rewards of a voluntary risk management

CHAPTER 1

INTRODUCTION

Overview

This chapter serves as an introduction, with the primary purpose of establishing

the foundation by introducing the study objectives. Within this section, we emphasize the

significance of voluntary risk management committees (VRMC), clarifying the study’s

purpose while discussing our research objectives. We begin by discussing the increased

necessity for organizations to enhance their corporate governance practices, particularly in

response to one of the most severe global financial crises in history, which scholars

attributed to failures in corporate risk management. Subsequently, we briefly discuss the

adoption of two influential corporate reform legislative policies concerning risk

governance in recent U.S. history. From this viewpoint, we highlight the differences

between the requirements for overseeing risk in the financial and nonfinancial aspects of a

firm. These discussions lead us to formulate our research questions that helped shape the

motivation behind this research. Finally, we provide an overview of the subsequent

chapters, which will be explored in detail throughout the study.

Background, Objectives, and Motivation for the Study

Practitioners have recently begun to emphasize the growing need to control all

dimensions of a firm’s corporate risk (Hines and Peters, 2015; Jia and Bradbury, 2020;

Moore and Brauneis, 2008; Schlich and Prybylski, 2009). Now more than ever, escalating

global disruptions have made overseeing an organization’s inherent risks a more vital role

in corporate governance due to increasing financial uncertainties. From the financial crisis

in 2008, caused by the ambiguous deregulation of financial firms (Amadeo, 2020), to

rising supply chain irregularities (Anser et al., 2021), organizations have increased their

focus on assessing corporate risk elements preemptively (e.g., operational, financial,

strategic, ESG, cybersecurity, bankruptcy, and natural disasters—just to name a few) that

can potentially jeopardize the firm’s existence (Harbert, 2019). Without having

appropriate risk-taking control and practices in place, uninformed decision-making can

cause long-term formidable damage to the organization (Tonello et al., 2012).

To broadly enhance the efficiency and stability of the financial system while

protecting both the firm’s assets and its investors, several federal regulations and

supplementary guidelines were issued to assist in strengthening the regulations of the

financial markets. Most notably, the Dodd-Frank Act (Dodd-Frank) and Sarbanes-Oxley Act

(SOX) are both considered the most recent influential corporate reform legislation intended

to safeguard stakeholders following the financial crisis.

The Dodd-Frank was enacted to protect against “instability in the U.S. financial

system” (Tonello et al. 2012). The Dodd-Frank, which was codified into law on July 21,

2010, provides financial risk provisions for publicly held financial firms with assets

exceeding $10 billion. It also enforces full transparency of records to the Federal Reserve

Board of Governors and requires these firms to develop a stand-alone risk management

committee (separate from the board of directors’ functions) to provide fiduciary oversight

of financial risk exposure that may hinder the firm’s achievement of its corporate objectives

(Dodd-Frank, 2010).

The SOX was also codified into law to enhance the standards used by all U.S.

public company boards, management, and public firms. This legislation comprises eleven

(11) sections ranging from corporate board responsibilities to assessing criminal penalties governed

by the Securities and Exchange Commission to enforce these new requirements. Section 404 of the

Act requires firms to maintain adequate internal control systems in place, along with

complementing risk oversight mechanisms, to enhance transparency against loose internal control

structures and procedures for financial reporting.

Although practitioners praise both the Dodd-Frank and The SOX for providing

institutional safeguards to protect against an impending financial crisis after the greatest

financial crisis of the 20th century (Acharya and Richardson, 2009; Malik et al. 2020),

both pieces of legislation fall short of requiring nonfinancial firms to possess a standalone

board-level risk management committee to adopt sophisticated risk management practices

in contrast to the highly focused financial institutions (Malik et al. 2020). While risk

management committees are becoming more prevalent within nonfinancial firms,

researchers claim still few organizations have established them (Muneer et al., 2021).

Instead, the audit committee remains the most prudent body to govern an organization’s

risk (Bates & Leclerc, 2009; Hines & Peters, 2015; Johnson, 2010; Keizer, 2010; Ng et al.,

2013) in nonfinancial firms. This can be inadvertently attributed to both Dodd-Frank and

SOX being so focused on the financial industry, to the exclusion of nonfinancial publicly

traded firms discounting the potential risky behavior outside financial institutions. Ishak et

al. (2017) argue that all firms have an obligation to lean forward and voluntarily

implement adequate business controls to manage risk, leveraging their commitment to

reduce “operational, financial and reputational risk” (p. 3). Despite the additional layers of

oversight that come with establishing a robust risk management committee, many

organizations elected not to develop this committee since it is not required by legislation

or governing oversight boards. Or, the lack of practical evidence that an established risk

management committee is closely linked to minimizing the cost of risk to the enterprise.

Thus, based on the above discussion, this study aims to investigate to what extent does a

nonfinancial firm’s decision to create a voluntary boardlevel risk management committee

relate to (1) the financial risk and (2) the financial health of the organization.

Additionally, we explore the compelling relationship between nonfinancial firms’

decision to create a voluntary board-level risk management committee and (3) credit risk,

which is often interconnected with the oversight governance and decision-making of the

organization’s performance indicators reflecting the financial health and risk activities of

the firm. Using data from the S&P 1500 index, we developed a mixture of small (S&P 600),

medium (S&P 400), and large (S&P 500) market capital firms to evaluate this relationship,

which is representative of approximately 90% of all U.S. stocks (Abebe & Acharya, 2022;

Vairavan & Zhang, 2020). These firms offer a wide of diverse organizational sizes and

industry segments across both financial and nonfinancial sectors.

In light of this, this study is motivated to examine the relationship of a VRMC on

leading risk indicators for nonfinancial firms and how its existence influences board risk

oversight. Initially, this study was driven by the limited amount of research on board

committees (Lee, 2020). Lee (2020) further articulates that there is very little research on

how both financial and nonfinancial committees are constructed and their corresponding

relationship on firm performance. Leaning forward into this argument, scholars assert that

the establishment of a VRMC remains minimally investigated (Hines, 2012; Ishak & Nor,

2017). In a later investigation, Hines et al. (2015) continue to express how prior empirical

research continues not to “definitively” evaluate the benefits of establishing a stand-alone

board-level committee to identify and manage the firm’s critical risk. Further, Carcello et

al. (2011) add that the practical outcomes of risk management committees need more

empirical studies. Based on the pool of literature surrounding the relationship of board

committees on establishing the functions of a voluntary board-level risk committee, there

remains a wide disparity in literature. Therefore, this study anticipates adding to the

marginalized gap in risk literature geared toward understanding this relationship.

Dissertation Structure

The study consists of four remaining chapters, each with a distinct focus. In

Chapter 2, we conduct a review of empirical literature shedding light on the intricate roles

and responsibilities of board committees while governing and monitoring a firm’s

potential risks. This chapter also incorporates relevant theoretical perspectives from

previous research on risk committees. In Chapter 3, we begin our first study using

research methodologies to test the hypotheses we have formulated. Specifically, we

investigate the relationship between the establishment of a VRMC and the financial

health and risk of nonfinancial firms. With a similar focus, Chapter 4 provides our second

study where we statistically test the relational hypothesis between the presence of a

VRMC and the short- and long-term credit ratings of a nonfinancial organization. Lastly,

Chapter 5 provides a comprehensive finding of both studies. It also provides a discussion of

the study’s practical implications, acknowledges its limitations, and identifies potential

avenues for future research.

CHAPTER 2

LITERATURE REVIEW

Chapter Introduction

While we expand on the introductory discussion within the previous chapter that

underscores the significance of comprehensive risk management due to the rising

challenges of global disruptions; we begin this chapter with an examination into the

critical roles VRMCs play in meeting the unique needs and challenges of each

organization. Drawing insights from existing literature, we also establish the theoretical

groundwork for understanding the practical objectives, structure, and operations of risk

management committees within an organizational setting. As such, this chapter plays a

pivotal role in developing our future study into the relationships for establishing a VRMC,

particularly in the context of nonfinancial firms where such a requirement does not exist.

