Does Firms' Risk Management Human Capital Reduce the Likelihood of Financial Distress?

Abstract

iii AbstractIn light of the corporate collapses and global financial crisis, risk management has been highlighted as an ever increasing important element of corporate governance.As risk management committees (RMC) bear the fundamental responsibility of risk management, RMCs' human capital performs a crucial role in risk management governance and warrants further investigation.The purpose of this study is to investigate the association between firms' RMC human capital and firms' management of risk, in terms of firm performance and the likelihood of financial distress. This study is motivated by the paucity of research on risk management governance and the Australian Security Exchange Corporate With respect to the association between RMCs, separate RMCs existence, and firms' management of risk in terms of firm performance and the likelihood of financial distress, the results revealed that the number of firms with a separate RMC remained stable over time, whereas there was an increasing trend of combined RMC establishment, and a decrease in the number of firms without a RMC. The regression results reveal that the existence of a RMC and a separate RMC were not significantly related to firm performance and the likelihood of financial distress. However, the findings show that the existence of a separate RMC moderated the relationship between firm risk and a firm's accounting performance. In terms of RMC human capital, the overall RMC human capital score was positively related to firm performance and market measurement of the likelihood of financial distress. With Does firms' risk management human capital reduce the likelihood of financial distress? v respect to individual RMC human capital characteristics, the total amount of experience (as a type of general human capital) was positively related to accounting performance, while RMC members' board tenure (as a type of firm-specific human capital) was negatively related to market performance.The findings make several important contributions. Firstly, this study contributes to the literature by providing empirical evidence about human capital theory from a risk management perspective, and draws on research to determine whether human capital is associated with firm performance and research that determines the association between risk management and firm performance. Secondly, this study informs policy setters about the current risk management practice in Australia, and provides implications for regulating risk management practices. Overall, the findings of this study highlight the importance of RMCs' human capital.

The effect of a separate risk management committee (RMC) towards firms' performances on consumer goods sector in Malaysia

“…Meanwhile, in a different study by Jia et al (2019), the findings also show that the existence of a stand-alone RMC significantly and positively related to risk management disclosure quality in terms of quantity, relevance, width and depth. The results are consistent with other studies that claimed the existence of a stand-alone RMC could increase risk monitoring and reduce agency costs and information asymmetry, hence, leads to higher risk management disclosure quality (Alkilani et al , 2020; Jia, 2017; Jensen and Meckling, 1976). Accordingly, Ishak and Yusof (2013) stated that a separate RMC is likely to foresee and able to evaluate a company's viability in future and reduce the risks of going-concern than depending on the role of the audit committee.…”

“…Past corporate governance studies often use the agency theory as a theoretical basis, in relation to the establishment of a RMC in an organisation (Jia, 2017). The theory aims at resolving two problems that can occur in agency relationships.…”

“…The theory aims at resolving two problems that can occur in agency relationships. These problems arise due to the conflict of interests between the principal and the agent, which arise due to the separation of ownership and control (Kakanda et al , 2018; Jia, 2017). According to the researchers, managers tend to develop opportunistic behaviour due to legitimacy authority that has been bestowed to them by the shareholders.…”

“…According to the researchers, managers tend to develop opportunistic behaviour due to legitimacy authority that has been bestowed to them by the shareholders. This behaviour leads to a conflict of interest, causing agency problem (Alkilani et al , 2020; Jia, 2017). For this reason, the committee formed by the board of commissioners is an application of effective corporate governance mechanisms to address the agency's problems (Cai et al , 2008).…”

“…For this reason, the committee formed by the board of commissioners is an application of effective corporate governance mechanisms to address the agency's problems (Cai et al , 2008). Usually, RMC is predicted to exist in a situation where the agency cost tends to be high, for example in a situation of high leverage and large-sized companies (Jia, 2017; Subramaniam et al , 2009; Chen et al , 2009). Indeed, the agency literature suggests that outside directors contribute expertise and objectivity that minimises opportunistic behaviour and expropriation of firm resources (Yatim et al , 2016; Byrd and Hickman, 1992).…”