The impact of risk committee on financial performance of UK financial institutions

Abstract

Following the recent financial crisis, Walker (2009) recommended that financial institutions should form a separate board level risk committee (RC) to manage various risks and prevent excessive risk taking. This research focuses on investigating how firms with separate risk committees differ from those that do not have one. The main research question we address is whether RCs have a fundamental influence on financial performance. We measure financial performance by ROA and ROE and we control for firm size, liquidity and gearing. Our sample consists of all listed financial institutions in FTSE-100 index from 2010 through 2014. Results indicate a negative relationship between risk committee characteristics (i.e., existence, size, independence, and meeting frequency) and financial performance. The results also indicate that firms without risk committee (RC) performed considerably well than firms with RC. The results are contradictory to Walker's (2009) where RCs are recommended for their ability to mitigate and manage risks more expertly. However, we argue that establish strong RC constrain management ability to make excessive risk taking behaviour which may affect financial performance negatively. We contribute to the current research on the impact of risk committee governance attributes on financial performance after banking and governance reforms.

Relationship between Risk Committee Existence and Financial Performance of Commercial Banks in Kenya

“…This study will focus specifically to the banking industry in Kenya and the findings will be generalised to the banking industry in Kenya. Another study done by (Elamer & Benyazid (2018) on impact of risk commmittee on financial performance of UK financial institutions found that institutions with existence of risk committee performed poorly compared with institutions that did not have risk committees. This study cincluded that risk committee existence is negatively related to financial perforemnce.…”

A bibliometric analysis of cash holdings literature: current status, development, and agenda for future research

“…The corporate governance mechanisms quality is the central influencing factor of corporate financial policies, including cash holding (Abdelfattah et al 2020 ; Abdou et al 2020 ; AlHares et al 2020 2020a ; Alnabsha et al 2018 ; Alshbili et al 2019 ; Alshbili and Elamer 2020 ; Hazaea, Zhu, et al , b ; Khatib et al 2020 ). Corporate governance practices are expected to ensure that executives act in the best interest of stockholders (Asante-Darko et al 2018 ; Bufarwa et al 2020 ; El-Dyasty and Elamer 2020 ; Elamer et al 2018 , 2020 , 2019 ; Elamer and Benyazid 2018 ; Elmagrhi et al 2018 ; Hazaea et al 2020a ). Jensen ( 1986 ) stressed that executives are reluctant to disburse the extra cash among stockholders to secure their benefits by investing it in unprofitable projects, which might destroy corporates' valuation.…”

The Effectiveness of The Risk Committee, Political Relations and Company Performance in the Banking Industry in Indonesia

“…First, the formation of a risk committee in the organizational structure will improve the company's financial performance (Jia & Bradbury, 2020). Second, companies that have a separate risk committee (RC) will form communication problems and cause conflicts within the company, which will reduce the company's financial performance (Elamer & Benyazid, 2018).…”

“…Company performance is measured based on the ROA value and Tobin's Q value (Aldhamari et al, 2020). ROA is calculated based on the comparison of the value of net income and total assets (Elamer & Benyazid, 2018). While the value of Tobin's Q is defined as the sum of the total market value of equity and book value of total debt divided by the value of total assets (Aldhamari et al, 2020).…”

“…(Bhatt & Bhatt, 2017). The characteristics of the effectiveness of the risk committee can be in the form of risk committee independence, number of risk committee members, activeness in conducting meetings, overlapping positions on the risk and gender committee (Aldhamari et al, 2020;Elamer & Benyazid, 2018). Independent risk committee members can be seen through the relationships they have with management or shareholders (Aldhamari et al, 2020).…”