Finally, we offer an overview of the chapter leading up to the exploration of our first

study.

The Roles of Board Committees

Most arguably, one of an organization’s greatest assets is its board of directors,

whose members are responsible for exercising governance over corporate operations while

capturing opportunities to drive organizational revenue and growth through innovation

(Kouzes & Posner, 1987). In today’s volatile business environments, organizations are

increasingly faced with creating value for their stakeholders despite unforeseen market

complexities (Mishra & Dasgupta, 2019). In addition to these unpredictable business

conditions, an increase in global market disruptions can exacerbate the organization’s

ability to thrive and compete. Through all this uncertainty, organizations must heavily rely

on the board of directors’ executive governance to steer them through various calamities

foreseen and unforeseen (Abebe & Myint, 2018; Shapiro et al., 2015).

This difficult and sometimes complex task (Baxt, 2005) comes with many layers

of regulatory restrictions and shareholder demands, which the board of directors must

consider while overseeing the future direction of the organization (Price, 2019). The

board of directors also creates policies governing company resources, goal setting, and

bylaw development while making decisions amidst competing organizational interests. To

undertake this task, many boards of directors establish small groups of highly specialized

directors to advise the full board of immediate and future challenges to proactively

minimize potential impending threats while maximizing the firm’s performance. Alces

(2011) reaffirms that the board’s responsibility is to provide critical directional guidance

and oversee senior management while making significant steering decisions for the firm.

Further, Ng et al. (2013) add that this expanded role creates a fiduciary monitoring and

oversight function needed to further increase confidence in public firms (Bainbridge,

2018) by attracting and retaining the support and trust of investors in both favorable and

unfavorable market conditions.

The Responsibility of the Board’s Committees for Monitoring

The success of a firm’s board of directors lies in its ability to effectively monitor

current and future financial and operational shifts. Specialized disciplines are needed to

identify, capture, and monitor wide-ranging threats (Abdullah et al., 2015) by recommending

decision-making strategies to respond to situational uncertainties (Hines & Peters, 2015).

Rather than relying solely on the entire board’s recommendation, this critical function is

delegated to specific board committees operating under the purview of the board of

directors. Once coined the governance “watchdog” (Tricker, 1994; Morgan, 1979, p. 161),

these committees set the tone for governance, ongoing monitoring, and accountability

expectations needed to carry out the best possible performance from challenges the

organization faces (Jaskyte, 2012). These fiduciary monitoring practices used to protect the

firm’s interests have prompted organizations to exercise corporate governance better over the

additional risk created by unforeseen events.

The evolution of board committees has occurred in response to the ever-changing

business environment, particularly due to recent business failures within the financial

sector. Several governing bodies (i.e., SEC, NASDAQ, and IRS) have required publicly

traded organizations to establish certain board committees to ensure the trustworthiness of

financial reporting (Ng et al., 2013). The three most commonly used board committees for

publicly held U.S. firms are compensation, nomination, and audit (Kolev et al., 2019),

each of which performs independent tasks within a firm’s corporate governance structure.

The compensation committee improves the board’s effectiveness by designing and

advising on executive compensation packages for top management (Sun et al., 2009). The

nominating committees support the selection of the newly qualified committee members

while evaluating the overall performance and makeup of the board (Soana & Crisci,

2017). The audit committee’s responsibilities are to (1) ensure the integrity of financial

statements and reporting, (2) ensure compliance with legal matters, and (3) ensure

effective financial and internal control parameters to identify material weaknesses and

fraud (JPMorganChase, 2020; Lockheed Martin, 2020; Workiva, 2020). Although these

three committees are the most common among U.S. firms, within the S&P 1500 index

firms, we observed 2,128 different subcommittees within our dataset governing the

board’s responsibilities for monitoring financial and operational performance.

As increasingly complex matters arise, the roles of subcommittees will continue to

evolve in response to continual changes established by governing bodies for publicly

traded companies (Tonello et al., 2012). Due to the increasing overwhelming oversight

responsibilities of both financial and performance operations by these committees (Brown

et al., 2009; Ng et al., 2013), many organizations also elect to establish a VRMC to assess

systemic risk in resolving strategic matters regarding imminent risk to the organization.

Introduction of Risk Management Committees

Risk management committees are primarily designed to evaluate risks that

jeopardize an organization’s survival (Hines & Peters, 2015). To identify and contend

with risk, boards have begun to establish risk management committees to ensure directors

have the knowledge, skills, and abilities necessary to align operational performance with

adequate risk assessments (Chams, 2019) more effectively. The risk management

committee has the overall responsibility for developing risk policies, procedures, and

cultural behaviors for the organization. Due to this expertise, the risk management

committee is better suited to perform specific evaluations on the unknown risks facing the

organization (Hines & Peters, 2015; Ishak et al., 2017; Ng et al., 2013). Also,

instructional regulatory guidance from SEC, NASDAQ, IRS, and Dodd-Frank provisions

(Infosys, 2007; Tonello et al., 2012) expanded the risk management committee’s role to

(1) assist in fulfilling its corporate governance role by evaluating potential risks of the

organization within both internal and external environments, including competitive,

technological, political, economic, and regulatory developments; (2) develop a risk management

framework to evaluate significant risk exposures, and (3) oversee the organization’s resources to

achieve its objectives (Appvion, 2013; Bunge, n.d.; Deloitte, 2014; Infosys, 2007). In all, the risk

management committee’s governing role is to provide the “big picture” view of potential

organizational threats (Tonello et al., 2012, p.

2), while developing a plan to mitigate financial and operational concerns.

Now more than ever, regulated organizations within the financial industry have

specific requirements regarding the need for risk management practices (Iahak, 2016). In

fact, most empirical studies that examine the role of risk management committees focus

on financially regulated organizations (Abdullah, 2015). This is because there is more

data available to examine. However, risk management committees are still voluntary for

nonfinancial unregulated industries (Iahak, 2016). Although established to improve

corporate governance, conversely, some researchers have found that risk management

committees may impair an organization’s ability to evaluate risk relative to strategy

operations (Bates & Lecierc, 2009; Hines & Peters, 2015). Others believe risk

management committees within an unregulated industry set the tone for the importance of

managing risk initiatives within an organization (Abdullah et al., 2015; Busa & Lee,

2021; Ishak et al., 2017). Oddly enough, some organizations choose not to form a VRMC,

as the overwhelming benefits of creating a risk management committee have been

addressed through previous empirical research (Busa & Lee, 2021). In fact, from a policy

standpoint, Dodd-Frank missed a clear opportunity to safeguard shareholders of

nonfinancial organizations by failing to require industries outside the financial sector to

add such board committees. This regulatory oversight serves as a strong antecedent for

poor regulatory business risk management practices for nonfinancial firms (Iahak, 2016).

The following section examines several theoretical frameworks used within previous

empirical studies regarding the practical usage of risk management committees.

Each subsection provides a theoretical view along with its applied relevance.

Introduction of Theoretical Frameworks and Risk Management Committees

Researchers have examined the effects of risk management committees (RMCs)

by applying various theoretical frameworks (Jia & Bradbury, 2020; Ishak et al., 2017) and

continue to evaluate the theoretical impacts of their implementation (Malik et al., 2021).

Gevutz (2003) presents a theoretical viewpoint that illustrates the board being subdivided

into three underlying factors, which indicate “the relationship of the directors to the

shareholders; the relationship of the directors to each other; and the relationship of the

directors to the corporation’s executives” (p. 4). Through Gevutz’s theoretical illustration,

we explore the “essence” of the committee’s fiduciary responsibility through agency,

organizational, and resource theories.

The following sections examine these theoretical frameworks by reviewing previous

empirical studies that explored the practical usage of risk management committees. Each

subsection provides a theoretic perspective, along with its practical significance within the

context of this research.

Agency Theory and Risk Management Committees Agency

theory is a prevalent behavioral philosophy within economics and management

research (Jensen & Meckling, 1976). According to Kolev et al. (2019), agency theory

is cited as the predominant framework being used in approximately 75% of board

committee research related to financial decision-making, corporate governance, and

risk management, with organizational theory being leveraged as a contributing factor.

