two-tailed)

Intercept

Responsibility

&Proactivity 1 732.77 732.77 274.74

< 0.001

Philosophy

Responsibility

&Proactivity 1 0.01 0.01 0.00 0.955

Expression

Responsibility

&Proactivity 1 0.56 0.56 0.21 0.648

Philosophy ×

Expression

Responsibility

&Proactivity 1 17.61 17.61 6.60 0.012

Error

Responsibility

&Proactivity 70 186.70 2.67

Table 9

Study 2 Cell Mean (Standard Deviation) of Perceived Responsibility &

Proactive Behaviors

Panel A: within-cycle risk Feasibility Desirability Total

Quantitative 3.16 (1.19) 2.75 (1.86) 2.94 (1.58)

Qualitative 2.85 (1.57) 3.35 (0.91) 3.09 (1.30)

Total 3.00 (1.40) 3.04 (1.50) 3.02 (1.44)

Panel B: out-of-cycle risk Feasibility Desirability Total

Quantitative 1.85 (1.14) 0.91 (1.62) 1.34 (1.48)

Qualitative 1.02 (1.68) 1.94 (1.59) 1.47 (1.68)

Total 1.41 (1.49) 1.39 (1.67) 1.40 (1.57)

Table 10

Study 2 Simple Contrast between Groups

Group I Group J

Mean

Differences (I-J)

Standard

Error

P-Value

(Two-tailed)

Desirability &

Qualitative

Feasibility &

Quantitative 0.139 0.338 0.682

Feasibility &

Qualitative 0.707 0.329 0.032

Desirability &

Quantitative 0.814 0.325 0.012

Feasibility &

Quantitative

Feasibility &

Qualitative 0.568 0.334 0.089

Desirability &

Quantitative 0.676 0.330 0.040

Feasibility &

Qualitative

Desirability &

Quantitative 0.108 0.320 0.736

Figure 1

Connection between Study 1 and Study 2

Figure 2

Study 1 Estimated Marginal Means of Proactivity *

* All data are on an 11-point scale ranging from -5 to 5 indicating the extent to which the

participants were likely to engage in problem prevention behaviors with a -5 indicating a low

extent and 5 indicating a high extent.

0.2

0.4

0.6

0.8

1.2

1.4

1.6

1.8

KRIs Absent KRIs Present

Feasibility

Desirability

Figure 3

Study 2 Estimated Marginal Means of Perceived Responsibility

& Proactivity *

* All data are on an 11-point scale ranging from -5 to 5 indicating the extent to which the

participants agreed their responsibility for the risk event and were likely to engage in problem

prevention behaviors with a -5 indicating a low extent and 5 indicating a high extent.

0.5

1.5

2.5

QuantitativeKRIs Qualitative KRIs

Feasibility

Desirability

Appendix

Experiment Materials

Study 1

Case 1

One day you are entering an unusually large invoice into the system that causes the customers

balance to exceed the maximum credit limit allowed in the accounting system. You bring this

matter to the attention of the Accounts Receivable (AR) Manager. The AR Manager reviews this

customer’s balance, payment history, and order size and decides to authorize credit and shipment

of the goods.

Case 2

One day you are delivering customer credit applications to the Credit Department, and as you

walk past the Purchasing Department, you hear a Purchasing Manager communicating loudly to

one of her staff the password to the confidential vendor database.

100

Study 2

Case 1

One day, a fire starts in your manufacturing area. It is quickly extinguished. Nobody is hurt. In

addition to the trays of wafers that are destroyed in the fire, production is interrupted. After the

fire, you alert the head of production that a fire has taken place and that production has been

stopped. You estimate that it will be at least one week before production can be restarted.

Case 2

LXC Corporation sets up a health and safety program named Occupational Safety and Health

Plan (OSHP). One objective of this program is to “package and label dangerous or flammable

materials safely in accordance with regulations.” One day, as you are passing by the storeroom

of another manufacturing unit (i.e., the mobile chip manufacturing sector), you notice that a

flammable material is misplaced in the wrong storage area.

