The value ambiguity of ERM: The case study of Pike River Coal Mine
Xia Meng
Post-graduate Student
Business School
Eastern Institute of Technology
Napier, New Zealand
Noel Yahanpath
Senior Lecturer
Business School
Eastern Institute of Technology
Napier, New Zealand
Corresponding author: Noel Yahanpath, Private Bag 1201, Taradale, Napier, Ph
+64 6 974 8000, Fx +64 6 974 8910, Email [email protected]
II
The value ambiguity of ERM: The case study of Pike River Coal Mine
Abstract
Enterprise risk management (ERM) has drawn increasing interests in academia and
practice. At a theory level, many frameworks and standards have been developed.
However, in practice, relatively few organizations have successfully implemented
ERM and met expectations (Locklear, 2012). Two common explanations for ERM
failures are: firstly, firms fail to implement ERM appropriately and secondly, the
ERM framework has limitations in itself.
This paper provides further evidence supporting the second explanation. There are
many vague terms in current ERM frameworks, for example, risk appetite (Bromiley,
McShane, Nair, & Rustambekov, 2014; Power, 2009), but the critical term is “value”.
While ERM is generally accepted as a value-adding approach, there is no universal
interpretation on the term “value”.
This paper argues that the lack of ERM success arises from “value ambiguity” and, in
particular, whose value should be enhanced? Therefore, more specific questions are:
Managing risks for whose value?
Is it for shareholders or other stakeholders?
If for shareholders, is it for major shareholders or minor shareholders?
To evaluate these issues, this paper first reviews literature on ERM and then examines
the role of “value ambiguity” in the case study of Pike River Coal Mine.
This paper offers insights for ERM researchers and practitioners to reconsider current
ERM frameworks and the dangers of “value ambiguity” in implementing ERM
programmes.
Keywords: Pike River Mine, enterprise risk management
1
The value ambiguity of ERM: The case study of Pike River Coal Mine
1 Introduction
Risk management has been practised for thousands of years; however, there is no
universally accepted risk management framework. Generally, risks can be managed in
two fundamentally different ways: one risk at a time or all risks together (Nocco &
Stulz, 2006). The latter approach is often referred to as Enterprise Risk Management
(ERM) and is viewed as the best practice (Locklear, 2012). Although ERM is
conceptually straightforward, its implementation is far more complex. At a theory
level, many frameworks and standards have been developed. However, in practice,
relatively few organizations have successfully implemented ERM and met
expectations (Beasley, Branson, & Hancock, 2010; Locklear, 2012).
Why is achieving effective ERM so hard? One popular answer is to blame
organisations and managements for failing to implement the framework properly. For
example, Fadun (2013) concluded that risk management failures can be classified as
operational failure and operators’ failure. Operational failure comes from execution of
ERM systems while operators’ failure refers to a firm’s managers’ misconduct.
However, these reasons are too broad. Basically, they can be used to explain any
business failures.
On the contrary, another explanation is that there is something wrong with current
ERM frameworks. Power (2009) argued that ERM is fundamentally “flawed” at the
level of design. Also, even the most widely accepted framework, which is developed
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is perceived to be too theoretical and contains overly vague guidance
(Beasley et al., 2010). Vague terms like “risk culture” and “risk appetite” are often
used in regulations and recommended procedures, but they are not explicitly
explained (Bromiley, McShane, Nair, & Rustambekov, 2014).
However, those terms are not the only ones that are not well defined. In fact, current
ERM framework fails to clarify its objectives. Risk management is well accepted as
an approach to add value, but whose value should be enhanced? This leads to a
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fundamental flaw in ERM frameworks; we have used the term “ value ambiguity” to
explain this shortcoming. One common approach is shareholder value maximisation
(SVM). SVM is often presented as the primary goal of risk management (Quon,
Zeghal, & Maingot, 2012). However, shareholders do not share equal rights and
usually the majority shareholders tend to have more influence, leading to inequitable
situations even among shareholders.
The other issue is stakeholder value maximisation. For example, the COSO ERM
framework is based on the premise that every entity exists to provide value for its
stakeholders (COSO, 2004). Similarly, the Casualty Actuarial Society (CAS) defines
the purpose of ERM is to increase the organization's short and long term value to its
stakeholders (CAS, 2003). Notably, shareholders are also stakeholders. Therefore, the
question remains whether ERM is for shareholders or for all stakeholders.
