Indonesian Journal of Business and Entrepreneurship, Vol. 10 No.

1, January 2024 Available online at

Permalink/DOI: http://dx.doi.org/10.17358/IJBE.10.1.52 http://journal.ipb.ac.id/index.php/ijbe

THE EFFECT OF ENTERPRISE RISK MANAGEMENT AND COMPLIANCE PRACTICES

ON THE FIRM PERFORMANCE OF INDONESIAN BANKING COMPANIES

M.L. Denny Tewu*)1, Innocentius Bernarto**), Suwarno***). Purwatiningsih Lisdiono****)

*)
Department of Management, Faculty of Economics and Business, Universitas Kristen Indonesia
Jl. Mayor Jendral Sutoyo No.2, Cawang, Jakarta 13630, Indonesia
**)
Department of Management, Faculty of Economics and Business, Universitas Pelita Harapan
Jl. M.H. Thamrin Boulevard No.1100, Kelapa Dua, Tangerang Regency, Banten 15811, Indonesia
***)
Deparment of Accounting, Institut Bisnis dan Informatika Kesatuan
Jl. Rangga Gading No.01, Gudang, Central Bogor, Bogor, West Java 16123, Indonesia
****)
Department of Accounting, Faculty of Economics & Business, Universitas Indonesia
Jl. Lingkar, Pondok Cina, Beji, Depok, West Java 16424, Indonesia

Abstract: Enterprise Risk Management (ERM) practices are particularly crucial in this industry
to ensure stability and compliance with regulatory requirements. This study examines the effect
of ERM on a firm’s operational and financial performances by using two mediating variables
of compliance practices and IT strategy. By using a quantitative approach, data was collected
through purposive random sampling from 250 bank managers in Jabodetabek, Indonesia. The
study found that ERM was found to influence financial and operational performance positively
and significantly. Moreover, compliance practices positively and significantly affect both
Article history: financial and operational performance. IT strategy also has a positive and significant impact on
firm performance. In testing the mediating effect, IT strategy partially mediates the relationship
Received between ERM and performance, as do compliance practices. These findings highlight the
20 September 2023 importance of ERM, IT strategy, and compliance practices in enhancing the performance
of banking companies in Indonesia. The findings validate the increasing importance of risk
Revised management in the financial landscape in Indonesia. The recognition of the banking sector's
4 November 2023 complexity and vulnerability to diverse risk types, including credit, market, operational, and
regulatory risks, underscores the critical role of risk management practices.
Accepted
30 November 2023 Keywords: enterprise risk management, compliance practices, it strategy, financial performance,
operational performance
Available online
15 January 2024 Abstrak: Praktik Enterprise Risk Management (ERM) memiliki peranan yang sangat penting
dalam industri ini untuk memastikan stabilitas dan kepatuhan terhadap persyaratan regulasi.
Tujuan dari penelitian ini adalah untuk menguji ERM terhadap kinerja operasional dan
This is an open access keuangan perusahaan dengan menggunakan praktik kepatuhan dan strategi TI sebagai
article under the CC variabel mediasi. Dengan pendekatan kuantitatif, data dikumpulkan melalui pengambilan
BY license (https:// sampel acak yang disengaja dari 250 manajer bank di Jabodetabek, Indonesia. Penelitian ini
creativecommons.org/ menemukan bahwa Pengelolaan Risiko Enterprise ternyata memengaruhi kinerja keuangan
licenses/by/4.0/) dan operasional secara positif dan signifikan. Selain itu, praktik kepatuhan berpengaruh
positif dan signifikan terhadap kinerja keuangan dan operasional. Strategi TI juga memiliki
dampak positif dan signifikan pada kinerja perusahaan. Dalam pengujian efek mediasi,
strategi TI sebagian menghantarkan hubungan antara ERM dan kinerja, begitu juga dengan
praktik kepatuhan. Temuan ini menyoroti pentingnya ERM, strategi TI, dan praktik kepatuhan
dalam meningkatkan kinerja perusahaan perbankan di Indonesia. Temuan ini memvalidasi
peningkatan pentingnya manajemen risiko dalam lanskap keuangan di Indonesia. Pengakuan
terhadap kompleksitas sektor perbankan dan kerentanannya terhadap berbagai jenis risiko,
termasuk risiko kredit, risiko pasar, risiko operasional, dan risiko regulasi, menegaskan peran
kritis praktik manajemen risiko.