The study of agency theory has helped scholars and practitioners understand the

relationship between agents within a firm. Through these interactions, conflicts of

interest on various levels of the firm become evident, ensuring that the risk-taking

decisions of managers ultimately align with the best interests of the firm and its

stakeholders, addressing information asymmetry that can arise when principals

delegate decisionmaking authority to agents to run the company on their behalf. Risk

management committees play a pivotal role between managers and shareholders as

they provide an additional oversight layer of monitoring and control by promoting

transparency and accountability within the firm (Carausu, 2015). Scholars have also

found evidence of agency theory in the egregious risky behavior of firm managers

(Jensen & Meckling, 1976). In such instances, a firm that develops a VRMC as a

component of its board oversight plays a pivotal role in ensuring that management

effectively oversees risks, consistent with the attributes of agency theory (Angbre,

2016; Nugraha et al., 2019). For these reasons, I leverage agency theory as an essential

component of the board’s decision to create a VRMC to help ensure that the best

intentions of all stakeholders are considered, which ultimately contributes to the

overall success of the firm.

Organization Theory and Risk Management Committees The

multiple ways organizations create value help us understand the interconnection

between a firm’s cultures, structure, and design. Together, these three elements allow

organizations to “diagnose problems, make adjustments” and monitor activities

needed to achieve optimal performance goals (Jones, 2013, p. 30).

Organizational theory conceptualizes this into functional relationships within both

individual organizations and the ecosystem in which they operate (Blomberg, 2020;

Jones, 2013). It also conceptualizes strategic management’s purpose to adapt as a

selfgoverning learning institution when informed decisions are required from risk-

triggered events (Sarta et al., 2021). With this ongoing learning functionality, scholars

maintain that organizational theory prompts organizations to continually mature from one

functional state to a future state, developing their organizational effectiveness along the

way (Jones, 2013, p. 32). Jones (2013) claimed the main goal of organizational theory is

“to find new and improved ways of using resources and capabilities to increase an

organization’s ability to create value, and hence, its performance” (2013, p. 32). The

expertise possessed by the risk management committee remains a critical component of

fulfilling the board’s fiduciary responsibilities. For this reason, risk management

committees, in many ways, support “forward-looking corporations” (Neef, 2005, p. 112),

developing “new operational behaviors vital to address the global corporate need of risk

management” (Neef, 2005, p. 112). Thus, for this study, we draw on the application of

organizational theory that supports a VRMC’s ability to influence the organization’s risk

culture by collaborating with various organizational functions to integrate risk

management practices throughout the firm.

Resource Theory and Risk Management Committees

Resource dependency theory was developed based on examining the need for

organizations to utilize external sources to maintain optimum performance for their existence

(Pfeffer & Salancik, 1978). Scholars have extended this definition within corporate

governance to suggest that the board’s personal attributes and diverse skills can serve as a

resource for the organization to succeed. Risk management committees are an extension of

organizations’ resources through which firms utilize their expertise on both internal and

external factors to identify and address risks that may arise from these resources (Abdullah

et al., 2017). Often, these committees are tasked with evaluating various risks ranging from

third-party vendor impacts, regulatory changes, process improvements, environmental

concerns, and contingency planning (Abdullah et al.,

2017).

In the context of this study, we utilize resource dependency theory to explain how

organizations often depend on external financing sources, such as credit ratings, to manage

operations while sustaining growth. Credit ratings play a pivotal role in the organization’s

ability to secure external funding. Risk management committees play a crucial role in

managing the firm’s creditworthiness and associated risks tied to external financing. This

includes overseeing the organization’s credit ratings and providing intermediary strategies

to maintain and enhance them. Effective risk management of the firm’s credit ratings is

imperative to ensure the safeguarding of the organization’s financial well-being.

Literature Gap and Research Question

The existing theories acknowledge the theoretical benefits and operational value

of risk management committees for boards that establish them, whether voluntarily or as a

requirement. Our review of a narrow collection of the literature reveals the positive

influence of VRMCs on various aspects of the firm, such as board structure and

characteristics (Sekome & Lemma, 2014; Yatim, 2010), risk-taking (Ng et al., 2013),

market risk disclosures (Al-Hadi et al., 2016), and corporate governance (Subramaniam et

al., 2009). However, in addition to this body of literature, there is small-scale research

exploring the relationship between VRMC presence and firm performance, which has

yielded mixed results. Toa and Hutchinson (2013) identified a positive relationship

between VRMCs and firm performance, whereas other studies such as those by Hines and

Peters (2015) and Hoque et al. (2013) found a negative association between VRMCs and

firm profitability. It is important to note that most of these studies were conducted in non-

U.S. regions, with the exception of Hines and Peters (2015) and Malik et al., (2020),

which focused on U.S. financial firms from 1994 to 2008 and 2005 to 2017 respectively.

Previous VRMC studies primarily focused on international markets like Malaysia,

South Africa, and Australia; however, our study concentrates on firms within the U.S.

market. Our dataset includes a comprehensive analysis of 10,257 U.S. firms spanning from

2008 to 2020, which broadens the scope beyond the 2008 timeframe used by Hines and

Peters in their 2015 study. Although Hines and Peters observed a negative correlation

between RMCs and profitability in their analysis of 47 firms, our research responds to the

call by Hines et al. to broaden this research beyond the Global Financial Crisis of 2008 to

comprehensively understand the propensity of firms for establishing a separate risk

management committee in various economical climates. In addition to our extensive

review of U.S. firms within our scope, we evaluated 10,248 observations across 1,091

firms. Among these organizations, 169 firms adopted a VRMC. As we observed Malik et

al.’s (2020) call to examine larger samples of firms, we pivoted to evaluate only a

standalone risk management committee, which Iselin (2020) asserts reflects the board’s

intentions to have a separate governing body responsible for improving the firm’s

oversight and performance role in various functioning areas such as compliance risk,

operational risk, strategic risk, and credit risk. Through this lens, we aim to empirically

address the following research question:

RQ 1: To what degree is there a trend in the establishment of separate VRMCs

among firms for the purpose of board-level risk governance and organizational wellbeing?

We note in recent years that the adoption of voluntary board-level risk

management committees has increased for nonfinancial firms to enhance their risk

management practices (Bugalla et al., 2012; Malik et al., 2020). Consequently, our paper

is of timely significance for practitioners in understanding the operational value of risk

management committees within firms. In Chapter 3, we conduct an analysis to explore the

benefits, relationships, advantages, and disadvantages associated with the implementation

of voluntary RMCs, particularly in terms of their relationship on the financial risk and

health of organizations.

CHAPTER 3

STUDY 1

Background and Hypothesis Development

The preponderance of research, along with the corresponding theory, suggests that

risk management committees are an integral component of the board of directors. Risk

management committees are well suited to monitor the organizations’ trajectory to

increase the firm’s overall risk management performance (Jia, 2019, p. 1053; Marsden &

Prevost, 2005). Due to the expertise needed to oversee the firm’s inherent risk, both

agency and organizational theory support the role of the risk management committee in

determining “risk management strategies, evaluating risk management operations and

assessing the appropriateness of risk management procedures” (Jia, 2019, p. 1053;

Subramaniam et al., 2009). De Villiers et al. (2022) argue that firms with separate (i.e.,

voluntary) risk management committees outperform firms without this function. Empirical

studies indicate that the future of corporate governance has been enhanced by the evolving

role of RMCs monitoring the company’s risk management practices. Rimin et al. (2021)

further suggested that the formation of a separate RMC enhances the overall board’s

effectiveness. Using a panel of commonly used industry financial ratios for measuring

risk, we applied several financial ratios used by industry practitioners to analyze the

financial relationship associated with VRMCs. We expect that the implementation of a

firm’s voluntary VRMC will have a significant relationship on measuring the

organization’s financial risk. This argument leads to the following hypotheses:

H1: The existence of a VRMC is related to the financial risk leverage of an organization.

H2: The existence of a VRMC is related to the financial risk solvency of an organization.

