Risk Management, Board Effectiveness and Firm Value: Evidence from S&P/Asx200 Companies

Abstract

Risk management has become a significant part of firm management after the recent financial crisis. In this study we examine risk management at enterprise level (Enterprise Risk Management or ERM), the effectiveness of audit & risk committee and the relation of ERM implementation to firm performance and firm value for a sample of S&P/ASX200 companies. ERM is the focus of all strategic management efforts as it gives a long run competitive advantage to businesses. Prior studies show mixed evidence on the performance effects of ERM for companies. Though various committees (e.g. COSO) and corporate governance councils (e.g. ASXCG Council) recommend firms to adopt ERM, its implementation and resulting benefits are inadequate. Prior literature on corporate governance supports the view that stronger governance mechanisms are needed for an effective implementation of management strategies. Following this, we test the effectiveness of the board in risk management implementation. Here we test the audit and risk committee effectiveness of our sample firms, using independence, power, size, and expertise of directors in the committee and compliance level of firms as the core stimulating factors of effectiveness, and the influence of effective committees on firm performance and firm value. Though our results show negative impact of ERM on firm performance and firm value, for firms with effective audit and risk committees, ERM implementation has positive and significant outcome on firm performance and value. There is evidence that the firms have increased awareness of the benefits of effective risk management after the financial crisis period compared to the pre-crisis period. Our results present further evidence that for firms with effective committees, this positive impact on firm value is pronounced more in the period after the recent global financial crisis.