Abstract
The cost of failure of a single corporate has a fatal impact on the economy. In addition to the macro-economic conditions leading to corporate collapse, management is responsible for developing and implementing a sound system of risk management and internal control in order to avoid such collapses. As a result, discussions on governance and risk have reached an unprecedented level for academics and practitioners. Moreover, risk exposure and management are increasingly becoming the foremost functions of modern business enterprises. However research that integrates corporate governance and risk has been limited. This study examines therefore the impact of corporate governance practices on corporate risk of listed companies in the Colombo Stock Exchange in Sri Lanka. The Board structure, Board Independence and Board procedures were considered as independent variables, whereas, corporate risk as dependent variable. The corporate risk represented the financial, operational and market risks faced by the companies. Furthermore the study used data from a sample of 64 listed companies for 5 years from 2014 to 2018 and employ panel regression to uncover the relationship that exists between these variables. The independent sample t-tests was used to test whether there was a statistically significant difference exist between the corporate governance practices of distress and non-distress companies. The results show that the corporate governance practices of distress companies was significantly lower than that of non-distress companies. The findings of the regression results suggest that Board independence was significantly and negatively impact on corporate risk. However, Board structure and Board procedures have no significant impact on corporate risk. The study therefore, concludes that the increased representation of independent non-executive directors of the board contributed to the significant decrease of corporate risk.
Highlights
Corporate governance is a dominant concept in the contemporary business climate in terms of legislation, processes and the administration of contracts between the corporation and shareholders, creditors, employees, vendors, customers and the government
The objective of this study was to examine the impact of corporate governance disclosures on Corporate Risk of listed companies in Sri Lanka
The Board structure, Board Independence and Board procedures were considered as independent variables, whereas, corporate risk as to the dependent variable
Summary
Corporate governance is a dominant concept in the contemporary business climate in terms of legislation, processes and the administration of contracts between the corporation and shareholders, creditors, employees, vendors, customers and the government. The focus of the business community on corporate governance has moved towards internal control and risk management concerns with the recent financial crisis and company failures at the beginning of the millennium (Daelen & Elst, 2010). Corporate governance and risk management are interrelated and interdependent (Knight, 2006). Companies must focus on achieving growth and profitability within the appropriate risk or control limits of corporate governance. Running a business comes with many different types of risk Some of these potential hazards can destroy a business while others can cause serious damage that can be costly and time-consuming to repair. As pointed out by Doherty (2000), there is evidence in terms of theories (e.g. neoclassical finance theory) that show how value can be generated from the adoption and application of risk management, and how risk can destroy corporate value. Risk management has become a global concern in term of value creation and is considered highly important for all forms of organizations around the world
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