“Value ambiguity” adds more challenges in implementing ERM, as all the actions and
decisions made via ERM are supposed to align with an entity’s value. Different
interpretations may lead to a totally different focus in ERM implementations. Clearly,
in reality, conflicts between shareholders and even conflicts within shareholders are
inevitable. Thus, this paper aims to outline the limitations in current ERM
frameworks by arguing that the large portion of ERM failures arises from difficulties
in clarifying ERM objectives, which is defined as “value ambiguity”. To illustrate the
role of “value ambiguity” in ERM failures, a case study of Pike River Coal Mine is
used.
The remainder of this paper is organised as follows. The methodology is presented in
Section 2. A literature review of the current state of ERM is given in section 3 and
section 4 examines the role of “value ambiguity” in the case of Pike Rive Coal Mine.
Section 5 contains the summary and conclusion.
2 Methodology
The basic methodology used in this paper is a combination of historical case-study
approach and documentary research method. The documentary research method is
used to categorise, investigate and interpret the research interest from the most
commonly written documents, in both the private and public domains (Payne & Payne,
2004). This method is useful but sometimes even more cost effective than other
3
methods (Gaborone, 2006). According to Bailey (1994), the documentary method
refers to the analysis of documents that contain information about the phenomenon
that researchers wish to study (Ahmed, 2010). For this research, data have been
collected from various published sources, including Tragedy at Pike River Mine: How
and why 29 men died, a number of financial reports, NZ Government Ministries, and
some newspaper articles and magazines and so on.
3 The current state of ERM
To understand the ambiguity surrounding ERM’s objectives and implementations, it
is necessary to have a broad understanding of how ERM emerged, why firms
implement ERM and current ERM framework’s limitations.
3.1 Emergence of ERM
Although risk management has been practised for thousands of years, enterprise risk
management is a relatively new concept (D’Arcy & Brogan, 2001). The term
“enterprise risk management” was first used by James Lam in the mid-1990s
(Locklear, 2012). In fact, risk management was originally developed by a group of
innovative insurance professors in 1950s (D’Arcy & Brogan, 2001). In 1963, Robert I.
Mehr and Bob Hedges published the first risk management text named “Risk
management and the Business Enterprise” (Head, 1982). In this text, the objective of
risk management was defined as “to maximise the productive efficiency of the
enterprise”. At that time this goal was mainly achieved by transferring risks to
insurance companies (Dickinson, 2001).
This risk-transferring tactic was sufficient until corporations were exposed to various
financial risks, such as volatility in exchange rates, commodity prices, interest rates
and stock prices, which cannot be transferred to insurance institutions. Since 1970s,
financial risk management began as a formal system practised by firms (Razali &
Tahir, 2011). At the same time, tools of financial risk management were developed by
investment banks to allow their corporate customers to hedge financial risks
(Dickinson, 2001). These financial products are forwards, futures, swaps and options
(D’Arcy & Brogan, 2001). They allowed financial institutions and other corporations
used them to manage risks in a similar approach as insurance risk management had
previously (Dickinson, 2001).
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Since mid-1990s, corporations realised the possibility to manage various risks at the
same time. Then, risk management shifted from traditional “piecemeal” risk
management to ERM, a systematic and integrated approach to manage total risks at
organisational level (Dickinson, 2001). This dramatic change emerges mainly from
the revolution in two fields, namely, corporate finance and governance.
In the field of corporate finance, the rise of shareholder value models facilitated the
emergence of ERM frameworks. More specifically, Dickinson (2001) highlighted that
shareholder value concepts inspired organisations to pay more attention to risk, which
has always played a central role in finance theory. Accordingly, financial
organisations and institutions began to emphasise on developing and practising risk
measurement tools, such as Value at Risk, to identify and assess the risk-return
relation underlying shareholder value. Power (2005) further defined this strand of
ERM as “the risk-based model of the firm”. In the other field, due to the collapse of
high-profile companies during 1990s, internal control became a central component of
corporate governance (Dickinson, 2001). Firms are required to report their internal
risk control systems either by voluntary codes or by legislation (Spira & Page, 2003).
This resulted in the emergence of the multitude of ERM frameworks, which is defined
as control-based ERM models by Power (2005). One classic control-based model is
COSO, ERM framework.
Collectively, ERM has experienced significant growth and evolution during the past
decades. According to Benabbou (2013), there are at least over 20 ERM standards and
frameworks worldwide. Yet, there remains no single, universally accepted ERM
framework (Locklear, 2012). Scholars and practitioners are still working on
developing and improving ERM frameworks.
