CHAPTER V

5.1 Introduction

An Effective Risk Management makes sure that the resources are

allocated properly on an ongoing basis and influences management
decisions daily. Moreover the establishment of Effective Risk
Management is an enterprise wide activity which includes all the
departments and functions within an organisation. The process of risk
management does not necessarily focus on the management of risk,
which is uncertain and unpredictable in nature, but on the capability of
the organization to operate effectively in a changing and uncertain
environment. Managing risk is actually about managing the organization:
planning, organizing, directing, and controlling organization systems,
processes and resources to achieve the organization's objectives. Effective
risk management requires development of the organization's systems,
processes, and resources to change the organization and its responses to
its environment. Risk should be integrated flawlessly into the overall
strategy clearly defined, communicated and understood by everyone.
After incidents such as the Enron collapse, Bhopal, Exxon Valdez, Risk
management has become a requisite management activity. Risk
Management helps an organisation to achieve its objectives. In Effective
Risk Management, business managers assume the ownership of the
management of the risks.

This chapter aims at framing a model for Risk Management

Practices and its outcomes. A conceptual framework is formed based on
the review of literature. Risk Management process, an enterprise wide
approach or commonly known as Enterprise Risk Management is adopted

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 by the business sector around the world. Organisations that manage risk
effectively are likely to achieve their objectives.

5.2 Literature Review

To frame a theoretical model on Effective Risk Management

practices and its outcomes, the available literature is studied. Risk
Management practices are governed by certain frameworks. There are
several types of Risk management frameworks. Risk Management
frameworks are a description of an organizational specific set of
functional activities and associated definitions that specify the processes
that will be used to manage risks. Effective Risk Management practices
are defined by these frameworks and it is discussed in detail.

5.2.1 AS/NZ Risk Framework

Risk Management standard (AS/NZ 2004) defines risk as the

chance of something that will have an impact on objectives. AS/NZ
2004 Risk Management standard is depicted below.

5.2.1.1 Communication and Consult

Communicating the type of risk and process to manage risk to both

internal and external shareholders is important, as it ensures that those
responsible for implementing risk management are aware about what has
to be done.

5.2.1.2 Establish the Context

It defines the basic parameters within which the risk has to be

managed (i.e. the organizations internal and external environment).

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 5.2.1.3 Identify Risk

It involves in identifying the Risk to be managed in terms of what

can happen, where, when, why it happens?

5.2.1.4 Analyse Risk

Risk Analysis is developing an understanding about risk. There are

several approaches used to analyse risk, which broadly includes
qualitative tools and quantitative tools.

5.2.1.5 Evaluate the Risk

The main purpose of risk evaluation is to make decisions about

which risk needs treatment and treatment priorities.

5.2.1.6 Treat Risk

Risk treatment involves identifying the range of options for treating

risks, assessing these options, preparation and implementation of
treatment plans.

5.2.1.7 Monitor and review

Monitoring and review involves learning lessons from the risk

management process, by reviewing events, treatment and their outcomes.

5.2.1.8 Recording the risk management process

The risk management process should be recorded appropriately.

Effective Risk Management as per AS/NZ Standard

Establishing Effective Risk Management as per AS/NZ Risk

Management standard comprises of developing a risk management policy

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 which enables risk management to be implemented effectively throughout
the organization. The Risk Management planning includes developing
risk management plans and communicating the risk management policy,
ensuring adequate resources and the support of senior management,
establishing accountability and authority.

5.2.2 Committee of Sponsoring Organisation (COSO) Framework

According to COSO framework, the Enterprise risk management

consists of eight interrelated components. These components are derived
from the way management runs an enterprise and are integrated with the
management process. These components are:

5.2.2.1 Internal Environment

It emphasizes on how the organization views the risk and addressed

by an entitys people. It gives a clear picture about the organizations risk
management philosophy, risk appetite, integrity, ethical values and the
environment in which they operate.

5.2.2.2 Objective Setting

Objectives must exist before management can identify potential

events affecting their achievement. Enterprise risk management ensures
that management has in place a process to set objectives and that the
chosen objectives support and align with the entitys mission and are
consistent with its risk appetite.

