EVIDENCE FROM S&P/ASX200 COMPANIES

Abstract:

After the recent financial crisis, risk management has become a significant part of firm management. We examine risk management at the enterprise level (Enterprise Risk Management or ERM), the effectiveness of the 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 that firms adopt ERM, its implementation and benefits are inadequate.   Prior literature on corporate governance supports the view that more robust governance mechanisms are needed to implement management strategies effectively. Following this, we test the board’s effectiveness in risk management implementation. Here we test our sample firms’ audit and risk committee effectiveness, using the 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 a negative impact of ERM on firm performance and firm value, ERM implementation has a positive and significant outcome on firm performance and value for firms with effective audit and risk committees. Evidence shows that the firms have increased awareness of the benefits of effective risk management after the financial crisis compared to the pre-crisis period. Our results show that for firms with effective committees, this positive impact on firm value is pronounced more in the period after the recent global financial crisis.

Keywords:   Enterprise risk management (ERM), Audit &Risk Committee.

Board Effectiveness, Firm Performance, and Firm Value.