Are required SEC proxy disclosures about the board’s role in risk oversight substantive?

Abstract

The U.S. Securities and Exchange Commission (SEC) requires companies it regulates to include disclosures about the board’s role in risk oversight in the annual proxy statement to shareholders. The SEC does not mandate specific content or actions that boards should perform as part of their risk oversight responsibilities, leaving the nature of activities and extent of those disclosures to the discretion of the reporting entity. This study examines whether these disclosures contain substantive information reflective of the effectiveness of the organization’s risk oversight. We find that organizations disclosing more specific information (but not simply more information) about board risk oversight practices are associated with firms independently assessed as having the strongest management and governance processes. These findings suggest that these firms use the discretion provided by the SEC’s disclosure rule to provide substantive and potentially value-relevant information for stakeholders about the entity’s risk management processes and board risk oversight activities.