Board’s financial incentives, competence, and firm risk disclosure

Abstract

Purpose – The purpose of this paper is to examine novel corporate governance-based determinants of risk disclosures among index-listed Finnish companies. Therefore the focus of the study is on explaining the board’s monitoring role in relation to corporate managers. Design/methodology/approach – Firms’ risk disclosures are analysed in terms of their Quantity and Coverage. The authors focus on two board characteristics not examined in prior related literature: first, non-executive board members’ self-interested financial incentives, measured by their share or option ownership, and annual compensation and second, non-executive board members’ competence, measured by their experience in the company and managerial capability proxied by prior education. The sample is composed of the OMXH-25-listed firms, representing the most traded and followed firms among Finnish publicly listed companies. Findings – The authors find that the risk disclosures of these firms can be explained by financial incentives (wealth and compensation) and competence-related factors (attrition rate and education). The results indicate that among the “best disclosers”, the narrative risk disclosures are, on average, on a high level, and variation in risk reporting is largely associated with board characteristics. Research limitations/implications – The relatively small sample size makes the results vulnerable to type two error. Further research could continue by examining the impact of board work on corporate disclosures across countries and disclosure items. Practical implications – Board members’ financial incentives and competence impact the dynamism of board work. In this way, they are also associated with board members’ disclosure decisions. Originality/value – This paper contributes to the extant literature by demonstrating the impact of previously unexamined board characteristics on the quality of the narrative risk disclosures of highly followed firms.