The Risk Slack Paradox: When Less-Formal ERM Beats Best-Practice ERM in Turbulent Environments

Test whether firms with moderately formalized enterprise risk management (ERM)—not minimal, not maximal—achieve unexpected competitive advantage in highly dynamic contexts. The core mechanism is that “risk slack” preserves strategic agility and managerial risk-taking, allowing faster opportunity capture. This challenges the assumption that more ERM is always better, suggesting over-formalization can rigidify decision processes and suppress upper-echelon risk-taking, undermining agility. It synthesizes RBV/contingency views of ERM with dynamic capabilities to argue that the fit of ERM formalization depends on environmental turbulence, proposing a curvilinear relationship moderated by turbulence and shock intensity. This explains why highly mature ERM adopters may underperform more flexible peers during shocks, offering a contingent ERM design framework. Empirical tests could leverage quasi-experiments around regulatory or macro shocks (e.g., IMO rules in shipping; sectoral digitization waves) to test the inverted-U and agility-mediated paths to competitive advantage.

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