5.2.2.3 Event Identification

Internal and external events affecting achievement of an

organisations objectives must be identified. Opportunities are channeled
back to managements strategy or objective- setting processes.

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 5.2.2.4 Risk Assessment

Risks are analyzed, considering likelihood and impact, as a basis

for determining how they should be managed. Risks are assessed on an
inherent and a residual basis.

5.2.2.5 Risk Response

Management selects risk responses like avoiding, accepting,

reducing or sharing risk. It also involves in developing a set of actions to
align risks with the entitys risk tolerances and risk appetite.

5.2.2.6 Control Activities

Policies and procedures are established and implemented to ensure

that the risk responses are effectively carried out.

5.2.2.7 Information and Communication

Relevant information is identified, captured, and communicated in

a form which enables people to carry out their responsibilities. Effective
communication also occurs in a broader sense-flowing down, across, and
up the entity.

5.2.2.8 Monitoring

The organisations enterprise risk management is monitored and

modifications are made accordingly. Monitoring is accomplished through
ongoing management activities, separate evaluations, or both.

Effective Risk Management practice as per COSO framework

Effectiveness of Risk Management as per COSO framework

depends upon the assessment of these eight components presence and its

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 functioning. Enterprise Risk management practices helps the
management to effectively deal with uncertainty and opportunity, reduces
operational surprises and losses, helps to effectively assess capital needs
and enhance capital allocation. Enterprise Risk Management helps the
organization in effective reporting and compliance with laws and
regulations, and also helps to avoid damage to the entities reputation and
associated consequences.

5.2.3 Network for Environmental Risk Assessment and Management

Accounting (NERAM) Framework

According to NERAM Framework, Key indicators of an effective

risk management activity in an organization are:

1. Commitment of senior management

2. Risk controls and programs that are ubiquitous in the

organization and well understood

3. A well-publicized Risk Profile that sets priorities for

modifying risk controls

4. Effective risk communication that results in transparency for

employees and other Stakeholders

5. Monitoring, review, and performance indicators of the

organizations risks. These include all legal and regulatory requirements.

Risk management should be a line management function not staffs

function since it is just another management activity and because it is an
integral part in decision making.

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 Effective management of risk process includes risk policy framing
and communicating to all staff, senior management support, promote,
own and lead on Risk management, an organizational culture that
supports risk management process. (Great Britain, Office of Government
commerce, 2002). An organization-wide view of risk management can
greatly improve efficiencies, generate synergies and ensure that the
company takes the optimal amount of risk. The right and strong culture
encourages entrepreneurial risk taking and helps to achieve the desired
results. (A.V Vedupuriswar, 2004). Risk Management is everyones job.
The risk management philosophy should be embedded in the companys
structure and culture. (Aswath Damodharan, 2007). Risk Control should
be embedded in the culture and business processes. (Turnbull report). In
case of JP Morgan Chase the key elements of risk management are
structure, culture, incentives, risk strategy, analytics and plumbing.
(Summit report 2008, Harvard Business School).The success of
organization depends on the risk management (Jorion 2001).

5.2.4 Outcomes of Risk Management

Opportunities

Good risk awareness and management organizations can gain

confidence to take new opportunities (Butterworth 2001).Enterprise Risk
Management has helped Walmart to take up the opportunities (William
2003). Effective Risk Management has the ability to exploit the
opportunities and avoid adverse economic impacts (Andersen 2009).
Meagher and ONeil (2000) advocated that risk management process
should be one that improves the linkage of risk and opportunity and
positions it as a source of competitive advantage. An Enterprise Risk
Management practice enhances organizational capabilities to respond to

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 risk and seize opportunities (Miccolis, 2001).It helps in seizing the
opportunity (Great Britain Office 2002, A.V Vedupuriswar 2004). Risk
Management practices helps to identify opportunities (Allen, Anne 1997,
KPMG 1999). Risk creates some potential opportunities for system
developed (Andrew Graham).The main aspect of risk is the focus on
identifying both threats and Opportunities (Collier, 2009; Olsson, 2007;
Lam, 2003; Hillson, 2002). Effective Risk Management practices help to
seize the opportunities (Collier 2009; Beasley & Frigo, 2007;Olsson
2007; Hillson 2002).

