Final answer:
The three main theoretical concepts for Enterprise Risk Management (ERM) are Stakeholder Engagement, Risk Culture, and Risk Appetite, which collectively form the foundation of a company's approach to managing risk.
Step-by-step explanation:
The three main theoretical concepts that explain how Enterprise Risk Management (ERM) works are Stakeholder Engagement, Risk Culture, and Risk Appetite. These concepts are essential for understanding the dynamics of risk management within a company. Stakeholder engagement involves considering the interests and expectations of all parties with a stake in the firm, not just shareholders, following stakeholder theory. This broadens the understanding of corporate responsibility and the scope of risk assessments.
Risk culture refers to the values, beliefs, and behaviors within an organization that shape its risk awareness and risk-taking behavior. A strong risk culture promotes an environment where risk considerations are integrated into the decision-making process. Risk appetite is the level of risk that an organization is willing to accept in pursuit of its goals. It is a key factor in decision-making and strategy development, ensuring that the risks taken align with the company's capacity for and attitude towards risk.