Kata kunci: manajemen risiko, praktik kepatuhan, strategi IT, kinerja keuangan, kinerja
operasional

1
Corresponding author:
Email: denny.tewu@uki.ac.id

52 Copyright © 2024, ISSN: 2407-5434; EISSN: 2407-7321

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

INTRODUCTION impacts to help create strategies to address these risks

and limit or eliminate their impact or exposure to the
Enterprise Risk Management (ERM) is a comprehensive company (Yolande, 2012).
approach to identifying, assessing, and managing risks
across an entire organization. It involves a systematic However, previous studies show inconclusive findings
process of recognizing potential threats, both internal regaring the effect of ERM on fimr performance. In their
and external, that can impact an organization’s investigations, Callahan and Soileau (2017), Florio and
objectives. ERM goes beyond traditional risk Leoni (2017), Lechner and Gatzert (2017), Tarigan &
management by integrating risk considerations into Valerie (2023) and Lai and Shad (2017) all discovered a
strategic decision-making, ensuring a more holistic and positive correlation between the adoption of Enterprise
proactive approach (Shad et al. 2019; Almeida et al. Risk Management (ERM) and firm performance. In
2019). The importance of Enterprise Risk Management contrast, Agustina and Baroroh (2016), Eikenhout
in company operations cannot be overstated. In today’s (2015), Ping and Muthuveloo (2015), and Pagach and
dynamic business environment, organizations face an Warr (2011) reported adverse effects of ERM on firm
array of risks, ranging from financial and operational performance. Nevertheless, it can be deduced that
risks to reputational and strategic risks. ERM provides the relationship between ERM and firm performance
a framework that enables companies to identify these remains inconclusive. The impact of implementing
risks early on, evaluate their potential impact, and ERM on enhancing business performance, particularly
develop strategies to mitigate or exploit them. By concerning the strategic utilization of compliance
embedding risk management into daily operations, practices and IT strategy in the banking sector, remains
organizations can enhance resilience, make informed an unanswered query (Shad et al. 2019). This sector
decisions, and seize opportunities for growth (Perera, is renowned for its intricate nature and susceptibility
2019). to diverse risk categories, encompassing credit risk,
market risk, operational risk, and regulatory risk. As a
Effective ERM contributes to the development of a result, the extent to which ERM contributes to improved
robust risk management plan. This plan outlines the business performance in this context remains a topic of
organization’s risk appetite, establishes risk tolerances, ongoing investigation. As banks nowadays rely heavily
and defines the roles and responsibilities of key on information technology (IT) infrastructure for their
stakeholders. It serves as a roadmap for implementing day-to-day operations, IT strategy plays a significant
risk management strategies and ensuring alignment role in managing technology-related risks, ensuring
with organizational goals. A well-executed risk data security, and enhancing operational efficiency.
management plan enhances an organization’s ability
to navigate uncertainties, protect assets, and create In this context, ERM encourages efforts to manage
sustainable value. Quon et al. (2012) argue that, to risks related to operational or strategic aspects in a
build an effective risk management plan, corporate risk more coordinated manner (Ward & Chapman, 2003).
management should impact business value and employ The main goal of risk management remains to enhance
an approach that encompasses the entire company to the value of the company, which is highly relevant in
manage these risks. The fundamental purpose of risk the context of business in Indonesia. Companies in
management is to enhance shareholder value. However, Indonesia are increasingly recognizing the importance
vulnerability has recently become a phenomenon that of risk management in facing various external and
pervades all aspects (Krause & Tse, 2016). Managing internal challenges, such as market changes, stricter
each type of risk in isolation can lead to inefficiencies regulations, and rapid technological advancements.
due to a lack of coordination between different risk In the development of this research, in addition to
management divisions. While the concept of risk considering the influence of risk management on
management applies to all types of businesses, the risk company performance, the importance of understanding
assessment and risk management attitude of owner- the role of information technology strategy (IT
managers determine the effectiveness of a company’s strategy) in managing these risks in the digital era is
risk management measures. Risk management is discussed. Furthermore, the research explains how the
the key premise that entrepreneurial or managerial implementation of compliance practices can strengthen
attention should be focused on in identifying future the competitiveness of companies in Indonesia in
uncertainties, hazards, possible manifestations, and the face of uncertainty and business risks. All of

Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017 53

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

this contributes to providing a more comprehensive four specific indicators. These indicators were
understanding of the role of risk management in the evaluated using conventional metrics sourced from
context of companies in Indonesia, particularly among previous studies (Zhu et al. 2004; Truong et al. 2017).
corporate entities. This research is expected to provide These metrics encompassed aspects like cost reduction
better insights into how risk management can influence (OPR1), enhanced service quality (OPR2), timely
the performance of companies in Indonesia and support delivery (OPR3) and improved operational flexibility
sustainable business growth. (OPR4). Lasty, financial performance (FINP) was
gauged through four indicators, drawing on the work
of Rao and Afum et al. (2020) as well as Zhao et al.
METHODS (2021). These indicators encompassed measures of
profitability (FP1), sales growth (FP2), return on assets
This study investigates, through empirical analysis, (FP3), and return on equity (FP4).
how Enterprise Risk Management (ERM) influences
the operational and financial performance of a company, The study considers the target population to be
with a focus on the mediating variables of compliance homogeneous because banking sector has common
practices and IT strategy. The banking sector is known characteristics related to their exposure to risk. Data
for its complexity and sensitivity to various forms of collection occurred simultaneously across all regions
risk. Financial institutions are exposed to a wide range within Jabodetabek over a period of approximately three
of risks, including credit risk, market risk, operational months, from November 17, 2022, to February 6, 2023.
risk, and regulatory risk. As a result, ERM practices are In this research, 250 questionnaires were distributed
particularly crucial in this industry to ensure stability through purposive random sampling to bank managers
and compliance with regulatory requirements. In in Jabodetabek, Indonesia. Banking managers are key
this study, we distributed 250 questionnaires to bank decision-makers in financial institutions and possess
managers in the Jabodetabek region, by using purposive in-depth knowledge of ERM practices, compliance
random sampling as the chosen sampling method. requirements, and IT strategies within the industry.
By selecting them as respondents, researchers can tap
In this study, various variables have been measured into their expertise, ensuring that the data collected is
to assess different aspects of compliance practices, highly relevant and informed. Each selected SME in
enterprise risk management (ERM), IT strategy, the sample had a representative who held the role of
financial performance, and operational performance. overall enterprise risk holder, including branch heads,
Enterprise Risk Management was measured by five supervisors, managers, heads of accounts and finance.
components of enterprise risk management adopted Out of the 250 questionnaires distributed, a
from Lai (2014), namely integration of ERM with commendable 167 were returned, resulting in a response
business strategy (ERM1) and integration of ERM with rate of approximately 66.8%. While 9 respondents
objectives (ERM2), risk identification (ERM3), risk provided incomplete information or left some answers
response (ERM4), and risk quantification (ERM5). The blank, the majority of the questionnaires remained
dimensions of compliance practices are likely measured complete and filled out accurately. As a result, 158
by four items from Burdon & Sorour (2020), namely questionnaires have been deemed eligible for further
regulatory compliance (CMP1), ethical compliance in-depth analysis, ensuring a robust and comprehensive
(CMP2), financial compliance (CMP3) and control examination of the research data. This high response
(CP4). Moreover, the dimensions of IT strategy were rate and diligent data collection process enhance the
measured by five indicators adopted from King & Teo reliability and validity of the study’s findings. The
(1996), namely strong IT leadership (ITS1), strong IT study utilized SMART PLS SEM for estimating the
planning capability (ITS2), perceived importance of relationship among variables.
strategic use (ITS3), tangible benefit of IT application
(ITS4), and adequate knowledge about information Contingency theory posits that organizational choices,
assets (ITS5). such as techniques, structures, or control systems,
should be customized based on various contextual
In addition, the dependent variable of firm performance factors, including environmental conditions, risk
was divided into operational and financial performance. levels, business strategies, company size, and
Operational performance (OP) was assessed through organizational structure and activities (Bryan, 2019).