3.2 Rationale behind ERM implementation
Despite of the absence of a universal-accepted ERM framework, the percentage of
organisations adopting ERM frameworks is growing (Beasley et al., 2010). However,
the rationale behind ERM implementation varies from organisation to organisation
(Muralidhar, 2010). Also, it is convinced that the reasons for implementing ERM
have impacted on ERM outcome (Hudin & Hamid, 2014). Thus, it is necessary to
understand why firms deploy ERM framework so as to investigate the lack of ERM
success.
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Generally, the drivers to implement ERM frameworks can be divided into two
categories: external forces and internal motivations. The first group is referred as to
pressures from external entities, including regulators, rating agencies, stock
exchanges, institutional investors, corporate governance oversight bodies and so on.
These parties require firms to be more transparent in corporate governance and to
strictly comply with laws and regulations. Meanwhile, firms are exposed to more
risks because of globalisation and fierce competitions (Dafikpaku, 2011). Therefore, it
is argued that the growing number of external risks speeds up the spread of ERM
practices (Hudin & Hamid, 2014).
Another set of drivers for ERM derives from organisations’ internal motivations. The
first motivation lies in the outlook organisations have towards risk (CAS, 2003).
Risks are viewed by organisations as opportunities rather than merely negative events.
Also, organisations have gradually recognised the importance of managed risks at an
enterprise level, that is, a holistic view of risks. The other main motivation is the
desire to leverage the benefits of effectively managing the enterprise risks. Some of
the benefits highlighted by COSO (2004) are:
• Aligning of risk appetite and strategy
• Reducing operational surprises and losses
• Identifying and managing cross-enterprise risks
• Providing integrated responses to multiple risks
• Seizing opportunities
• Improving deployment of capital
Notably, the list above can be endless as the ERM frameworks promise a balance
between risk and return in core business processes (Dafikpaku, 2011). Thus, The core
benefit is value creation. Nocco and Stulz (2006) argued that ERM creates value by
influencing companies at both a “macro” or company-wide level and, “micro” or
business-unit level. At macro level, value is created through establishing senior
management to quantify and manage the risk-return trade-off in the entire
organisation. At micro level, ERM ensures the commitment of all managers and
employees to carefully evaluate and manage risks. Similarly, Quon et al. (2012)
highlighted that ERM increases shareholder value from three aspects. First, efficient
use of capital is enhanced along with expenditures reduced. Second, better decisions
are made. Third, investor confidence is stabilised. Interestingly, while investors are
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indifferent to what kind of ERM system the firm uses, they will pay a 20 or 30 per
cent premium for a firm who manage risks effectively (Schneier & Miccolis, 1998).
3.3 Implementations and limitations of ERM
Not surprisingly, although organisations are driven to implement ERM for many
reasons, the fundamental driver is to achieve the benefits of ERM. Unfortunately,
studies reveal that most organisation failed to achieve the expected benefits by
implementing ERM systems (Locklear, 2012). A survey conducted by COSO
indicated that the state of ERM is relatively immature (Beasley et al., 2010). Only less
than a third of respondents describe their current stage of ERM implementation as
“systematic, robust and repeatable” with regular reporting to the board. Also, Quon et
al. (2012) investigated the relationship between ERM and firm performance for 156
non-financial firms, and they found that ERM information did not predict or have any
favourable impact on business performance. In contrast, Grace, Leverty, Phillips, and
Shimpi (2015) found that ERM practices across insurers result in statistically
significant increases in both cost and revenue efficiency. Interestingly, studies
conducted by insurance companies present a different picture. A report published by
Aon in 2010 showed that only 7 per cent of the respondents had been successfully
implementing ERM programs at a mature level (Locklear, 2012).
A great deal of research indicates the existence of limitations of ERM theory and
practice (see Locklear, 2012, Beasley et al., 2010 Shimpi 2015). In fact, ERM systems
developers are aware of some limitations in the current frameworks. For example,
COSO states in its framework that ERM cannot ensure the entity will always achieve
its objectives, because of the limitations, such as, judgement, breakdowns, collusion,
cost versus benefits, and management override (COSO, 2004). Notably, these
limitations are mainly behavioural, and it does not state any limitation in the
framework itself. However, Segal (2006) argued that ERM programs lack required
level of quantitative rigor, including lack of a business case for ERM, unclear concept
of “risk appetite”, incomplete integration of ERM into decision-making process,
inability to quantify operational risk, and misalignment of various ERM. Similarly,
Power (2009) emphasised that ERM is flawed at the design level. This argument is
illustrated by investigating the role of impoverished conception of risk appetite in
financial crisis. In addition, notwithstanding that the COSO ERM framework defined
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risk appetite as “the amount of risk that an entity is willing to accept in pursuit of
value” (COSO, 2004), there is no explanation for whose risk appetite accounts. More
importantly, the term “value” remains unclear in these definitions and frameworks.