Objectives

An integrated approach to managing risk enhances the firms

ability to achieve its business objectives. (Adopting an Integrated
approach to managing risk, 1998; Berry et.al.1998; Beasley&Frigo,
2007). The undertaking of the risks should be lined up with corporate
strategies, objectives, and goals (IAAS, 2008).Risk Management
practices helps to achieve the organizations objective (ISO 31000).A
survey on Canadian Best practices in Risk Management revealed that
effective risk management practices helped in achieving the objectives
(KPMG 1999).The goal of Risk Management is to increase the likelihood
that an organisation will achieve its objectives by managing risk (Beasley
& Frigo, 2007).Increases the ability to meet corporate objectives
(Anthony Carey and Nigel Turnbull, 2001)

Reputation

The benefits of Risk Management include enriching corporate

reputation (Collier, 2009; Crouhy et.al. 2006; Bailey et.al. 2004;
Belmont, 2004; Lam, 2003; Great Britain, Office of Government
commerce, 2002; Bettis, 1983). Ineffective Risk Management may cause

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 damage to the reputation of the firm (Edmund N. Conrow, 2003).Risk
Management practices helps to avoid damages to the reputation of the
firm (COSO 2002).

Resource allocation

The results of Singapore risk management survey have found that

the risk management has improved resource allocation (KPMG 2006).
Effectively integrated Risk Management cultivates opportunity seeking
behaviour and leads to improved performance. (Gibbs, Jim Deloach,
2006). It facilitates proper resource allocation (Gupta, 2009; Great
Britain, Office of Government Commerce, 2002; Micollis, 2000).It
facilitates better capital allocation (A.V Vedupuriswar)

Decision Making

Risk Management practices help in improving decision making

(Economic Intelligence Unit Research Report, 2007;Crouhy et.al. 2006;
KPMG Research report 2006; Andrew Woods, David Axon, Grey
Hackett, 2006; Kid Sagrove, 2005; Bailey et.al. 2004; Belmont, 2004;
A.V Vedupuriswar, 2004; Lam, 2003; Great Britain Office of
Government commerce, 2002; Gupta, 2004 a, b; Bettis, 1983)

Accountability

A clear set of Risk Management practices defines the

responsibilities and accountability attached with the employees of
organisation. Risk Management practices improves accountability
(AS/NZ Standard, 2004; COSO, KPMG, 1999; Great Britain, Office of
Government Commerce, 2002; Kit Sad grove, 2005). Infosys has found
that the best risk management comes from their line management. It has
hold managers more accountable for risk management by embedding the

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 measures of risk management into the firms performance management
system. (Harvard Business School, Summit Report 2008).

Shareholder value

Proper Risk Management practices will be able to generate

competitive advantage and create value for shareholders (A.V
Vedupuriswar, 2004; Berry Andrew Philips, 1998; Gerald Gay, Jouhann
Nam, 1998; Carole Hicks, 2002; Matheson, David and Matheson, Jim,
1998; Smit, Barbara 1998; Hunt, Ben, Colin Witheat, 1999; KPMG
Research Report, 1999; Barton et.al. 2002; Suryanarayana, 2003).
Effective Risk Management practices will help to increase greater
shareholder confidence (Butterworth, 2001; Anthony Carey and Nigel
Turnbull, 2001).

Better information system

The risk management function ensures that right amount of

information flows across the organisation (Conference Board of Canada,
2011 EIU, 2006; Protiviti Research report, 2007; Institute of Management
Accountant, 2007).