54 Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

Contingency theory also emphasizes that companies as well as the utilization of quantitative risk assessment
should actively monitor their environmental conditions techniques. Ahmed et al. (2016) demonstrate that the
and commit to adapting to possible changes. Internal implementation of an Enterprise Risk Management
control is not a static aspect of organizational (ERM) framework and regulatory compliance
structure, and the relationship between internal positively influence non-financial performance. Their
control system structure and environmental factors study supports the third hypothesis, indicating that
needs to be considered (Felipe et al. 2017). Each board effectiveness reinforces the positive relationship
organization should choose an internal control system between ERM framework adoption and non-financial
that best suits the characteristics of its environmental performance. As a result, the following hypotheses are
conditions and situations (Otley & Berry, 2019). Chen advanced:
et al. (2020) highlights the importance of internal H1: ERM practices have a significant effect on
controls in mitigating agency costs and improving compliance practices
organizational performance. Internal controls act as
mechanisms to align the interests of principals and Lamine et al. (2020). In exploring the influence of
agents by reducing information asymmetry, enhancing enterprise risk management on competitive advantage,
accountability, and promoting transparency. Effective considering the moderating role of information
internal controls provide a structured framework for technology, Saeidi et al. (2019) revealed a positive
monitoring managerial actions, ensuring compliance correlation between ERM implementation and a firm’s
with organizational goals, and safeguarding assets. competitive advantage. Additionally, the findings
However, some scholars emphasize that the mere indicated that both IT strategy and IT structure not
design or implementation of internal control systems only directly impacted competitive advantage but also
does not automatically lead to a reduction in agency played a moderating role in the relationship between
costs (Sun et al. 2020). While internal controls are ERM and competitive advantage. Kwateng et al. (2022)
essential components, their effectiveness depends on find a substantial positive effect of ERM on IT security
various factors such as the organizational context, the within financial institutions, highlighting the significant
commitment of top management, and the quality of the correlation established by ERM among various
control environment. Merely having internal controls variables. Arnold et al. (2015) reveal that a strategic,
in place does not guarantee a decrease in agency costs; broad-based approach to ERM enhances flexibility and
it requires a dynamic and adaptive approach to their strengthens the relationship between flexibility and
design and implementation (Henk, 2019). performance. The results also suggest that improved
IT integration is the mechanism through which ERM
Enterprise Risk Management (ERM) is a strategic strengthens both flexibility and performance. Contrary
and integrated approach to identifying, assessing, to some previous studies, Mahama et al. (2022) find no
and managing the full spectrum of risks that an evidence that the application of governance frameworks
organization faces in pursuit of its objectives. ERM is improves risk management effectiveness, challenging
designed to provide a holistic framework that enables the mechanistic view implied by governance guidance
companies to recognize and address potential threats on risk appetite and tolerance. Thus, the following
comprehensively, rather than dealing with risks in hypotheses are proposed:
isolated and fragmented ways (Krüger & Meyer, H2: ERM practices have a significant effect on IT
2021). It involves the systematic coordination of strategy
people, processes, technology, and information to
facilitate informed decision-making and enhance an Kiradoo (2008), Bromiley et al. (2015), and
organization’s ability to navigate uncertainties while Schoenmaker & Schramade (2019) highlight the
optimizing opportunities for sustainable growth. ERM choices companies make between an active or passive
aims to create value for stakeholders by promoting a Enterprise Risk Management (ERM) approach, a
risk-aware culture, aligning risk management with decision that significantly shapes their strategic
strategic goals, and ensuring that risks are managed orientation. Companies opting for an active approach
efficiently and effectively throughout the entire to ERM tend to proactively engage with risks,
organization. Marquez-Tejon et al. (2022) suggest integrating risk considerations into strategic decision-
that the perceived effectiveness of risk management is making, while those adopting a passive approach may
linked to the frequency of risk assessment and reporting, address risks more reactively, often dealing with them

Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017 55

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

in a segmented manner. The selected ERM approach has shown that an effective IT strategy can have a
becomes a pivotal factor influencing how companies substantial impact on a firm’s overall performance and
align their risk management strategies with broader competitiveness. According to Asghar et al. (2023), a
organizational goals. Furthermore, Anton & Elena well-aligned IT strategy can enhance a firm’s ability
(2020) conducted research on the impact of ERM on to achieve its business goals, improve operational
firm performance, revealing nuanced outcomes that efficiency, and drive innovation. Moreover, IT
are yet to be fully clarified. The complex relationship investments that are aligned with a firm’s strategic
between ERM and firm performance suggests that objectives can lead to increased revenue, cost savings,
the effectiveness of ERM practices can be contingent and improved customer satisfaction (Pothineni, 2023).
on various factors, including organizational context, IT strategy also plays a crucial role in enabling firms
industry dynamics, and the specificities of risk to adapt to rapidly changing business environments
management implementation. On a positive note, and emerging technologies, which are essential for
Kulathunga et al. (2020) corroborate the potential maintaining a competitive edge (Nwankpa et al. 2020).
benefits of ERM by demonstrating favorable effects In essence, the relationship between IT strategy and
on firm performance. Their findings suggest that, firm performance underscores the strategic importance
when implemented effectively, ERM can contribute of IT as a driver of business success and growth. Thus,
positively to various facets of organizational the following hypothesis are proposed:
performance, underscoring its potential as a strategic H5: IT strategy has a significant effect on firm
tool for enhancing overall business outcomes. Thus, the performance.
literature reflects a dynamic landscape where the choice
of ERM approach and its impact on firm performance Songling et al. (2018) explored how compliance
warrant continuous exploration and understanding. practices play a mediating role in the connection between
Thus, the following hypotheses are proposed: enterprise risk management practices and company
H3: ERM practices have a significant effect on firm performance, along with examining how financial
performance literacy functions as a moderator in the relationship
between enterprise risk management practices and
Compliance practices play a pivotal role in shaping compliance practices. In the relationship between
firm performance by establishing a foundation of the relationship between ERM practices and firm
ethical and legal conduct (Nguyen et al. 2021). performance, Ahmed and Manab (2016) demonstrated
When companies adhere to regulatory requirements, the substantial positive impacts of implementing an
industry standards, and internal policies, they mitigate ERM framework and adhering to regulatory compliance
the risk of legal and reputational damage, fostering a on non-financial performance. Furthermore, Ahmed
trustworthy and transparent corporate image (Özcan and Manab (2016) indicate that compliance practices
& Elçi, 2020). This, in turn, can enhance investor strengthen the positive relationship between ERM
confidence, attract top talent, and bolster stakeholder framework adoption and non-financial performance.
trust (Kiradoo, 2008; Armour, Mayer, et al. 2017). However, in the context of compliance, the interaction
Furthermore, effective compliance practices often effect did not influence non-financial performance.
lead to operational efficiencies as they encourage In a related context, Rehman and Anwar (2019)
streamlined processes and risk management strategies emphasized the essential role of a risk management
(Alsharari, 2022). Ultimately, a strong commitment system for internal purposes, highlighting its direct
to compliance not only safeguards a company against influence on business strategy and firm performance.
potential pitfalls but also contributes positively to The study aimed to investigate how ERM practices
its long-term financial stability and overall success mediate firm compliance with guidelines and corporate
(Demirgüç-Kunt & Detragiache, 2011). Therefore, the norms. Compliance with regulations and corporate
subsequent hypotheses are put forward: norms, as underscored by Shimpi (2005), is a crucial
H4: Compliance practices have a significant effect on factor shaping the success of risk management. Roth
firm performance (2006) revealed that successful ERM adoption hinges
on robust support from the compliance system. Grubb
The relationship between IT strategy and firm and Burke (2008) noted that compliance is intricately
performance is a topic of significant interest in the linked with both internal efficiency assessments and
fields of business and information technology. Research external regulatory monitoring. Establishing positive

