The Governance of Risk Management: The Importance of Directors’ Independence and Financial Knowledge

Abstract

This paper tests the effects of the independence and financial knowledge of directors on risk management and firm value in the gold mining industry. Our original hand-collected database on directors’ financial education, accounting background, and financial experience allows us to test the effect of each dimension of financial knowledge on risk management activities. We show that directors’ financial knowledge increases firm value through the risk management channel. This effect is strengthened by the independence of the directors on the board and on the audit committee. Extending the dimension of education, we show that, following unexpected shocks to gold prices, educated hedgers are more effective than average hedgers in the industry. As a policy implication, our results suggest adding the experience and education dimensions to the 2002 Sarbanes–Oxley Act and New York Stock Exchange requirements for financial literacy.

Keywords: risk management governance, financial knowledge, financial and accounting education of director, financial experience of director, independence of director, policy implications

JEL Classification: D83, G18, G30, G32, G34, G38