A risk management committee is not only concerned with the financial and strategic risks

of the firm but also with the entire financial health of the institution (Nocco & Stulz,

2006). These scholars also assert that the evaluation of financial metrics is critical to

maximizing the overall health risk of the organization. The absence of such

measurements is consistent with several studies indicating that the formation of an RMC

had an unfavorable effect on a firm’s health (Hines et al., 2015). Prior literature has also

reported mixed findings on the effects of RMCs (Bensaid et al., 2021). Though the

literature regarding the association between VRMCs and the financial health of the firm

seems inconclusive, no empirical studies evaluating this relationship were found. Due to

the strategic and intuitive nature of risk oversight provided by risk management

committees, we predict that risk management committees will have some influence on the

financial health of the firm (Jia et al., 2019). This argument leads to the following

hypotheses:

H3: The existence of a VRMC is related to the financial health soundness of an

organization.

H4: The existence of a VRMC is related to the financial health efficiency of an

organization.

Methodology

Sources of Data

For this study, we started by exploring the BoardEx global database, which is a

research portal that provides millions of executive profiles on public and private companies

(BoardEx, 2021). Scholars and practitioners utilize this database for statistical and

academic research in areas such as “leadership, management, diversity and inclusion,

governance, compensation, and networks” (BoardEx, 2021). Scholars have deemed the

usage of BoardEx reliable for researching firm performance, compensation, and finance

committee demographics (Basu & Lee 2020; El-Khatib et al., 2017; Kim, 2021).

To identify the relationship that VRMCs may have on organizations, we initially

queried data files from Compustat to explore both currently active and inactive

(unbalanced) publicly traded companies within the S&P1500 index during the calendar

years 2009 to 2017. Then, we queried key financial calculations (ratios) from the WRDS

Financial Ratio Suite and found 190,294 company observations, using several financial

soundness/solvency and efficiency ratios for firms designated within our selected scope.

We used these corporate financial ratios to measure the overall financial risk and health of

the organization.

Next, we queried BoardEx to obtain data regarding board subcommittees. Using the

same corresponding parameters as above for consistency purposes, we explored both active

and inactive (unbalanced) publicly traded companies within the S&P1500 index during

calendar years 2009 to 2020. We found 203,328 company observations using BoardEx’s

North America catalog portal, encompassing both financial and nonfinancial organizations.

With the subcommittees identified, we were able to pinpoint organizations possessing a

separate risk management committee. To recognize a firm with a separate risk management

committee, we identified and grouped the following committee names: “Risk,” “Risk

Assessment,” “Risk Evaluation,” “Risk Management,” “Risk Management and Finance,”

“Risk Oversight,” and “Risk Policy.” We then utilized Stata to collapse the yearly

observations and merged the data using the S&P ticker marker as the unique identifier to

link both BoardEx committee files with the Compustat financial data. This resulted in a

sample of 18,546 company observations related to 1,494 companies, of which 93 had a

separate risk management committee. Our focus was on evaluating only the nonfinancial

sector organizations, as we assert that both financial and nonfinancial firms have different

regulatory requirements that are not voluntary. Scholars argue the financial industry is

highly regulated, with risk management responsibilities for financial institutions (e.g.,

Dodd-Frank criteria), which require many financial firms to establish RMCs (Malik et al.,

2020). Thus, evaluating both sectors equally would be an inequitable comparison, making

the contrast unsound. For this reason, we excluded all financial firms within this dataset.

This reduced our dataset to 14,702 observations across 1,099 firms. After removing all

blank and duplicate cells, we were left with a final sample of 10,247 corporate line entries

within 1,091 companies, of which 30 firms remain to be reviewed. Lastly, we merged the

credit ratings with this list, which was limited to 2017, with much incomplete firm

information provided. This provided our final sample of 5,973 firm observations,

consisting of 903 firms, of which 21 adopted a VRMC.

Variables and Model Specification

To test the four hypotheses, we use the logistic regression model shown in Figure 1

to illustrate the variables for H1, H2, H3, and H4. We also provide the listing of all

variables in Table 1.

For H1: VRMC = α + β1(DegreeOfOperatingLeverage) + β2(DegreeOfFinancialLeverage)

+ β3(TotalDebt/Equity) + β2(Year) + β3(GICS) + β4(Number of Directors) +

β5(Number of Director Qualifications) + β6(Gender) + ε

For H2: VRMC = α + β1(TotalDebt/Equity) + β2(Year) + β3(GICS) + β4(Number of

Directors) + β5(Number of Director Qualifications) + β6(Gender) + ε

For H3: VRMC = α + β1(CashFlowMargin) + β2(CashBalance/TotalLiabilities) +

β3(TotalLiabilities/TotalAssets) + β4(TotalDebt/EBITDA) +

β5(LongtermDebt/TotalLiabilities) + Β6(CashFlow/TotalDebt) + β7(Year) +

β8(GICS) + β9(Number of Directors) + β10(Number of Director Qualifications)

+ β11(Gender) + ε

For H4: VRMC = α + Β1(AssetTurnover) + Β2(ReceivablesTurnover) +

Β3(SalesInvested/Capital) + β2(Year) + β3(GICS) + β4(Number of Directors)

+ β5(Number of Director Qualifications) + β6(Gender) + ε

Variables Descriptions

Using the BoardEx committee data and employing the same approach as Ling et al.

(2014), we assigned a dichotomous value for the VRMC with a value of one (1) if a risk

management committee exists and zero (0) if it does not. To assess both the financial risk

and financial health explored within this equation, leverage, solvency, financial soundness,

and efficiency ratios were measured as dependent variables, providing indicators of a

company’s financial health and risk positioning.

Independent Variable - Voluntary Risk Management Committee

The independent variable in this study is VRMCs as a dichotomous variable indicating

whether a firm possessed this board committee. Scholars suggest that firms possessing a

VRMC possibly represent the most effective way for the board to manage risk oversight

governance (Ling Liew et al, 2011; Sekome & Lemma, 2014). We explore this variable to

understand the value that VRMCs bring to the firm that adopts them.

Dependent Variables—Financial Risk Leverage Ratios

Degree of Operating Leverage

The degree of operating leverage measures a firm’s evaluation of operating income

to fixed and variable costs from sales. Essentially, this formula is used to measure the

firm’s break-even point and profit margin and provide how sales impact a firm’s operating

income. Additionally, the degree of operating leverage is a crucial tool for risk

management committees as it provides a clear understanding of how the company’s cost

structure and sales volume affect its financial stability while aiding in making informed

decisions to mitigate financial risks. In this study, we are analyzing this variable in the

context of understanding the firm’s decision to adopt a VRMC to monitor risk as a

potential indicator of financial default (Sari & Hutagaol, 2009). This factor is critical in

risk management as it directly relates to the firm’s ability to maintain financial stability

and meet its liabilities.

Degree of Financial Leverage

The degree of financial leverage measures a firm’s earnings per share to variations

in operating income (Gatsi et al., 2013). The degree of financial leverage is a metric used

for evaluating the future net income with the future changes in operating income, interest

payments, and debt payments. Once debt payments are required from an organization,

interest payments become a cost that can affect the firm’s breakeven for profit (Bragg,

2022). Additional debt may increase the firm’s default risk depending on the fluctuation

of income to cover debt and interest payments. As a result, we explore the degree of

financial leverage to understand the firm’s voluntary adoption of a risk management

committee to monitor company debt and its implications for financial risk.

Dependent Variables—Financial Risk Solvency Ratios

Total Debt-to-Total Assets

The total debt-to-total assets ratio is a crucial metric for risk management

committees as it provides insight into the financial structure and risk profile of a

company. The total debt-to-total asset ratio provides an evaluation of the firm’s assets that

are financed by debt. Practitioners use this ratio to determine if the firm is able to cover

its current debt obligations while providing a return on investment to its shareholders

(Yahya & Hidayat, 2020). Yahya and Hidayat (2020) define a high ratio as indicating that

the company has more debt than assets, possessing a default risk on future loan payments.

We use this variable to understand the firm’s decision to adopt a

VRMC to monitor the company’s liquidity risk.