56 Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

connections between risk management, compliance, constructs. For Enterprise Risk Management (ERM),
and corporate governance is imperative for achieving items ERM1 to ERM5 exhibit satisfactory factor
organizational goals, enhancing stakeholder value, and loadings ranging from 0.709 to 0.801. The Cronbach’s
improving firm performance (Grubb & Burke, 2008). alpha for ERM is high at 0.942, indicating internal
Shatnawi and Eldaia (2020) further reinforced the consistency, and the Composite Reliability (CR) and
notion that compliance is indispensable within ERM Average Variance Extracted (AVE) values are 0.950
practices to achieve optimal firm performance. and 0.615, respectively. Compliance Practices (CMP)
H6: The compliance practices mediate the relationship and IT Strategy (ITS) also show strong reliability and
between the relationship between ERM practices and validity, with high factor loadings, Cronbach’s alpha,
firm performance. CR, and AVE values. Financial Performance (FIN)
demonstrates excellent reliability, with factor loadings
Saeidi et al. (2019) highlight the intermediary function ranging from 0.905 to 0.916, a high Cronbach’s alpha
of IT strategy, indicating that organizations leveraging of 0.965, and robust CR and AVE values. Operational
robust ERM practices are more likely to enhance their Performance (OPR) exhibits slightly lower factor
overall performance when a well-aligned IT strategy loadings but maintains acceptable internal consistency
is in place. The integration of IT strategy serves as a and convergent validity. Overall, the results indicate
conduit for translating risk management efforts into that the measurement model is reliable and valid,
strategic advantages, contributing to improved firm supporting the suitability of the selected constructs for
performance. Moreover, Gajapathy & Balanagarajan further analysis.
(2018) underscore how an effectively implemented
IT strategy, guided by ERM principles, can enhance To assess the inner structural model, various indicators
operational efficiency, innovation, and adaptability, such as the coefficient of determination (R2), path
thereby positively impacting firm performance metrics. coefficient (β value), t-statistic value, effect size
On the other hand, Saleh & Al-Nimer. (2022) explores (f2), predictive relevance of the model (Q2), and
the contingent nature of this relationship, suggesting that goodness-of-fit index were utilized. The coefficient
the effectiveness of IT strategy as a mediator between of determination is used to measure the extent to
ERM practices and firm performance is contingent which the endogenous construct in the structural
on factors such as organizational culture, leadership model explains the variation and overall effect size,
support, and technological capabilities. Arnold et al. indicating the model’s predictive accuracy. Table 2
(2015) discusses factors such as resource constraints and reveals the coefficient of determination (R Square and
organizational resistance that may impede the seamless R Square Adjusted). Compliance Practices exhibit an R
integration of ERM practices and IT strategy, thereby Square of 0.639, indicating 63.9% explanatory power.
influencing the overall impact on firm performance. Financial Performance shows an R Square of 0.201,
Thus, the following hypothesis is proposed: denoting 20.1% variance explanation. IT Strategy and
H7: IT strategy mediates the relationship between ERM Operational Performance have substantial R Squares
practices and firm performance. of 0.685 and 0.474, respectively, with corresponding
adjusted values. These results signify the model’s
effectiveness in explaining and predicting the variability
RESULTS in the examined variables.