Service delivery

By managing risks, managers are likely to meet service delivery

(KPMG Research Report, 1999; National Audit Office, 2004; Victorian
Auditor General Office, 2007, Great Britain Office, 2002)

Management reporting

Effective risk management practices helps in Management

reporting and monitoring the reporting process (Lam 2003.,A.V
Vedupuriskhar)

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 5.3 Conceptual Framework

Based on the literature review, this research concentrates on

Conceptual framework of Risk Management practices and its outcome. It
is evident from the literature that practicing Risk Management effectively
will help the company to improve its outcomes in terms of decision
making, resource utilization, planning, increase in accountability etc.,
Apart from this the researcher has attempted to test whether effective risk
management practices have negative outcomes on Risk score. Risk score
is obtained as a product of likelihood occurrence of risk and Impact of
occurrence of risk.

H01- Effective risk management practices have positive association

with outcomes of risk management.

H02- Effective risk management practices have negative association

with risk score.

FIGURE 5.1 PROPOSED MODEL

Effective Risk
Outcomes of Risk
Management H01
Management
practices

H02

H2
Risk Score

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 5.4 Methodology

SEM is a comprehensive statistical approach to testing hypothesis

about relations among observed and latent variables (Hoyle, 1995).SEM
uses various types of model to depict relationships among observed
variables, with the same basic goal of providing a quantitative test of a
theoretical model hypothesized by a researcher. More specifically,
various theoretical models can be tested in SEM how sets of variables
define constructs and how these constructs are related to each other. The
goal of SEM is to determine the extent to which the theoretical model is
supported by sample data. Partial Least square (PLS) is one of the
Structural Equation modeling technique to map the variable based on the
nature of dependency. It is an extension of non-parametric multiple
regression. Partial least squares (PLS) method is used to estimate the
model because of the advantages argued by the authors (J.Hulland et.al.
2010; Chin, 1998; Fornell and Cha, 1994; Bookstein, 1982; Wold, 1985).
Partial Least Squares (PLS) methods constitute one alternative to
estimating SEM (Virales et.al. 2010). Furthermore, PLS is a powerful
method for predictive applications, as PLS aims at explaining variances
(Fornell and Bookstein, 1982).Many softwares like Smart PLS Visual
PLS are used for SEM calculations. For the estimation of the structural
equation model, Visual PLS is user friendly software (Dirk Temme,
Henning Kreis and Lutz Hildebrandt, 2006).

5.5 Results and Discussions

Confirmatory factor analysis (CFA) has been done for testing the
constructs whether their characteristics are measurable by their respective
indicator variables (Bollen, 1989). The results of CFA are presented in
two stages (Anderson and Gerbing 1988). First the measurement model is

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 evaluated and then the structural model is evaluated. The measurement
model or factor model specifies the relationship among measured
(observed) variables underlying the latent variables. The reliability and
validating of the model should be checked while assessing the
measurement model (Fornell and Larcker, 1981). To assess the internal
consistency reliability Cronbachs Alpha (Haier et.al. 2006; Malhotra and
Briks, 2006), Composite reliability Coefficient measure (Chin, 1998, p.
320; Fornell and Larcker, 1981), Average Variance Explained can be
used. Cronbachs alphas, should be larger than 0.7 (Nunally 1978). The
composite reliability estimates the extent to which as set of latent
construct indicators share in their measurement of a construct (Haier et.al.
1998). Composite reliability should be greater than 0.6(TSENG et.al.
2006), 0.70 (Haier et.al. 1998, Fornell and Larcker 1981; Nunally 1978).

The Average Variance Extracted (AVE) measures the amount of

variance captured by a construct in relation to the variance due to random
measurement error (Fornell and Larcker 1981). AVE demonstrates the
internal consistency for the indicators of all latent variables. The
measurement model specifies relationship an assessment of convergent
and discriminate validity.

The structural model specifies the relationship among the latent

variables as posited by the theory. To evaluate a PLS model, researchers
typically examine R2 values for the dependent latent variables (Chin
1998, Hulland ,1999).

Table No 5.1 shows the confirmatory factor analysis results. From

table it is understood that factor loadings of the indicator variables are
higher for respective constructs than the other constructs. Therefore,

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 confirmatory factor analysis results show that the SEM is applicable to
the data given.