Thus, this paper argues that the difficulties in implementing ERM lie in “value
ambiguity”. The large portions of ERM failures arise from the challenges in clarifying
ERM objectives. The related questions are:
Managing risks for whose value?
Is it for shareholders or other stakeholders?
Is it for major shareholders or minor shareholders?
If an entity fails to answer these questions above, its ERM implementation is not only
doomed to failure but also harmful to other parties’ interests. Even worse, the value it
pursues may end up at the expense of human lives. Next section will illustrate the
danger of “value ambiguity” by examining the role of “value ambiguity” in the case
of Pike River Coal Mine.
4 The role of “value ambiguity” in the case of Pike River Coal Mine
The explosion happened in Pike River Coal Mine, located in the West Coast of the
South Island of New Zealand, on 19 November 2010. It is one of the worst disasters
in New Zealand mining history. It took 29 miners’ lives and, following the explosion,
Pike River Coal Ltd (PRC), went into receivership, resulting in numerous losses for
stakeholders. In the aftermath of the tragedy, a royal commission was established to
investigate the causes of the explosion. Its report pointed out that, although PRC
operated in a risky industry, the health and safety risks were not well managed (Royal
Commission on the Pike River Coal Mine Tragedy, 2012a)
In fact, the PRC had implemented risk management framework, which is described as:
Pike River has developed a framework for risk management and internal
compliance and control systems which cover organisational, financial and
operational aspects of the company’s activities…there is a strong safety culture
which is fostered by management… detailed compliance programmes operate to
ensure the company meets its regulatory obligations. (Royal Commission on the
Pike River Coal Mine Tragedy, 2012b, p. 51)
From the above, it can be seen that PRC used a control-base approach to manage risks
collectively, which is somewhat similar to other ERM frameworks. As mentioned
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before, ERM is regarded as the best practice to manage risks. Why then, did PRC fail?
Regarding this question, some blame the lapses in governance and regulations from
government. For example, Ewen (2014) outlined the responsibility of the New
Zealand parliament for this tragedy in his book titled “Pike: Death by parliament”.
Meanwhile, the media and families of the victims have been closely following the
process of the Health and Safety Reform Bill (Bennett, 2014; Mitchell, 2015). It
seems that people have fallen prey to a legitimacy-driven style of risk management. In
contrast, we argue that this tragedy resulted from the “value ambiguity” in the ERM
framework. Particularly, like other frameworks, PRC’s framework failed to clarify its
objectives, which leads to the failure.
In PRC’s corporate governance disclosure statement filed with the New Zealand
Stock Exchange in September 2010, the role of ERM was described as “an essential
part of the company’s approach to creating long-term shareholder value” (Pike River
Coal Limited, 2010). Clearly, PRC’s objective is to create shareholder value, that is,
shareholder value maximisation (SVM). Notably, PRC stressed “ long-term” in the
above statement. It is often viewed that maintaining positive stakeholder relationships
provides maximum long-term benefits to shareholders (Gitman, 2011). Accordingly,
PRC’s goal can be expanded to all stakeholders, that is, stakeholder theory.
Thus, the perennial question comes again: whose value should be enhanced? This
dilemma represents the term “value ambiguity”, and there was no solution provided in
PRC’s framework. This unsolved question was left to intellectual judgements. Hence,
in terms of PRC, did it manage risks for shareholders or other stakeholders?
Clearly, the PRC failed to manage risks for other stakeholders, in particular,
employees. It is evident that all the risk related to health and safety was not well
managed. First, according to PRC’s risk management framework, the Health, Safety
and Environment committee was established to assess management and firm
performance in health, safety and environment matters, and it was supposed to meet
twice per year. However, by the time of the explosion the Health, Safety and
Environment committee had not met for 13 months (Royal Commission on the Pike
River Coal Mine Tragedy, 2012b).