Total Debt-to-Equity

The debt-to-equity ratio provides an indication that measures the proportion of

total debt and financial obligations to shareholders’ equity. A higher debt-equity ratio

indicates the firm is favorable with consistent cash flow. Conversely, a lower ratio

indicates a firm’s riskiness by being financed with debt equity (Siregar & Harahap, 2021).

This ratio is also crucial in assessing the company’s long-term solvency and stability.

High debt levels relative to equity can make the company more vulnerable in economic

downturns or when facing financial challenges. Thus, the total debt-to-equity ratio

becomes a key metric to provide a comprehensive view of a company’s financial leverage

and risk profile. We used this variable to understand the firm’s decision to adopt a risk

management committee to provide oversight of its potential relationship on the cost of

debt and the overall financial health of the company.

Dependent Variables—Financial Health Soundness Ratios

Cash Flow Margin

Cash flow margin (CFM) provides a measure of the effectiveness by converting

income into capital (Rohanova, 2019). The higher the CFM, the less exposed the firm is to

converting sales to capital, indicating profitability margins. A lower CFM indicates the

firm is exposed to a higher risk of higher cash flow. Following Sharma’s (2001)

evaluation, CFM is a critical benchmark of risk to determine if a firm will be unable to

produce sufficient cash to cover its debts. Thus, the CFM becomes a vital metric for the

adoption of a risk management committee as it provides insights into the financial health

and efficiency of a company. We used this variable to understand the firm’s rationale to

assist with monitoring and evaluating the company’s ability to generate cash from its sales

and manage its liquidity.

Cash Balance to Total Liabilities

The cash balance-to-total liability ratio provides the firm’s ability to cover all short-

term obligations with its own cash liquidity (Ilugbemi, 2020). This ratio is a direct measure

of its ability to cover short-term liabilities with its cash reserves. A higher ratio suggests a

strong liquidity position, which is crucial for meeting immediate financial obligations and for

handling unforeseen expenses. Practitioners also use this metric to assess the company’s

solvency. The cash balance-to-total liability ratio indicates how well equipped the company

is to handle its debts in the short term (Ilugbemi, 2020). A low ratio can signal potential

solvency issues, especially in adverse economic conditions. We observe this variable to better

understand a firm’s adoption of a risk management committee in overseeing its debt and cash

management strategies, planning for contingencies, and ensuring the company’s overall

financial stability.

Total Liabilities to Total Assets

The total liabilities-to-total assets ratio provides the firm’s position with the

company’s assets being financed with debt (Hayes, 2022). This ratio helps the committee

understand how much of the company’s assets are financed through liabilities. A high

ratio suggests a greater reliance on debt and other liabilities for financing assets, which

can indicate higher financial risk. Additionally, the total liabilities-to-total assets ratio is

an indicator of the company’s solvency. A high ratio may signal potential solvency issues,

as it implies that a significant portion of the company’s assets is obligated to creditors.

Further, this ratio is used to monitor the firm’s short-term liquidity and longterm stability.

It reflects the firm’s ability to meet its short-term obligations and sustain operations in the

long run. Thus, we used the total liabilities-to-total assets ratio as a variable to examine

the firm’s decision to adopt a risk management committee to monitor the firm’s use of

debt financing.

Total Debt to EBITDA

Total debt to earnings before interest, taxes, depreciation, and amortization

(EBITDA) ratio measures the firm’s ability to resolve its debts (Strischek, 2001).

Additionally, this ratio provides an indication of the operational timeframe needed to pay off

its liabilities. Commonly used by creditors, this ratio provides insight into whether the

company is at risk of defaulting on its debt payments (Strischek, 2001). Thus, we used this

variable as a critical metric to offer insight into understanding the adoption of the firm’s risk

management committees to monitor the firm’s financial leverage and ability to pay off its

debts.

Long-Term Debt to Total Liabilities

The long-term debt-to-total assets ratio provides an indicator of how much of the

total assets are financed with long-term debt. The greater the ratio, the more risk the

company possesses by owning less of the asset through debt. Following Sophonvit’s

(2021) research, long-term debt-to-total assets ratio was used as a key indicator to evaluate

the overall risk of the organization. A higher ratio indicates a greater reliance on long-term

debt, which can affect the company’s financial flexibility and risk profile. Additionally,

this metric signifies potential challenges in refinancing or servicing debt in the future,

especially if market conditions change. Therefore, we use this ratio to understand why the

firm chooses to establish a risk management committee to monitor how changes in

economic conditions, market trends, or operational shifts may impact the firm’s ability to

manage its long-term debt.

Cash Flow to Total Debt

The cash flow-to-debt ratio compares the firm’s operational cash flow to total

debt. The cash flow-to-debt provides an analysis of the timeframe for a firm to resolve its

debt from operating cash flow. The greater the firm’s ratio indicates, the stronger the

ability to pay off debt quickly. Conversely, having a lower ratio indicates the risk of

inability to make future debt payments. Jooste cites this indicator as “the best indicator” to

determine predictive financial failure (2007, p. 11). We evaluate this metric to understand

the firm’s decision to adopt a risk management committee to oversee strategic plans for

debt restructuring, refinancing, or paying down debt to improve the firm’s overall risk

profile.

Dependent Variables—Financial Health Efficiency Ratios

Asset Turnover

The asset turnover ratio provides the measurement of the overall efficiency of the

firm. This ratio evaluates the firm’s investment by combining the impact of both short-

and long-term assets. The higher the ratio, the more effectively the firm is utilizing its

funds (Fairfield & Yohn, 2001). Further, this ratio is used to help the firm make strategic

decisions regarding its assets, whether to invest in new assets, dispose of underutilized

assets, or find ways to increase revenue from existing assets. Thus, we examine the firm’s

decision to create a risk management committee to help the firm monitor the efficiency of

a company’s use of its assets to generate revenue and the potential relationship on changes

within the company’s performance.

Receivable Turnover

The receivable turnover asset ratio measures how quickly the firm recoups its

funds from customers (Wajo, 2021). Further, it indicates how effective a firm’s credit

policy is with its corresponding expense to maintain internal control procedures. A higher

value of this ratio indicates favorable conditions for the firm. In contrast, lower ratios

illustrate the firm’s poor credit policy while risking receivables being reported as a bad

debt (Wajo, 2021). We evaluate the firm’s decision to adopt a risk management committee

to evaluate how efficiently the company’s credit policies convert sales into cash and

mitigate the risk of bad debts.

Sales to Invested Capital

The sales-to-capital ratio is an efficiency ratio that measures the firm’s ability to

convert capital into revenue. This measurement provides the risk impact of the firm’s capital

invested in its operational cash flow (Cyganski, 2004). This metric also helps in identifying

areas where operational efficiencies can be improved to maximize sales from the existing

capital base. We used this variable to understand the rationale for a firm to voluntarily adopt

a risk management committee to understand the firm’s competitive position to predict future

sales growth while identifying areas for improvement.

Control Variables

Years

Years as a control variable is an approach to evaluate the potential impact of

timerelated factors using VRMCs and multifactorial variables being evaluated. We used the

time period from 2009 to 2017 to help us better understand the relationships between

variables within our study while also accounting for the impact of time trends during one of

the major global financial crises (Hines & Peters, 2015).

Gender

Gender as a control variable enhances the understanding of demographics

accounted for within gender-related factors influencing the adoption of a VRMC. This

diversity may lead to more thorough and comprehensive risk assessments and management

strategies. Controlling for gender allows us to examine if gender diversification is

associated with the adoption of a VRMC (Francoeur et al., 2008).

Number of Directors

Evaluating the number of directors on the board examines the potential impact of

the size or composition of a board of directors on its relationship with adopting a risk

management committee (Be´dard et al., 2004). A larger number of directors might

indicate greater diversity in terms of expertise, experience, and perspectives, which can be

critical for effective risk identification and management. We controlled for the number of

directors to examine the potential benefits of this diversity to drive the firm’s initiative to

adopt a VRMC.