From the Table 5.2, it is observed that all loading of individual

indicator variables on respective constructs (factor) are statistically
significant, since T statistics for all the constructs are greater than two ( T
table values). Bootstrapping is a resampling algorithm for practical data
analysis and statistical testing of hypothesis without basic assumption
about population.

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 TABLE 5.1 FACTOR STRUCTURE MATRIX OF LOADINGS
AND CROSS-LOADINGS
SCALE
S.No. ERM ORM RISKSCORE
ITEMS
1 ER1 0.5815 0.1838 -0.2755
2 ER2 0.3886 0.1904 0.0085
3 ER3 0.4532 0.086 -0.2061
4 ER4 0.39 0.1406 -0.1124
5 ER5 0.2268 0.0079 -0.0095
6 ER6 0.5356 0.0692 -0.148
7 ER7 0.4216 0.1092 0.0078
8 ER8 0.4361 0.1818 -0.0954
9 ER9 0.5885 0.1731 -0.1858
10 ER10 0.2374 0.012 -0.0217
11 ER11 0.6761 0.1547 -0.1684
12 ER12 0.6818 0.2969 -0.0824
13 ER13 0.5104 0.23 0.0482
14 ER14 0.5435 0.1811 -0.1512
15 ER15 0.4586 0.2509 0.1206
16 ER16 0.5396 0.2462 -0.0183
17 ER17 0.6566 0.1366 -0.3476
18 ER18 0.4261 0.2432 0.0663
19 ER19 0.5888 0.2741 -0.1447
20 ER20 0.5816 0.1969 -0.1319
21 ORM1 0.0868 0.6196 0.0468
22 ORM2 0.0517 0.6342 -0.0256
23 ORM3 0.2462 0.715 0.0113
24 ORM4 0.238 0.7297 -0.109
25 ORM5 0.2264 0.7699 -0.0973
26 ORM6 0.2899 0.7846 -0.1791
27 ORM7 0.2788 0.7674 -0.2251
28 ORM8 0.2739 0.7517 -0.2645
29 ORM9 0.2364 0.799 -0.0811
30 ORM10 0.1998 0.6966 0.0257
31 ORM11 0.2769 0.7893 0.0005
32 ORM12 0.3394 0.8381 -0.1172
33 ORM13 0.3571 0.7622 -0.0565
34 RS1 -0.1505 -0.0921 0.6069
35 RS2 0.0089 0.0529 0.5362
36 RS3 -0.0177 0.0239 0.4025
37 RS4 -0.1573 -0.0654 0.7173
38 RS5 -0.1791 -0.079 0.7923
39 RS6 -0.1905 -0.1766 0.7758
40 RS7 -0.0533 -0.0724 0.6742
41 RS8 -0.0038 -0.0181 0.6458
42 RS9 -0.0045 0.0263 0.4995
43 RS10 -0.0005 -0.0556 0.6305
44 RS11 0.0038 0.0201 0.6267
45 RS12 -0.0473 -0.0494 0.5805
46 RS13 -0.1016 -0.0791 0.6093
47 RS14 -0.1884 -0.0451 0.6007

