The Effect of Chief Risk Officer and Risk Committee Expertise on Risk Management

Abstract

Financial volatility and the recent financial crisis have turned the spotlight on enterprise risk management (ERM). Yet, high quality ERM is difficult to define and in many ways, poorly understood. Further, little is known about the individuals occupying key risk management positions within the firm and their effect on ERM system quality and firm-level risk. While the resource-based theory of the firm suggests that expertise in key risk management positions will be beneficial, institutional theories of corporate governance suggest that these positions might be created simply as window dressing in response to pressure from regulators and investors. The purpose of this study is to gain an understanding of the role played by the expertise of the chief risk officer (CRO) and risk committee members in (1) achieving/implementing a high quality ERM system, and (2) addressing the underlying risk objectives and outcomes of the firm. Results show that CRO expertise is related to higher quality ERM, in addition to lower levels of total risk, strategic risk and internal control risk. Risk committee expertise is related to lower levels of total risk and material weaknesses. Additional tests show that supervisory expertise of the CRO and industry expertise of the risk committee are driving results. Findings in this study should inform investors and regulators of the importance of the individuals occupying key risk management roles within the firm and help further understanding of the determinants and benefits of high quality ERM.