Second, most of safety risks were not assessed at all. Even some obvious warning
9
signals were constantly ignored. For example, Hawcroft Consulting International,
commissioned by PRC’s insurers, conducted a comprehensive risk survey for PRC in
2009 and 2010 and recommended a “broad-brush” risk assessment of the operation in
both of the two reports (Macfie, 2013; Royal Commission on the Pike River Coal
Mine Tragedy, 2012b). Its 2010 report identified a number of outstanding risks that
required assessment, including windblast, gas ventilation and hydro mining. The risk
of a methane gas explosion, which is the immediate cause to Pike River Tragedy, was
rated as possible. However, the reports were never discussed by the board and no
actions were taken, either (Royal Commission on the Pike River Coal Mine Tragedy,
2012b).
Third, PRC displayed a culture that put production before safety (Royal Commission
on the Pike River Coal Mine Tragedy, 2012b). It can be seen that many actions were
taken to meet production targets at the expense of safety. For example, although PRC
went through a number of exercises before the start of hydro mining and identified
some major weaknesses in the mine’s systems, it began hydro extraction without
addressing critical problems and implementing effective monitoring systems. Also,
while staffs were not given sufficient training and lack related experiences, PRC
offered a bonus incentive to workers if they could meet production targets by
September. Not surprisingly, workers made every effort to produce 1000 tonnes of
coal by the due date for the $10,000 bonus. Even when methane levels reached
explosive levels, the operation was continuing until the bonus had been achieved.
Again, after part of the roof in panel 1 goaf collapsed on 30 October 2010, resulting in
an explosive accumulation of methane, no formal investigation was taken.
In fact, PRC did receive advice on the potential of windblast and large goaf falls and
underground workers had been keeping reporting the incidents of excess methane for
months. However, PRC neither suspended hydro extraction nor effectively controlled
methane. Instead, Peter Whittall, PRC’s chief executive officer at that time, claimed
that “there have been no significant issues” at PRC’s annual general meeting on 15
November 2010 (Royal Commission on the Pike River Coal Mine Tragedy, 2012b, p.
167). Four days later, the large methane explosion happened and it took 29 miners’
lives.
Thus, it can be concluded that PRC did not manage risks for other stakeholders, and it
10
can be assumed that its ERM framework is for the best interests of shareholders. Then,
did PRC manage risks for major shareholders or minor shareholders?
To answer this question, it is essential to examine PRC shareholders’ expectation, that
is, what they expected from investing in PRC. To begin with the largest shareholder
of PRC, which was New Zealand Oil & Gas (NZOG), at the time of explosion its
share was 29.34% (Pike River, 2010). What NZOG expected from PRC is supposed
to pursue profits and returns as other investors did. However, it appears that NZOG
did not have confidence in PRC. Tony Radford, chairman of NZOG and PRC director,
admitted that PRC was a non-core activity and NZOG intended to sell Pike
shareholding within a year or two of the floatation (Macfie, 2013). Therefore, one
could argue that NZOG focus was an immediate return rather than long-term value
creation.
How about other shareholders? The total listed ordinary shares had reached over 400
million and the number of shareholders was 8,748 at 20 August 2010 (Pike River,
2010, p. 38). It is impossible to get the exact information about each shareholder’s
expectation. Nevertheless, PRC’s performance had strong impact on these
shareholders’ earnings. For instance, fully paid ordinary shares are entitled to
dividends according to Pike River (2010), and dividends could not be paid unless
PRC had excess earnings. PRC’s only source of revenue was Pike River Coal Mine
and its profits were from the production of coal. Thus, it can be concluded that other
shareholders would like PRC to generate profits from the production, that is, long-
term value creation.
Obviously, PRC’s major shareholder did not share the same expectation as other
minor shareholders. So, how did PRC handle this complex situation? It seems that
PRC shifted its initial objective to meet its largest shareholder, NZOG’s expectations.
At the very beginning, Pike aimed to develop a safe, world-class coal mine, however,
it put more emphasise on the market than the project (Royal Commission on the Pike
River Coal Mine Tragedy, 2012b). As stated by Behre Dolbear Australasia Pty Ltd,
“there is a lot of effort being expended on presenting the project to the broking
community” (Royal Commission on the Pike River Coal Mine Tragedy, 2012b, p. 42).
As a consequence, PRC had increased the number of its shares to over 400 million by
11
2010 from 87 million in 2007 while the first coal production was delayed from 2008
to 2010. Interestingly, NZOG did not increase its shareholdings in PRC. Instead, it
provided PRC capitals in terms of convertible bonds and short-term loans and became
PRC’s shareholder and secured creditor. As creditors generally share fewer risks than
shareholders, it can be argued that PRC had created value for NZOG through
mitigating NZOG’s risks.
