On the role of the chief risk officer and the risk committee in insuring financial institutions against litigation

Abstract

Purpose In most financial institutions, chief risk officers (CROs) and their risk management (RM) staff fulfill a role in managing risk exposures, yet their lack of involvement in the governance has been cited as an influential factor that contributed to the financial crisis of 2007-2008. Various legislative and regulatory bodies have pressured financial firms to improve their risk governance structures to better weather potential future crises. Assuming that CROs and risk committees are given sufficient power to influence the corporate governance of financial institutions, can CROs and risk committees protect financial institutions from violating litigable securities law? Can they improve bank performance? The paper aims to discuss these issues. Design/methodology/approach The authors employ a principal component analysis to construct a single measure that captures various aspects of RM in a firm. The authors compare the risk governance characteristics of sued firms with their non-sued peers and consider one of the final outcomes of risky behavior: shareholder litigation. The authors compute ROA and buy-and-hold abnormal returns to capture operating and stock performance and examine whether risk governance improves bank performance by reducing litigation risk. Findings Proper risk governance reduces a firm’s litigation probability. The addition of the RM factor to models that have been previously proposed in the literature improves the accuracy of those models in identifying companies that are most susceptible to class action lawsuits. Better RM improves the financial and stock price performance of financial institutions. Research limitations/implications The data collection is laborious as the information about CRO governance has to be hand-collected from the 10-K report. A broader sample employing, e.g., non-US banks may provide additional insights into the relationship between RM practices, shareholder litigation, and bank performance. Practical implications The study shows that a bank’s RM functions play a critical role in improving bank and operating performance and in reducing shareholder litigation. Banks should emphasize the RM function. Originality/value This is the first study to examine the mechanism behind the positive association between RM and bank performance. The study shows that better RM improves overall bank performance by decreasing litigation risk.

The Impact of Risk Management Committee Characteristics on Corporate Voluntary Disclosure in Malaysia

“…Various factors may have contributed to these failures, but high risk-taking may have been one of the most significant factors (Ng et al, 2012). Meanwhile, the lack of an RMC may have contributed to the instability that gripped many significant institutions during the global financial crisis of 2008 in various ways (Fajembola, Rahman, & Rus, 2018;Amoozegar, Pukthuanthong, & Walker, 2017;Hines & Peters, 2015). This is in line with Malaysia CCG 2017, which stated that the board of directors forms an RMC, consisting of a majority of independent directors, to supervise the firm's risk management (RM) framework and policies.…”

Implementation of Enterprise Risk Management Practices in Organizations: An Empirical Analysis of Takaful Industry Financial Performance

“…Risk Management Committee: According to Amoozegar et al (2017), the infrequent meetings of Risk Management committee has also been considered an important element to the risk management failure during the financial crisis of 2008. Board Size: A direct positive relationship has been recognized among the board size, risk management and the organizational performance but this relationship is more significant in the small size organizations than the gigantic businesses.…”

CEO chairman controversy: evidence from the post financial crisis period

“…Measures the number of years a CRO has worked in that role at the BHC following Amoozegar et al (2017). Tenure is used in governance studies for directors, CEOs and other executives to proxy experience (Tanda 2015;Booth et al 2002 and Swizter and Sahut 2015).…”