Enterprise risk management in small and medium-sized family businesses

Summary of the study

Taking the right amount of risk is essential for a successful business. In response to the importance of risk management, the effectiveness and implementation of Enterprise Risk Management (ERM) systems have recently been discussed in the literature. However, smaller entrepreneurs often approach this challenge more informally in practice. Most of these small and medium-sized enterprises (SMEs) are family businesses in which family dynamics additionally influence their risk behavior.

To address the lack of ERM implementation in small and medium-sized family enterprises (SMFEs), the first step is to analyze how ERM influences the performance of SMFEs. In a second step, the influence of CEO tenure and family involvement as moderators on the ERM-performance relationship is analyzed. The regression analysis of a sample of 116 Austrian SMFEs shows that ERM implementation does not directly influence financial performance. However, CEO tenure and family involvement both show significant moderating effects on the ERM-performance relationship. Complementing the current literature on this topic, this study reveals that ERM performance is positively moderated by CEO tenure and negatively moderated by family involvement.

Key findings of this study

• The implementation of enterprise risk management (ERM) does not directly affect the financial performance of small and medium-sized family enterprises (SMFEs) significantly. This is explained by the fact that the costs and resources required to establish a formal ERM system may be too high for smaller companies.
• CEO tenure shows a significant positive moderating effect on the relationship between ERM and firm performance. This suggests that ERM can help counteract stagnation in family firms that may result from long CEO tenure and reduced risk taking.
• Family involvement shows a significant negative moderating effect on the relationship between ERM and firm performance. This suggests that with high family involvement, the costs of ERM implementation may exceed the benefits, as informal information flows and different perspectives within the family already enable effective risk identification.
• For SMFE, this means that ERM becomes more important with longer CEO tenures and can have a significant positive impact on financial performance. This implies for owners to consider implementing ERM as the tenure of the family CEO increases to avoid rigidity and improve the identification of business opportunities.
• With more family involved in the business, this may reduce the benefit of formal ERM systems as informal risk management capabilities may already be working well. This could be because several actively involved generations bring in new ideas and different opinions, which increases the ability to informally identify and assess risks.