Director Qualifications

Director qualifications consider the impact of the qualifications or expertise the

directors possess in relation to the adoption of a VRMC. We controlled for director

qualifications to allow for an evaluation of how the formation of a risk management

committee specifically contributes to an organization’s governance and risk management

effectiveness based on the influence of the directors’ backgrounds and skills (Sila &

Gonzalez Hagendorff, 2016). By doing so, we can examine if the qualifications of directors

can significantly influence their decision-making abilities and risk assessment capabilities

within the firm.

Global Industrial Classification Sectors

Global industrial classification sectors (GICS) are a widely accepted classification

system for categorizing companies into different sectors and industries. Incorporating

GICS sectors as a control variable accounts for the potential impact of industry-specific

factors (Dalziel, 2007). Different industries face unique sets of risks. Controlling for GICS

allows us to account for these industry-specific risks when evaluating the effectiveness

and adoption of risk management committees. We choose to control for GICS to

understand which specific industry requirements are more prone to adopting a

VRMC.

Table 1.

List of Variables for Study One

Category

Variables Type

Voluntary risk management committee

Dichotomous

• 0 = Board’s absence of

VRMC

• 1 = Board VRMC presence

DV1

Cash flow margin

Scale

DV2

Cash balance to total liabilities

Scale

DV3

Cash flow to total debt

Scale

DV4

Total debt to EBITDA

Scale

DV5

Long-term debt to total liabilities

Scale

DV6

Total liabilities to total assets

Scale

DV7

Total debt to total assets

Scale

DV8

Total debt to equity

Scale

DV9

Asset turnover

Scale

DV10

Receivables turnover

Scale

DV11

Sales to invested capital

Scale

CV1

Years (CY2009–2020)

Scale

CV2

Gender

Nominal

CV3

GICS

Nominal

CV4

Director qualifications

Continuous

CV5

Number of directors

Continuous

The research model in Figure 1 provides a graphical picture of the research hypothesis being

explored in this study. The visual diagram illustrates the hypothesized effect of a

VRMC on the financial risk and health of an organization.

Figure 1. Research Model.

Data Analysis and Results

To empirically analyze the research questions and hypotheses posed for this study,

a quantitative approach was chosen to investigate the effects of risk management

committees while assessing the association between research variables. This section

begins with descriptive statistics and industry analysis and concludes with hypothesis

testing.

Descriptive Statistics

Table 2 represents the descriptive statistics for nonfinancial firms’ data collected

from CY2009 to CY2017. It illustrates our sample with 5,973 observations, indicating

105 possessing a risk management committee. Exploring the trends since the enactment of

Dodd-Frank in 2010, we observe risk management committees have increased by 41% for

nonfinancial firms.

Table 2

Nonfinancial Firms’ VRMC Observations by Year (2009–2017)

Voluntary Risk Management Committee (VRMC)

Data Yrs. 0 1 Total

2009

107

112

2010

765

777

2011

787

799

2012

811

823

2013

810

823

2014

813

826

2015

838

854

2016

471

482

2017

466

477

Total

5,868

105

5,973

Table 3

Descriptive Statistics

Variable

Obs.

Mean

Std. Dev.

Min. Max.

Voluntary risk management committee

5973

0.0175

0.1314

0 1

Total debt to total assets

5973

0.5545

0.2409

0.029 3.806

Total debt to equity

5973

−0.4918

127.592

−9243.9 510.4

Degree of operational leverage

5973

−0.2616

212.596

−12291.518 3600.116

Degree of financial leverage

5973

0.9332

268.414

−8214.909 13968.75

Cash flow margin

5973

−0.0244

5.395

−279.46

3.607

Cash balance to total liabilities

5973

0.4617

0.9662

14.86

Total liabilities to total assets

5973

0.2577

0.2084

3.28

Total debt to EBITDA

5973

2.052

5.652

−141.32

179.565

Long-term debt to total liabilities

5973

0.3619

0.2276

0.976

Cash flow to total debt

5973

0.2598

0.4181

−9.923

7.91

Asset turnover

5973

1.052

0.7497

0.001

9.895

Receivables turnover

5973

23.528

253.792

0.036

17431.6

Sales to invested capital

5973

1.895

8.321

0.001

598.333

2009

5973

0.0187

0.1356

2010

5973

0.1300

0.3364

2011

5973

0.1337

0.3404

2012

5973

0.1337

0.3447

2013

5973

0.1337

0.3447

2014

5973

0.1382

0.3452

2015

5973

0.1429

0.3500

2016

5973

0.0806

0.2723

2017

5973

0.0798

0.2710

Gender ratio

Global Industry Classification Standard:

5973

0.8535

0.1068

0.25

10—Energy

5973

0.0498

0.2177

15—Materials

5973

0.0838

0.2772

20—Industrial

5973

0.2209

0.4149

25—Consumer discretionary

5973

0.1793

0.3836

30—Consumer staples

5973

0.0723

0.2590

35—Health care

5973

0.1237

0.3292

40—Financials

5973

0.0123

0.1106

45—Information technology

5973

0.1580

0.3648

50—Communication services

5973

0.0339

0.1812

55—Utilities

5973

0.0606

0.2386

60—Real estate

5973

0.0048

0.0695

Number of directors

5973

9.558

2.204

Number of directors qualifications

5973

25.482

11.704

Business Sector Descriptive Statistics

We examine the sectors identified for each of the corresponding observations

represented in this study. To do so, we utilize the GICS, which is a financial industry

standard, to categorize companies into sectors and industries. Developed by Morgan

Stanley Capital International (MSCI) and Standard & Poor’s (S&P), it provides a

consistent definition for global industry classification and is widely used by both industry

practitioners and scholars alike. Figure 2 displays the three most represented sectors in our

dataset: Industrials, with 3,273 observations, making up 32% of our sample; Consumer

Discretionary, with 1,953 observations, accounting for 19%; and Health Care, with 1,132

observations, contributing 11% to our sample.

Figure 2. Firm Observations by GICS Sectors.

We also examine the S&P U.S. sector indices listed within our review. We find in

Figure 3 that 37.7% of the companies in our sample are designated as S&P SMALL CAP

600 index (3,792). Additionally, 25.7% of firms are listed within the S&P MID CAP 400

(2,590). Lastly, 24% of the firms listed are designated as S&P 500 index (2,418), which in

total accounts for approximately 87.4% of the firms being evaluated.

Figure 3. S&P Sector Indices Statistics.

Descriptive Analysis

Descriptive analysis in Table 3 is also used to determine the minimum, maximum, sum,

means, and standard deviation for all variables in the categorization. The dataset encompasses

various financial, operational, and organizational metrics for a sample of 5,973 entities. The

risk management committee has a mean of 0.0175 with a standard deviation of 0.1314. This

indicates on average that a small percentage of firms (0.0175) in this sample have a VRMC,

expressing that the presence of such committees is not prevalent. The predictive variables

shown in Table 3 provides the descriptive statistics for financial risk being examined using

several leverage and solvency ratios. For leverage, we observe both the degree of operating

leverage and the degree of financial leverage ratios. Likewise, for solvency, we examine total

debt-to-equity and total debt-to-asset ratios. The degree of operating leverage and degree of

financial leverage ratios means are −0.2616 and 0.9332 with corresponding standard deviations

of 212.596 and 268.414, respectively. The mean value of 0.9332 for degree of financial

leverage suggests a relatively high average financial leverage among the entities, reflecting a

reliance on debt in their capital structure. The total debt-to-asset ratio has a mean of 0.5545 and

a standard deviation of 0.2409, and the debt-to-equity ratio has a mean of −0.4918 and a

standard deviation of 127.592. The variables used in Table 3 provides descriptive statistics for

examining the financial health being explored by several financial soundness ratios and

efficiency ratios. For financial soundness, we observe the CFM, cash balance-to-total

liabilities, total liabilities-to-total assets, total debt-to-EBITDA, long-term debt-to-total

liabilities, and cash flow-to-total debt ratios. For efficiency, we examine the asset turnover,

receivable turnover, and sales-to-invested capital ratios. CFM and cash balanceto-total

liabilities ratio means are −0.0244 and 0.4617 with corresponding standard deviations of 5.395

and 0.9662, respectively. CFM with a mean of −0.0244 indicates a slightly negative CFM on

average, suggesting potential challenges in generating positive cash flows from operations.