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 TABLE 5.2 RESULT OF BOOTSTRAP ESTIMATE
Measurement Mode(Loading)BootStrap
Entire Sample Mean of Standard
t-Statistic
estimate Subsamples error
ERM ER1 0.5815 0.5016 0.1748 3.3266
ER2 0.3887 0.3582 0.1334 2.9142
ER3 0.4532 0.3735 0.1804 2.5125
ER4 0.39 0.3343 0.1654 2.3583
ER5 0.2268 0.2152 0.1143 1.9835
ER6 0.5355 0.4842 0.1319 4.0608
ER7 0.4215 0.4232 0.1221 3.4507
ER8 0.436 0.4289 0.1061 4.1096
ER9 0.5885 0.532 0.1153 5.1062
ER10 0.2374 0.2391 0.0979 2.425
ER11 0.676 0.6075 0.1411 4.7921
ER12 0.6818 0.6327 0.1112 6.1292
ER13 0.5104 0.5327 0.1005 5.0788
ER14 0.5435 0.4973 0.1218 4.4607
ER15 0.4586 0.5133 0.155 2.9592
ER16 0.5396 0.5635 0.1114 4.845
ER17 0.6566 0.5646 0.1708 3.845
ER18 0.4261 0.4683 0.1266 3.3669
ER19 0.5888 0.5227 0.1414 4.1638
ER20 0.5817 0.5318 0.1311 4.4385
ORM ORM1 0.6195 0.6311 0.0798 7.7671
ORM2 0.6341 0.6429 0.0793 7.9988
ORM3 0.715 0.7182 0.0608 11.7678
ORM4 0.7297 0.7225 0.0583 12.513
ORM5 0.7699 0.7632 0.0439 17.5332
ORM6 0.7845 0.7715 0.0521 15.071
ORM7 0.7673 0.7492 0.0577 13.3009
ORM8 0.7518 0.7327 0.0616 12.1951
ORM9 0.799 0.7952 0.0324 24.6448
ORM10 0.6966 0.6996 0.0502 13.8736
ORM11 0.7893 0.7902 0.0399 19.7975
ORM12 0.8381 0.8285 0.0273 30.6706
ORM13 0.7622 0.7568 0.0417 18.2887
RISK
RS1 0.6069 0.5733 0.1244 4.8768
SCORE
RS2 0.5362 0.5476 0.1343 3.9938
RS3 0.4025 0.4164 0.1419 2.8362
RS4 0.7173 0.6572 0.1215 5.9046
RS5 0.7923 0.7275 0.1021 7.7613
RS6 0.7758 0.6702 0.1325 5.854
RS7 0.6742 0.6623 0.0908 7.424
RS8 0.6458 0.6399 0.1223 5.2817
RS9 0.4995 0.4993 0.1214 4.1149
RS10 0.6305 0.6697 0.1366 4.6154
RS11 0.6267 0.6541 0.1475 4.2479
RS12 0.5805 0.5831 0.1385 4.1899
RS13 0.6093 0.5706 0.1313 4.6403
RS14 0.6007 0.5358 0.1363 4.4077

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 Effective Risk Management practices (ERM)
The variables under the construct Effective Risk Management practices,
Outcomes of Successful Risk Management, Risk Score and its coding are
depicted below:
Effective organizational culture -ER1
We have defined& communicated policies, procedure, systems and internal
controls-ER2
The linkage between risk and corporate aims and objectives are clearly
defined ER3
The level of understanding of risk and risk management across the
organisation is know -ER4
Specification of the organisations risk environment ER5
The linkage between risk management and individual performance appraisal
are communicated ER6
Risk appetite, risk tolerance and risk treatment measures followed by the
organization-ER7
Establishment of criteria for evaluation of risk ER 8
Identification of risk ER 9
Recording of risk ER 10
Process of risk analysis ER 11
Prioritization of risk ER12
Development and implementation of risk strategies ER13
Resourcing of risk management process and strategies ER14
Development of key performance indicators to measure the success of
strategies and emerging issues -ER15
Appropriate use of risk recording ER 16
Monitoring strategies against key performance indicators ER17
Continuous review/feedback on risk management strategies and performance
ER18
Regular feedback to senior management ER 19
Line management ownership of risk management ER 20
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 Outcomes of Risk Management

Has ensured more robust corporate planning - ORM 1

It helped in Achievement of objectives - ORM 2
It helped in Decision making - ORM 3
Has improved the Quality of service delivery - ORM 4
It has helped in proper Resource allocation and utilization - ORM 5
Leads to Better Information systems - ORM 6
Has improved Management reporting ORM 7
It has led to better Management of Stake holders and customers - ORM 8
Has improved better Reputation management - ORM 9
Has improved Physical asset management - ORM 10
It has helped in Project management - ORM 11
Has improved the Accountability required - ORM 12
Has increased recognition and uptake of opportunities - ORM 13
Risk Score
Credit Risk RS1
Financing Risk RS2
Market Risk RS3
Treasury Risk RS4
Regulatory Risk RS5
IT Risk RS6
Strategic Risk RS6
Environmental Risk RS7
Operational Risk RS8
Reputational Risk RS9
Political Risk RS10
Natural Hazard Risk RS11
Human Capital Risk RS12
Industry Risk RS13

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 Evaluation of the Measurement model

The measurement model given in table 5.3, shows that Absolute t

statistic values are greater than 2, there is significant relationship between
Effective Risk Management practices and outcomes of Risk
Management. Similarly, there is a relation between Effective Risk
Management practices and risk score.