In contrast, it seems that PRC had ever generated value for other shareholders, as
PRC had been loosing money since IPO. In 2007, it recorded a loss of $0.88 million
and the loss increased to $1.14 million by 2008. Next year, the number rocketed to
$13.02 million. It further tripled to $39.3 million in 2010 (Royal Commission on the
Pike River Coal Mine Tragedy, n.d). After the explosion, PRC went to receivership
and was delisted from NZX. Even worse, when the receivers appointed on 13
December 2010, PRC only had $10.9 million cash on hand (PWC, 2011). To date,
PRC have not paid all secured creditors, and there is unlikely any payment available
to shareholders (PWC, 2015).
From the above discussion, it can be concluded that PRC managed risks for its largest
shareholder, NZOG, rather than minor shareholders or other stakeholders. Although
PRC had defined its objective in its ERM framework, which is “to create long-term
shareholder value” (Pike River Coal Limited, 2010); it failed to clarify whose value
should be enhanced, like other ERM frameworks. Because of “value ambiguity” in
PRC’s ERM framework, PRC’s ERM implementation resulted in numerous losses to
minor shareholders and it end up at the expense of 29 miners’ lives. Thus, the tragedy
at Pike River further illustrates the dangers of “value ambiguity” in current ERM
frameworks.
5. Summary and conclusion
Risk is an integral part in business world and daily life. Although risk management
has been practiced for a long time, ERM is a relatively new concept. ERM is referred
to as a systematic and integrated approach to manage total risks at organisational level
and is listed ERM as one of the “breakthrough ideas for 2004” (Bromiley et al., 2014).
The revolution in corporate finance and governance since 1990s leads to the
emergence of two strands of ERM frameworks, namely, the risk-based model of the
firm and the control-based model (Dickinson, 2001; Power, 2005). The most widely
12
accepted ERM framework developed by COSO belongs to the latter category;
however, there is no single, universal accepted ERM framework.
The popularity of implementing ERM in business world derives from external forces
and internal motivations. Ultimately, the core driver is to leverage the benefits of
ERM implementations. However, studies from both private sectors and academic
researchers showed that a significant amount of organisations cannot realise these
benefits by adopting ERM frameworks (Locklear, 2012). Two common explanations
to ERM failures are: firms fail to implement ERM appropriately and there are
limitations in ERM framework itself. This paper agrees with the latter view. There are
many vague terms in current ERM framework, e.g. risk appetite (Bromiley et al.,
2014; Power, 2009), but the critical one is value. This paper argues the difficulties in
implementing ERM lie in the “value ambiguity”, that is, whose value should be
enhanced? The large portions of ERM failures arise from the challenges in clarifying
ERM objectives.
It is generally acknowledged that ERM creates value. However, current ERM
frameworks fail to define creating whose value. From corporate finance perspective,
the goal of the firm is to maximise shareholder wealth while satisfying other
stakeholders is considered as part of the firm’s social responsibility (Gitman, 2011;
Sundaram & Inkpen, 2004). Meanwhile, as shareholders are stakeholders, the goal of
ERM can be expanded to all stakeholders. However, there are inevitable conflicts
between shareholders and other stakeholders. Even within shareholders, various
interests exist. Because current ERM frameworks fail to instruct organisations to
clarifying their objectives related to value, effective implementations are hard to
achieve.
This paper used the case study of Pike River Coal Mine to illustrate this important
shortcoming, “value ambiguity”, in ERM. PRC had implemented an integrated and
control-based ERM system and aimed to “create long-term shareholder value”.
However, it ended up with focusing on creating short-term value for largest
shareholder, NZOG. First, it put huge efforts on raising capital instead of the project
itself, because NZOG seek an immediate return. As a result, it transferred NZOG’s
risks to other shareholders. Second, the interests of other stakeholders like employees
were ignored. Consequently, safety risks were never well managed and critical risks
13
had never been properly assessed. Eventually, the mine exploded. It resulted in
unrecoverable costs to PRC shareholders, especially those with minor shares. Also, it
took 29 workers lives and left enormous harm to victims’ families. The “value
ambiguity” in ERM enabled PRC to focus on largest shareholder’s short-term value
and at the expense of employees’ lives and minor shareholders’ wealth. Thus, it is
evident that “value ambiguity” in current ERM frameworks can lead to failures in
ERM as well as harm other stakeholders.
In summary, this paper provides insights for ERM researchers and practitioners to
reconsider current ERM frameworks and highlights dangers of “value ambiguity” in
implementing ERM programs. It also offers another perspective to investigate what
went wrong at Pike River.
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