The measurement model underwent a rigorous analysis In this study, the f2 metric gauged the impact of each
using PLS-SEM and Smart PLS 3.0, evaluating factor exogenous latent construct on the endogenous latent
loadings, composite reliability, Cronbach’s alpha, construct. According to Hair et al. (2014), f2 values
average extracted variance (AVE), and discriminant of 0.35 signify a strong effect, 0.15 a moderate effect,
validity. This assessment aimed to ensure the reliability, and 0.02 a weak effect. The results as shown in Table
internal consistency, and validity of observed and 3 showed that compliance practices and IT strategy
unobserved variables in the outer measurement demonstrated weak effects on financial and operational
model, crucial for establishing a strong foundation performance, while enterprise risk management
for subsequent structural model analysis. Table 1 showed a moderate effect on both. Confirmatory factor
presents the results of the outer measurement model analysis (CFA) confirmed the structural model’s good
evaluation, assessing the reliability and validity of the fit, as indicated by acceptable fit indices in Table 4.

Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017 57

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

Table 1. Evaluation of outer measurement model

Construct Item Loading Cronbach's alpha CR AVE
Enterprise Risk Management ERM1 0.709 0.942 0.950 0.615
(ERM) ERM2 0.801
ERM3 0.778
ERM4 0.761
ERM5 0.788
Compliance Practices (CMP) CMP1 0.899 0.899 0.930 0.767
CMP2 0.874
CMP3 0.874
CMP4 0.857
IT Strategy (ITS) ITS1 0.821 0.923 0.937 0.650
ITS2 0.786
ITS3 0.823
ITS4 0.792
ITS5 0.860
Financial Performance (FINP) FINP1 0.905 0.965 0.970 0.824
FINP2 0.914
FINP3 0.912
FINP4 0.916
Operational Performance (OPR) OPR1 0.616 0.898 0.915 0.534
OPR2 0.836
OPR3 0.577
OPR4 0.790

Table 2. Assessment of coefficient of determination

Variables R Square R Square Adjusted
Compliance Practices (CMP) 0.639 0.642
Financial Performance (FINP) 0.201 0.201
IT Strategy (ITS) 0.685 0.685
Operational Performance (OPR) 0.474 0.474

Table 3. Effect Size Assessment (f2)

Variables Financial Performance (FINP) Operational Performance (OPR)
Compliance practices 0.007 0.008
Enterprise risk management 0.078 0.103
IT Strategy 0.010 0.013

Table 4. Goodness-of-Fit
Index Saturated Model Estimated Model
SRMR 0.146 0.157
d_ULS 16.081 23.535
d_G 2.802 3.631
Chi-Square 112675.032 127238.576
NFI 0.738 0.742

58 Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
Vol. 10 No. 1, January 2024
Accredited by Ministry of RTHE Number 32a/E/KPT/2017

The results of the analysis (Table 5; Figure 2) indicate In Table 6, a mediation analysis was conducted to
that compliance practices have a significant impact evaluate the mediating effects of IT strategy and
on firm financial performance. This is evidenced by compliance practices on the relationship between
the obtained T statistics value of 5.775 (>1.96) and a enterprise risk management and financial performance
P-value of 0.000 (< 0.05). Additionally, compliance as well as operational performance. IT strategy, as a
practices have also been proven to significantly mediator in the relationship between enterprise risk
influence operational performance, as evidenced by management and financial performance, obtained
a T statistics value of 6.262 and a P-value of 0.000. a T-statistic value of 7.868 (> 1.96) and a P-value
Furthermore, the impact of enterprise risk management of 0.000 (< 0.05). These results indicate that IT
on firm financial performance has also been proven to strategy effectively mediates the relationship between
be significant, with a T statistics value of 27.976 and enterprise risk management and financial performance.
a P-value of 0.000. Enterprise risk management has Additionally, IT strategy has proven to be a successful
also been demonstrated to significantly influence firm mediator in the relationship between enterprise
operational performance, as indicated by a T statistics risk management and operational performance, as
value of 23.932 and a P-value of 0.000. Moreover, IT evidenced by a T-statistic value of 7.471 and a P-value
strategy in influencing firm financial performance has of 0.000. On the other hand, compliance practices, as
obtained a T statistics value of 7.147 and a P-value a mediator in the relationship between enterprise risk
of 0.000, indicating that IT strategy has a significant management and financial performance, obtained a
impact on firm financial performance. The influence of T-statistic value of 6.193 and a P-value of 0.000. This
IT strategy on operational performance has also been suggests that compliance practices effectively mediate
proven to be significant, as evidenced by a T statistics the relationship between enterprise risk management
value of 6.355 and a P-value of 0.000. and financial performance. Furthermore, compliance
practices have also been shown to be effective mediators
in the relationship between enterprise risk management
and operational performance, as evidenced by a
T-statistic value of 6.862 and a P-value of 0.000.

