Determinants of Voluntary Formation of Risk Management Committee: Evidence from an Emerging Economy

Abstract

The study aims to explore firm characteristics associated with a firm's decision to setup a separate risk management committee (RMC) within the context of companies listed on the Johannesburg Securities Exchange (JSE). We develop a battery of econometric models based on triangulation of corporate governance theories which linked a company’s decision to setup a separate risk management committee (RMC) in its board structures as a dependent variable and a host of firm-specific factors as independent variables. Data collected from audited annual reports of 181 JSE listed non-financial firms were analysed by using logistic regression technique. The results show a strong positive relationship between the likelihood that a company would establish a separate RMC, on the one hand, and board independence, board size, firm size, and industry type, on the other. However, we did not find support for the hypothesis that firm characteristics such as the independence of board chairman, use of big 4 audit firms, financial reporting risk, and levels of financial leverage do influence an entity’s decision to form a separate RMC. These findings signify the role that information asymmetry between executive and non-executive directors, agency cost and potential damage to reputation capital of directors; diversity in background, expertise, and skills of directors; economies of scale in absorbing RMC costs; and industry specific institutions and norms play in a company’s decision to form a separate RMC. The implication of our finding is that policy makers should consider the size and composition of boards and also take cognisance of firm size and industry-specific idiosyncrasies in setting recommended corporate governance practices.