Table 5.3 Measurement Model Boot strap

Entire
S.No. Constructs Mean of Standard
Sample t statistics
subsamples error
estimate

1 ERM ORM 0.3520 0.4143 0.0683 5.1546*

2 ERM RS -0.2270 -0.3168 0.0731 -3.1039 *

*Significant at 5% level.

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 FIGURE 5.2 SEM MODEL

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 The figure 5.2 shows that Effective Risk Management practices
contributes only 12.4% (R2 =0.124) on the outcomes of Risk
Management. The rest of the variation in outcomes of risk management is
based on many characteristics which are unobservable. However, there is
a significant regression of Effective Risk management practices on the
outcomes of Risk Management. Further Effective Risk Management
practices significantly contribute on risk score. But the contribution is
only 5% (R2=0.051).

Reliability and Validity of the proposed model.

From table 5.4, Cronbach alpha values are greater than 0.8, it is
inferred that the constructs are highly reliable. Since the Average
Variance explained (AVE) is greater than 0.5, convergent validity is high
for the construct Outcomes of Risk Management. Convergent validity is
the degree to which the items of a given construct are measuring the same
underlying latent variable (Kim et.al. 2004).

TABLE 5.4 RELIABILITY ANALYSIS AND AVE

Composite Cronbach
S.No. Construct AVE
Reliability Alpha

Effective Risk
1 0.869565 0.261617 0.849548
Management

Outcomes of
2 Risk 0.941655 0.555520 0.934479
Management

3 Risk Score 0.899456 0.395892 0.894610

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 TABLE 5.5 CORRELATIONS OF LATENT VARIABLES

Outcomes of
Effective Risk Risk
S.No. Construct Risk
Management Score
Management

Effective Risk 1.00

1 Management

Outcomes of
2 Risk 0.352 1.000
Management

3 Risk Score -0.227 -0.129 1.000

From Table 5.5, since R2 for Outcomes of Risk Management and

Effective Risk Management practices (0.1225) is less than AVE values of
Outcomes of Risk Management (0.555) and Effective Risk Management
practices (0.2616), the discriminant validity is more for this model.
Similarly R2 for Risk score and Effective Risk Management practices
(0.051) is less than AVE values of Risk Score (0.3958) and Effective
Risk Management practices (0.2616), the discriminant validity is
observed for this model also.

5.6 Conclusion

Bootstrapping analysis referring to this model reveal the value of

absolute t statistics are all greater than 2, which means that the regression
coefficients are all significant. Finally, conceptual analysis of the model
shows whether the risk management practices successfully helped to
improve the outcomes of risk management and risk score. This is
depicted in the final PLS model obtained. Pedhazur (1982) states that
there are no strict norms to assess the significant value of R 2; since
meaningfulness is specific to a given research area and can differ

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 significantly between researchers, domains and phenomenon. It was
noted that practicing Risk management effectively contributes only 12 %
to the outcomes of Risk Management and 5% in reducing the Risk Score.
A possible explanation for the low R2 value could be the fact the
respondents hesitated to respond thinking it may reflect their
inefficiencies in Risk Management practices. Or the rest is from many
unobserved variables. It is important to note what might be the possible
variables that are not considered. The researcher to highlight the above
puts the following questions. Does CEO or Boards involvement help to
improve the outcomes of Risk Management? Does the appointment of
CRO in an organization helps to improve the outcomes of Risk
Management and reduce Risk Score? In future the research can be further
directed in observing these variables.

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