Table 5. Path Coefficients

Hypothesis Standardized Path Coefficient T Statistics P Values
Compliance Practices → Financial Performance 0.215 5.775 0.000
Compliance Practices → Operational Performance 0.214 6.262 0.000
ERM → Financial Performance 0.585 27.976 0.000
ERM → Operational Performance 0.564 23.932 0.000
IT Strategy → Financial Performance 0.263 7.147 0.000
IT Strategy → Operational Performance 0.248 6.355 0.000

Table 6. Indirect effect

Indirect Relationship Standardized Path Coefficient T Statistics P Values
ERM → IT Strategy → Financial Performance 0.192 7.868 0.000
ERM → IT Strategy → Operational Performance 0.180 7.471 0.000
ERM → Compliance Practices → Financial Performance 0.117 6.193 0.000
ERM → Compliance Practices → Operational Performance 0.121 6.862 0.000

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Figure 2. Measurement model

This study reveals that compliance practices have (2023), demonstrating a positive relationship between
a positive and significant impact on financial improved management capabilities and company value.
performance and operational performance. This finding Pothineni (2023) also supports this finding by showing
is consistent with previous research by Chen et al. that information technology strategy can enhance
(2020), which also found that compliance practices operational and financial performance. Furthermore,
have a significant influence on firm performance. compliance practices are known to mediate the
Furthermore, enterprise risk management has been relationship between enterprise risk management and
proven to have a positive and significant impact on both financial and operational performance of the
financial performance. Additionally, corporate risk company. This finding aligns with the research by
management also has a positive and significant impact Adenutsi & Whajah (2023) and Songling et al. (2018),
on operational performance. These results support the stating that compliance practices play a crucial role
findings of Saeidi et al. (2019) and Adenutsi & Whajah in mediating the relationship between corporate risk
(2023), stating that the implementation of corporate management and firm performance. Additionally, IT
risk management can affect the overall performance strategy has been proven to mediate the relationship
of the company. Kulathunga et al. (2020) also add that between enterprise risk management and both financial
the concept of corporate risk management can help and operational performance of the company. This
companies adapt to environmental changes, provide finding supports the research by Nwankpa et al.
strategic advantages, and enhance competitiveness and (2020), stating that information technology strategy
commercial success. Moreover, IT strategy is found to plays a crucial role in enabling companies to adapt to
have a positive and significant impact on both financial a changing business environment, thus maintaining a
and operational performance of the company. This competitive advantage.
finding reinforces the earlier research by Asghar et al.

60 Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017

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Managerial Implications CONCLUSIONS AND RECOMMENDATIONS

As managerial implications, bank managers should Conclusions

prioritize the development and enforcement of
compliance protocols, as they can directly impact The analysis provides valuable insights into the
the organization’s financial and operational success. complex interplay between compliance practices,
Moreover, the findings highlight the need for Enterprise Risk Management (ERM), IT Strategy
organizations to strategically manage risks. Managers (ITS), and the subsequent impact on financial and
should allocate resources to strengthen ERM processes, operational performance. Firstly, the direct relationships
ensuring a proactive approach to risk identification, between compliance practices, ERM, IT, and financial
assessment, and mitigation. In the context of IT and operational performance are noteworthy. The
strategy investment, the managers should consider strong positive path coefficients signify that investing
investing in IT infrastructure, digital transformation, in compliance practices, robust ERM, and effective
and cybersecurity measures to leverage the benefits of IT strategies can substantially enhance both financial
a well-defined IT strategy and explore how IT strategy and operational performance. This underscores the
can be leveraged to enhance financial resilience, importance of adopting comprehensive approaches
especially in times of crisis or uncertainty. to these critical facets of organizational management.
Secondly, the indirect relationships emphasize the
These findings suggest that aligning compliance practices, intricate connections among ERM, IT Strategy,
ERM, and IT strategy with overall organizational goals Compliance Practices, and performance outcomes.
and objectives can yield substantial benefits. Managers Managers should recognize that the synergy between
should ensure that these functions are integrated into ERM and IT Strategy plays a pivotal role in shaping
the broader strategic planning process. Given the financial and operational performance positively.
significant path coefficients, managers should establish Furthermore, the indirect influence of ERM on
ongoing monitoring mechanisms to track compliance performance through Compliance Practices highlights
practices, ERM, and IT strategy. Regular assessments the multifaceted impact of ERM, extending beyond
and improvements in these areas can help maintain or risk management into areas crucial for organizational
enhance financial and operational performance over success.
time. Thus, to implement effective compliance practices
and IT strategies, organizations may need to invest in Recommendations
employee training and skill development. Managers
should consider providing opportunities for staff to These findings underscore the strategic significance
acquire the necessary knowledge and competencies. of aligning compliance, ERM, and IT Strategy within
The research findings carry significant managerial organizations. This alignment can result in substantial
implications for the interplay between Enterprise Risk improvements in financial resilience, performance, and
Management (ERM), IT Strategy (ITS), Compliance overall competitiveness. Organizations should prioritize
Practices (CMP), and financial and operational investments in these areas, adopt a holistic perspective,
performance. Managers should leverage ERM and and implement continuous monitoring and adaptation
IT Strategy for improved financial and operational practices to harness the full potential of these interrelated
results, emphasizing the need for strategic alignment. components. By doing so, they can position themselves
Enhancing ERM can positively influence compliance for long-term success and adaptability in a dynamic
practices, contributing to financial and operational business environment. The theoretical implications
excellence. A holistic approach that recognizes the of these findings highlight the interconnectedness of
interconnectedness of these components is vital. compliance, Enterprise Risk Management (ERM),
Investments in IT resources and compliance-driven and IT Strategy in shaping organizational outcomes.
initiatives are essential for performance improvement. This underscores the importance of integrating these
Continuous monitoring, strategic alignment, and elements into broader strategic frameworks for a
employee training are key to optimizing these more comprehensive understanding of their collective
relationships for organizational success and resilience. impact. The study contributes to theoretical frameworks
by emphasizing the synergy of these components
in enhancing financial resilience, performance, and

