The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking

70 Pages Posted: 19 Aug 2014 Last revised: 16 Mar 2015

Christopher D. Ittner

University of Pennsylvania - Accounting Department

Thomas Keusch

INSEAD

Date Written: March 12, 2015

Abstract

The Board of Directors’ role in risk oversight has come under increased scrutiny, resulting in shareholder lawsuits, increased regulation, and more extensive disclosure and listing requirements. While theory predicts that Board risk oversight can benefit stakeholders by mitigating risk-related agency conflicts, critics argue that changes in Board practices in response to external pressure may simply be window-dressing. Using both archival and survey data on corporate risk management processes, we examine the influence of Board risk oversight responsibilities and practices on the maturity of the firm’s risk management processes and risk-taking. We find the location of Board risk oversight responsibilities to be a major determinant of Board risk oversight practices, with greater oversight in firms that formally assign responsibilities to the Board as a whole as well as its committees. Supporting the view that risk oversight is conducted for economic reasons, the quality of Board oversight practices has a direct positive relation with the maturity of risk management processes, as well as a significant indirect influence on future stock return volatility and tail risk through the enhanced risk management maturity.

Keywords: corporate governance, board of directors, risk oversight, ERM

JEL Classification: G30

Suggested Citation

Ittner, Christopher D. and Keusch, Thomas, The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking (March 12, 2015). AAA 2015 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=2482791

Christopher D. Ittner (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

Thomas Keusch

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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