Changes in capital allocation practices – ERM and organisational change

Abstract

This paper aims to study changes in capital allocation routines following the introduction of a new risk management system, enterprise risk management (ERM). Based on an institutional framework and empirical evidence from multiple sources in a large UK insurance company, we evaluated the extent and nature of organisational change. ERM was seen as an external driver to the change in the existing routines, which in turn led to internal changes in new capital allocation routines. The change was extreme, which signifies that existing capital allocation routines were not strong enough to deal with ERM as a key driver of change.

Keywords:

• Capital allocation
• Enterprise risk management (ERM)
• Institutional theory
• Insurance
• Risk management change

Acknowledgments

We gratefully acknowledge the comments and suggestions of the anonymous reviewers and Professor Glen Lehman (Editor In-Chief). We also thank participants at the EAA congruence (Paris, 2013) and Critical Studies in Accounting and Finance (CSAF) Conference (Abu Dhabi, 2013) for their helpful comments on the earlier version of this paper.

Notes

1 Examples of ERM frameworks released are COSO (the Committee of Sponsoring Organisations of the Treadway Commission) (2004a,b) and ISO 31000 (2009).

2 Capital allocation routine refers to capital allocation practices, i.e., the ways/approaches used to allocate capital to different business units, products, and customers as a main part of the process of profitability-measurement. Thus, practices are the ways in which capital allocation is exercised.

3 Twelve per cent of the survey respondents were from the financial industry.

4 Risk management routines can be approached as a unit of analysis whereby there is a need to study their internal dynamics when designing or managing them within an ERM environment (Feldman and Pentland, 2003; Pentland and Feldman, 2005).

5 Even though the data analysis process was supported by using Nvivo software for textual analysis, it was a helping hand tool as the researchers felt more comfortable referring to the actual transcripts. Nvivo facilitated the process through applying mapping techniques when structuring the data.

6 Success here describes the implementation process itself, which refers to a well-developed and full implementation of ERM related processes at all levels of the company. In this regard, ERM processes are embedded into decisions at different levels in the company.