Case 3

LXC uses a customer complaint form to report any complaints received from clients. Today,

your Circuit Board Manufacturing division received a notification form documenting a

complaint from W. Inc., about a defect present in the circuit boards delivered last month. W. Inc

was disappointed with the low quality of the product and returned it to your division.

Case 4

The information security policies at LXC Corporation require employees to prevent any breach

of confidentiality when processing, storing, and transmitting confidential information. This

morning, you walked over to the accounting department to deliver some materials requisition

forms. While in the accounting department office, you heard a supervisor communicating loudly

to one of her staff, the password to an apparently confidential database.

101

Manipulations

Emphasis of Risk Management Philosophy

LXC’s Risk Management Philosophy (Desirability Condition)

The following is an excerpt from LXC’s Risk Management Philosophy.

LXC’s Risk Management Philosophy (Feasibility Condition)

The following is an excerpt from LXC’s Risk Management Philosophy.

Our Enterprise Risk Management (ERM) program requires a comprehensive approach to manage

risks in maximizing stakeholders’ value. We emphasize the significance of managing risk at all levels

of our organization. We must understand why risk management is important to our organization. Our

ERM integrates the company’s core values and it promotes broad strategic thinking and analysis. The

ultimate goal of ERM is to manage risks in an integrated way. We must look at risks as a whole.

In order to make sure that our employees have a clear understanding of ERM, we emphasize the value

of managing risk in our organization. Our company encourages employees to attend to the overall

end of managing risks. We must focus on why risk management matters to the company’s strategic

goals.

Our Enterprise Risk Management (ERM) program requires a comprehensive approach to manage

risks in delivering products and services in an efficient and cost effective manner. We emphasize the

importance of assessing factors that can potentially affect risk management across our organization.

We must understand how to manage risk in our organization. Our ERM is incorporated into the

company’s current management control system to provide a continuous loop of risk information.

In order to make sure that our employees have a clear understanding of ERM, we emphasize the tools

and techniques for employees to use in managing risks. Our company encourages employees to

attend to the means of managing risks. We must focus on developing and implementing procedures

for managing risks.

102

Presence of KRIs (Study 1)

Key Risk Indicators (Present Condition)

The company’s risk tolerance is communicated through its Key Risk Indicators (KRIs). The company

aims to control risks on these indicators as much as possible. Some of the major KRIs for the company

include:

Key Risk Indicators

1 Losses of assets from theft, spoilage or obsolescence

2 Percentage of credit sales in excess of authorized credit limits

3 Interest charged on past due accounts

4 Number of unauthorized accesses to computer data files

103

Expression of KRIs (Study 2)

Key Risk Indicators (Qualitative Condition)

The company’s risk tolerance is communicated through its Key Risk Indicators (KRIs). The

company aims to control risks on these indicators as much as possible. Major KRIs for the

manufacturing plant include:

Measure

1 Ethical training fail rate

2 Number of client complaints

3 Losses of physical inventory from pilferage, spoilage, and obsolescence

4 Number of rejects exceeded

5 Materials waste rate

6 Unauthorized changes to customer records

7 Number of transactions unconfirmed beyond a certain time limit

8 Average response time to customer complaints

Key Risk Indicators (Quantitative Condition)

The company’s risk tolerance is communicated through its Key Risk Indicators (KRIs). The

company aims to control risks on these indicators as much as possible. Major KRIs for the

manufacturing plant include:

Measure Target Tolerances

1 Ethical training fail rate Less than 8% Less than 12%

2 Number of client

complaints

Less than 3 complaints

per 1,000 transactions

Less than 5 complaints per

1,000 transactions

3 Losses of physical inventory

from pilferage, spoilage, and

obsolescence

Less than 2% Less than 4%

4 Number of rejects exceeded Less than 5 rejects per

10,000 products

Less than 8 rejects per

10,000 products

5 Materials waste rate Less than 3% less than 5%

6 Unauthorized changes to

customer records

Less than 5 times per

1,000 records

Less than 10 times per 1,000

records

7 Number of transactions

unconfirmed beyond a

certain time limit

Less than 1 transactions

beyond 3 business day

Up to 10% of transactions

may be confirmed within 5

business day

8 Average response time to

customer complaints

Within 24 hours Up to 25% of complaints

may receive a response

within 24-36 hours

104

Dependent Measures

Problem Prevention Behaviors

Please indicate how likely you would engage in the following activities given the situation

described in the case above:

-5=Extremely

Unlikely

5=Extreme

ly likely

Try to develop procedures that are effective

to address potential risks that may result

from the above situation in the long term,

even if they slow things down to begin

with?

-5 -4 -3 -2 -1 0 1 2 3 4 5

Try to find the root cause of the above

problem. -5 -4 -3 -2 -1 0 1 2 3 4 5

Spend time planning how to prevent the re-

occurrence of this problem. -5 -4 -3 -2 -1 0 1 2 3 4 5

Perceived Responsibility for Risk Management

Please indicate your agreement or disagreement with the following statements related to the above

case:

-5=Strongly

disagree

5=Strongl

y agree

I feel a personal sense of responsibility to

address potential risks that may result from

the above situation.

-5 -4 -3 -2 -1 0 1 2 3 4 5

It’s up to me to bring about improvement to

address potential risks that may result from

the above situation.

-5 -4 -3 -2 -1 0 1 2 3 4 5

I feel obligated to try to introduce new

procedures to address potential risks that

may result from the above situation.

-5 -4 -3 -2 -1 0 1 2 3 4 5

Dealing with potential risks that may result

from the above situation is really not my

responsibility.

-5 -4 -3 -2 -1 0 1 2 3 4 5

I feel little obligation to address potential

risks that may result from the above

situation.

-5 -4 -3 -2 -1 0 1 2 3 4 5

105

Control Variables

Would you be willing to participate in a gamble where you have a 50 percent chance of winning

$10 and a 50 percent chance of losing $10, or would you prefer not to play the gamble?

How would you rate your willingness to take risks as compared to your classmate?

0 1 2 3 4 5 6 7 8 9 10

0 = less 10 = more

0 1 2 3 4 5 6 7 8 9 10

0 = extreme

unwillingness

(no gamble)

5 = no preference 10 = extreme

willingness

(gamble)

106

Manipulation Checks

Study 1

In Part II, when considering each case, which of the following role did you imagine in LXC

Corporation (please check one only)?

____an entry-level staff accountant in the Accounts Receivable (AR) Department

____an employee in the Purchasing Department

____a warehouse employee in the Shipping and Receiving Department

Please indicate to what extent you agree with the following statements.

-5=Strongly

disagree

5=Strongly

agree

LXC's risk management philosophy emphasizes

procedures and steps for managing risks more

than the importance and significance of

managing risks.

-5 -4 -3 -2 -1 0 1 2 3 4 5

Study 2

In Part II, when considering each case, which of the following role did you assume in LXC

(please check one only)?

____an employee in the Circuit Board Manufacturing division

____a storeroom worker in the Mobile Chip Warehouse

____a clerk in the Customer Service Department

____an accountant in the Accounting Department

Please indicate to what extent you agree with the following statements.

-5=Strongly

disagree

5=Strongly

agree

LXC's risk management philosophy emphasizes

procedures and steps for managing risks more

than the importance and significance of

managing risks.

-5 -4 -3 -2 -1 0 1 2 3 4 5

107

Demographic Information

Gender: Male ____ Female ____

Age: ____ years

Which country were you born? __________

Major: ____________________________________________________

You are a: freshman____; sophomore____; junior____; senior____; graduate student____.

Number of years of full time work experience: ___; your most recent full-time position is: _______.

Number of years of part time work experience: ___; your most recent part-time position is: _______.