Table 4.

Correlation Analysis 1

The cash flow-to-total debt ratio means is 0.2598 with a corresponding standard

deviation of 0.4181. Total debt-to-EBITA and long-term debt-to-total liabilities ratios

have a mean of 2.052 and 0.3619 with a matching standard deviation of 5.652 and

0.2276, respectively. Total liabilities to total assets provide a mean of 0.2577 and a

standard deviation of 0.2084. The asset turnover ratio has a mean of 1.052 and a

standard deviation of 0.7497, which suggests moderate efficiency in utilizing assets to

generate sales. Receivable turnover and sales-to-invested capital ratios have means of

23.528 and

1.895 with corresponding standard deviations of 253.792 and 8.321, respectively.

The increasing trend in mean values over the fiscal years (2009 to 2015) suggests

a possible rise in interest in possessing a VRMC, potential trends in risk management

practices, and/or additional capture of data reporting availability during this period. The

gender ratio ranges from 0.25 to 1, representing the contrast of men’s and women’s

positions within the VRMCs. The high mean of 0.8535 indicates a predominantly high

men ratio, with a narrow standard deviation of 0.1068, suggesting a relatively low

variability of women on the board. The number of directors’ qualifications has a wide

range (0 to 94) with an average of 25.482, indicating variability in the qualifications

possessed by directors.

Hypothesis Testing

Correlations Analysis

The correlation matrix in Table 4 provides a detailed view of the relationships

among all variables used within the dataset. The statistical analysis of financial ratios

within the provided dataset reveals several significant correlations underscored by

pvalues below 0.05, denoting statistical significance. A notable positive correlation of

0.839 is observed between total debt to total assets and total liabilities to total assets,

indicating that increases in a firm’s total debt are proportionally reflected in its total

liabilities. This is a logical outcome given that debt is a major component of liabilities.

Conversely, the cash balance to total liabilities and total debt to total assets show a

significant negative correlation of r = −0.477, p < 0.00, suggesting that companies with

higher debt ratios usually have lower cash balances relative to their liabilities. This is

potentially due to the increased financial burden imposed by higher debt levels.

Furthermore, a strong positive correlation of r = 0.780, p < 0.00 between total liabilities

to total assets and long-term debt to total liabilities explains a trend where firms with

higher total liabilities relative to their assets tend to have a significant proportion of these

liabilities as long-term debt. This possibly indicates a strategic push toward long-term

financing.

Additionally, the cash flow/total debt and cash balance/total liabilities correlation

r = 0.374, p < 0.00 implies that firms with higher cash flow in relation to their total debt

also maintain higher cash reserves compared to their liabilities. This illustrates a firm’s

effective monitoring of liquidity management. The dataset also reveals a correlation

coefficient of r = 0.671, p < 0.00 between the number of directors and directors’

qualifications indicating that larger boards tend to comprise more qualified individuals to

possibly oversee the complexities and skillset needed to monitor larger organizations.

Lastly, the correlation of r = 0.518, p < 0.00 between total debt to total assets and

longterm debt to total liabilities suggests that firms with a higher debt-to-assets ratio are

more inclined toward long-term debt to correspond with their long-term strategic goals.

These correlations collectively shed light on the relationships between various financial

aspects of a firm, including debt management, liquidity, and solvency, emphasizing their

relationship to corporate financial health.

Regression Analysis

The regression analysis in Table 5 provides an understanding of the relationship

between the presence of a VRMC and several selected financial variables within our

scope. With Hypothesis 1, we explore whether the existence of a VRMC is related to the

financial risk leverage of an organization. To evaluate this hypothesis, we utilize the

degree of operating leverage and degree of financial leverage ratios as firm leverage

variables. We find no clear association between the degree of operational leverage and

the likelihood of having a VRMC (B = 2.53e06, p = 0.750). Similarly, we also observe no

significant relationship between financial leverage and the presence of a VRMC (B =

−1.38e06, p = 0.827). Thus, Hypothesis 1 cannot be supported.

Hypothesis 2 predicts that the existence of a VRMC is related to the financial risk

solvency of an organization. To evaluate this variable, we explore the association

between the firm possessing a VRMC and the total debt-to-equity ratio. The coefficient is

positive, but the relationship is not statistically significant (B = 6.25e06, p = 0.637),

indicating that the total debt-to-equity ratio is not a significant predictor of having a

VRMC. This finding implies that the existence of a VRMC does not have a substantial

relational role within the financial risk solvency of the nonfinancial firms within our

scope. Hence, Hypothesis 2 cannot be supported.

Hypothesis 3 predicts that the existence of a VRMC is related to the financial

health soundness of an organization. To evaluate these variables, we utilize the following

ratios: the CFM, cash balance to total liabilities, total liabilities to total assets, total debt

to EBITDA, long-term debt to total liabilities, and cash flow to total debt. We find CFM

(B = −0.000118, p = 0.717), cash balance-to-total liabilities (B = −0.0002503, p = 0.56),

debt to EBITDA (B = −0.000346, p = 0.263), cash flow to total debt (B = −0.002674, p =

0.263) ratios indicating no significant relationship between the firm’s financial health

soundness and the presence of a VRMC.

In contrast, two financial ratios show statistically significant relationship:

longterm debt to total liabilities (B = −0.064789, p = 0.001) and total liabilities to total

assets (B = −0.089971, p = 0.001). However, the association differed: long-term debt to

total liabilities is associated with a lower likelihood of having a VRMC, while total

liabilities to total assets are associated with a higher likelihood of having a VRMC. To

further illustrate this relationship, Figure 4 indicates that as the long-term debt/total

liabilities ratio increases (moving from left to right on the x-axis), the probability of

having a VRMC decreases (moving from top to bottom on the y-axis). This is shown by

the red line, which represents the negative correlation between the two variables. Thus,

holding other variables constant, an increase in long-term debt/total liabilities ratio is

associated with a decrease in the probability of possessing a VRMC. As the long-term

debt/total liabilities ratio increases, the likelihood of having a risk management

committee decreases. This scenario can exist when a firm with a higher long-term debt

may allocate its resources toward servicing this debt rather than investing in the

infrastructure for a risk management committee.

Table 5

Regression Analysis Showing the Effect of VRMC and Financial Risk Ratios

Voluntary risk management committee

Coef.

2.53e06

−1.38e06

6.25e06

−0.000118

−0.002503

0.002674

0.000346

−0.064789

0.089971

−0.000879

−1.79e06

−0.000061

−0.029541

−0.029926

−0.029885

−0.028100

−0.027513

−0.024333

−0.025260

−0.024084

St. Err.

7.95e06

6.30e06

0.000013

0.000326

0.002237

0.004582

0.000309

0.013521

0.013656

0.002774

6.71e06

0.000208

0.013239

0.013224

0.013207

0.013223

0.013242

0.013246

0.013937

t-value

0.32

−0.22

0.47

−0.36

−1.12

0.58

1.12

−4.79

6.59

−0.32

−0.27

−0.29

−2.23

−2.26

−2.13

−2.08

−1.84

−1.81

−1.72

p-value

0.750

0.827

0.637

0.717

0.263

0.56

0.263

0.000

0.751

0.790

0.768

0.026

0.024

0.034

0.038

0.066

0.070

[95% Conf.

−0.000013

−0.0000137

−0.0000197

−0.000756

−0.0068881

−0.0063093

−0.0002597

−0.0912948

0.0632007

−0.0063168

−0.0000149

−0.0004682

−0.0554931

−0.0558505

−0.0557766

−0.0540218

−0.0534724

−0.0503

−0.0525806

−0.0514954

Interval]

0.0000181

0.000011

0.0000322

0.0005201

0.0018814

0.0116563

0.0009516

−0.0382846

0.1167408

0.0045588

0.0000114

0.0003459

−0.003588

−0.0040015

−0.003994

−0.0021781

−0.0015537

0.0016339

0.0020599

Sig.

