Abstract
This paper examines the effect of key board distinctiveness on managerial risk-taking behaviour. Using a total sample of 121 firms made up of 1,166 corporate directors and 847 firm-year observations, the study finds robust evidence across the three stages of estimation that suggests power separation in terms of CEO non-duality is negatively associated with executive risk-taking due to enhanced board assertiveness and independence. Board size is inversely associated with the variability of market value measure both within and at inter-firm levels. With average board membership in the study sample made up of 10 directors, the study finds crucial empirical evidence that points to the key benefits of large board configuration including the social capital, diversity of thoughts, knowledge, and experience, effectiveness and vigilance which curtails executive entrenchment. In contrast, the paper records positive association between the presence of foreign directors and corporate risk-taking. Due to their wealth of experiences, foreign directors tend to have more strategic sense of purpose and are likely not to hesitate in taking appropriate risk decisions when it really matters. While the paper finds little evidence that suggests a within-firm positive relationship between board independence and managerial risky propensities, there was no evidence found to indicate that board quality and ethnic diversity affects corporate risk-taking.
Highlights
Constrained by the separation of ownership and control due to the dynamics of modern corporation, dispersed shareholders depends on the board of directors as the first line of defense in providing the oversight and obtaining reasonable assurances regarding the overall effectiveness of firm governance system
The study found sufficient board structure related empirical evidences in Nigeria as an emerging market to agree with the assertions of previous studies that the introduction of codes of corporate governance and subsequent adoption by listed firms dampens corporate risk-taking
The passive attitude towards corporate risk-taking is driven by the effectiveness of the internal mechanisms such as leadership power dilution at board level through chief executive officer (CEO) non-duality and the adoption of large board size configuration
Summary
Constrained by the separation of ownership and control due to the dynamics of modern corporation, dispersed shareholders depends on the board of directors as the first line of defense in providing the oversight and obtaining reasonable assurances regarding the overall effectiveness of firm governance system. The executive management and board of directors have fiduciary responsibilities in corporate risk management. The later, being the trusted eye of the shareholders has the utmost overriding responsibility for providing the oversight function that ensures both risk and opportunities are strategically managed in a way that preserve shareholders’ value. It is imperative to note that board plays crucial role in setting the tone at the top regarding the overall firm’s attitude toward risk-taking and governance
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