The Effects of Corporate Governance on Enterprise Risk Management: Evidence from Malaysian Shariah-Compliant Firms

Abstract

The 2008 global financial scandals have increased pressure on corporations to improve corporate governance practices particularly on risk management. As a response to the crisis, corporate governance reforms have been evidenced. Enterprise risk management (ERM) was introduced as one of the mechanisms that can improve corporate governance practices particularly on risk management. Since its introduction, ERM has received major attention from corporations. Despite the claim that ERM is the solution for corporate governance deficiency, the number of empirical research examining this new field is still limited. Thus, this study aimed at assessing the current development of ERM practices and identifying corporate governance characteristics that influence ERM implementation among Malaysian Shariah-compliant firms. The extent of ERM implementation was measured by using ERM Dimension index (ERMDi). A questionnaire survey was developed based on ERMDi to gather information on the extent of ERM practices. Four corporate governance characteristics were examined that are risk management committee (RMC), board size, proportion of non-executive directors and board expertise and its influence to ERM implementation. The data was analyzed by using Partial Least Squares and Structural Equation Modelling technique (PLS-SEM). Findings of this study show that the extent of ERM implementation among sample firms is at the moderate level and based on PLS-SEM analyses, board size and board expertise has a strong influence to ERM implementation. This study, find support that corporate governance characteristics have a positive and significant association with ERM implementation. The findings of this paper provide an additional empirical evidence regarding the extent of ERM practices and corporate governance characteristics that would influence ERM implementation among Malaysian Shariah-compliant firms.