Indonesian Journal of Business and Entrepreneurship, Vol. 3 No. 2, May 2017 61

P-ISSN: 2407-5434 E-ISSN: 2407-7321 Indonesian Journal of Business and Entrepreneurship,
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competitiveness. Practically, the study suggests that performance dimensions: a mediated

organizations stand to gain significant advantages by approach. Journal of Manufacturing Technology
aligning compliance, ERM, and IT Strategy. Investments Management 31(7):1417-1438. https://doi.
in these areas, coupled with a holistic perspective, can org/10.1108/JMTM-02-2020-0036
lead to tangible improvements in financial resilience and Agustina L, Baroroh N. 2016. The relationship
overall performance. The practical implication is that between Enterprise Risk Management (ERM)
organizations should prioritize strategic alignment and and firm value mediated through the financial
continuous monitoring. This entails not only meeting performance. Review of Integrative Business and
regulatory requirements but also proactively adapting Economics Research 5(1):128.
to changing circumstances, leveraging technology, and Almeida R, Teixeira JM, Mira da Silva M, Faroleiro
fostering a resilient and competitive organizational P. 2019. A conceptual model for enterprise risk
culture. Such practices position organizations for long- management. Journal of Enterprise Information
term success and adaptability in the dynamic landscape Management 32(5): 843-868. https://doi.
of the business environment. org/10.1108/JEIM-05-2018-0097
Alsharari NM. 2022. Risk management practices and
There are a few limitations in this study. While trade facilitation as influenced by public sector
purposive random sampling was used, there may still reforms: institutional isomorphism. Journal of
be some sampling bias as the study focused solely on Accounting Organizational Change 18(2): 192-
bank managers in the Jabodetabek region. The findings 216. https://doi.org/10.1108/JAOC-11-2018-
may not fully represent the diversity of banking 0117
institutions in Indonesia. While the study examines Armour J, Mayer C, Polo A. 2017. Regulatory sanctions
mediation relationships, it does not establish causation. and reputational damage in financial markets.
The mediating variables may have other influences not Journal of Financial and Quantitative Analysis
considered in this research. Future research could employ 52(4):1429-1448. https://doi.org/10.1017/
longitudinal designs to capture changes and trends in S0022109017000461
the relationship between ERM, compliance practices, Arnold V, Benford T, Canada J, Sutton SG.
IT strategy, and performance over time. Future research 2015. Leveraging integrated information
is also advisable to explore the behavioral aspects of systems to enhance strategic flexibility and
ERM implementation and compliance, including the performance: The enabling role of enterprise
role of organizational culture and leadership, in shaping risk management. International Journal of
outcomes. Accounting Information Systems 19: 1-16. https://
doi.org/10.1016/j.accinf.2015.10.001
FUNDING STATEMENT: This research did not Asghar N, Khattak A, Danish MH, Bokhari IH, Waris M.
receive any specific grant from funding agencies in the 2023. Managerial skills, technology adaptation
public, commercial, or not - for - profit sectors. and firm performance: Mediating role of process
innovation and product innovation. Cogent
CONFLICTS OF INTEREST: The authors declare no Business Management 10(3): 2281485. https://
conflict of interest. doi.org/10.1080/23311975.2023.2281485
Bromiley P, McShane M, Nair A, Rustambekov E. 2015.
Enterprise risk management: Review, critique,
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