***

Degree of operational leverage

Degree of financial leverage

Total debt/Equity

Cash flow margin

Cash balance/Total liability

Cash flow/Total debt

Total debt/EBITDA

Long-term debt/Total liability

Total liabilities/Total assets

Asset turnover

Receivables turnover

Sales/Invested capital

2009 (Base)

2010

2011

2012

2013

2014

2015

2016

2017

Gender ratio

Global industry classification Standard:

10 (Base)

0.070548

−0.000068

0.013983

0.017982

0.009596

3.92

−0.01

0.085

0.000

0.994

0.0352967

−0.0188793

0.0033281

0.1057984

0.0187432

***

Table 5

(continued)

−0.011305

0.008474

−1.33

0.182

−0.0279175

0.0053083

−0.011528

0.008883

−1.30

0.194

−0.0289411

0.0058853

−0.008739

0.010137

−0.86

0.389

−0.0286095

0.0111315

−0.024281

0.009129

−2.68

0.007

−0.0423247

−0.0065315

***

−0.02237

0.017000

−1.32

0.188

−0.0556945

0.0109546

−0.009511

0.008866

−1.07

0.283

−0.026892

0.0078692

−0.032544

0.012023

−2.71

0.007

−0.0561133

−0.008975

***

−0.014574

0.01062

−1.37

0.170

−0.0353916

0.0062443

−0.039787

0.025738

−1.55

0.122

−0.0902419

0.0106677

Number of directors

0.005618

0.001093

5.14

0.000

0.003476

0.0077596

***

Number of directors’ qualifications

−0.000195

0.000203

−0.96

0.337

−0.0005948

0.0002039

Constant

−0.050984

0.025581

−1.99

0.046

−0.1011325

−0.0008347

*** p < 0.01, ** p < 0.05, * p < 0.1

Figure 4. Long Term Ratio and the Probability of Adopting a VRMC.

Many of the financial decisions favor the fact that a company must carry on its

operations with the reliance on debt (Hanousek, 2011). Conversely, an agency problem

exists where investor confidence prompts investors or other stakeholders to advocate for

more direct control mechanisms or oversight, rather than a formal committee structure.

Additionally, we also find an increase in total liabilities to total assets is

associated with a higher likelihood of having a VRMC. Figure 5 depicts the relationship

between the total liabilities/total assets ratio and the probability of possessing a risk

management committee. As illustrated, the chart shows a positive correlation: as the total

liabilities/total assets ratio increases (moving from left to right on the x-axis), the

probability of having a risk management committee also increases (moving from bottom

to top on the y-axis). Holding other variables constant, an increase in total liabilities/total

assets ratio is associated with an increase in the probability of possessing a risk

management committee. As the total liabilities/total assets ratio increases, the likelihood

of having a risk management committee increases.

Figure 5. Total Liabilities to Total Assets Ratio and the Probability of Adopting a VRMC.

This finding aligns more with the traditional decision for firms to adopt a VRMC.

A higher total liabilities/total assets ratio implies higher interest obligations and

repayment commitments, thus increasing the firm’s financial risk. A risk management

committee would be the critical mechanism to assist with mitigating these financial risks.

Additionally, higher liabilities can concern stakeholders about the firm’s solvency and

liquidity risks. Having specialized expertise of a risk management committee can provide

additional assurance that the firm is actively managing its risk profile. For Hypothesis 3,

we use several financial ratios to analyze similar data points offering different aspects of

the firm’s financial health. Also, using this approach provides a robust, comprehensive

evaluation of the organization’s financial stability instead of using one ratio. Since we

find significance in the diverse ratios we used for the firm’s financial soundness, we

consider Hypothesis 3 supported.

Hypothesis 4 predicts that the existence of a VRMC is related to the financial

health efficiency of an organization. To test this interaction, we evaluate traditional

efficiency ratios to examine the relationship between VRMCs’ presence on the firm’s

financial efficiency. Asset turnover has a negative coefficient and is not statistically

significant (B = 0.000879, p = 0.751), indicating no significant relationship between asset

turnover and the presence of a VRMC. The receivable turnover coefficient is negative

and not statistically significant (B = −1.79e06, p = 0.790), indicating no clear association

with the likelihood of having a VRMC. Lastly, sales-to-invested capital coefficient is not

statistically significant (B = −0.000061, p = 0.768), also suggesting no significant

relationship between the sales/invested capital ratio and the presence of a VRMC. These

findings imply that the existence of a VRMC does not have a relationship with the

financial health efficiency of nonfinancial firms within our scope. Hence, Hypothesis 4

cannot be supported.

Controlled Effects

The control variables are included in all the statistical models. Firstly, we evaluate

fiscal years from 2010 to 2017. All years from 2010 to 2017 show significant negative

coefficients compared to the base year 2009, with p-values ranging from 0.026 to 0.085.

This suggests a consistent and significant negative trend of firms possessing a VRMC

through the observation years from 2009. The 2 × 2 chart in Figure 6 illustrates the

relationship between the fiscal years of review and the likelihood of firms possessing

VRMCs. It shows a negative correlation: as time progresses (moving from left to right on

the x-axis, which represents normalized fiscal years), the likelihood of firms having

VRMCs decreases (moving from top to bottom on the y-axis). Holding other variables

constant, the negatively significant relationship between the fiscal years of review and the

presence of VRMCs implies that there is a statistical association indicating a decreasing

likelihood of firms possessing VRMCs as time progresses. This data provides several

reasons that might explain this trend. After the global financial crisis (GFC), there is a

noticeable shift toward integrating risk management into the fabric of organizational

decision-making processes (U.S. Securities and Exchange Commission, 2009). This

integration means that instead of relying solely on a risk committee, risk management

becomes a part of the strategic responsibilities of all executives and boards, thereby

diluting the focus on stand-alone committees. These guidelines often necessitate more

integrated and comprehensive risk management practices within the entire organization,

possibly reducing the need for a separate risk committee by embedding risk management

into every aspect of the organization’s operations. Additionally, some organizations might

have found that separate risk committees are not as effective or efficient in managing new

and emerging types of risks post-GFC. The fast-evolving nature of these risks requires a

more agile and cross-functional approach to risk management that can be better achieved

through direct management oversight with specialized functions rather than a traditional

compliance committee structure.

Figure 6. Fiscal Years and the Probability of Adopting a VRMC.

When evaluating gender effects within our sample, the coefficient indicates a

significant positive relationship between the gender ratio and the dependent variable (B =

0.070548, p = 0.000). This suggests that an increase in the gender ratio (more male

representation) is associated with a positive relational change with a firm having a risk

management committee. The 2 × 2 chart in Figure 7 illustrates the relationship between

the gender ratio of men on the board and the probability of having a risk management

committee.

Figure 7. Number of Directors and the Probability of Adopting a VRMC.

The chart suggests a positive correlation. As the proportion of men on the board

increases (moving from left to right on the x-axis), the likelihood of the board having a

risk management committee also increases (moving from bottom to top on the y-axis).

Holding other variables constant, a higher gender ratio (more men representation on the

board) is associated with an increase in the probability of possessing a risk management

committee. As more men are on the board, the likelihood of having a risk management

committee increases. We find this trend interesting as research on gender differences in

risk perception and tolerance has produced mixed results. Alemany, Scarlata, and

Zacharakis (2020) suggest that men traditionally may exhibit higher risk tolerance than

women regarding financial decisions. Historically, corporate boards have been male

dominated, particularly in certain industries and regions. Leadership styles and

decisionmaking processes, as well as social networking norms, can also differ based on

the composition of a board. Firms with a higher proportion of men on their boards might

adhere to more traditional norms, which include the establishment of formal structures

and committees, such as risk management committees, as part of their operating

framework. However, the correlation between board composition and the adoption of risk

management committees does not imply causation, and the dynamics of board

decisionmaking are influenced by a complex interplay of factors that encompass gender.

Additionally, the push for diversity and inclusion in corporate governance suggest that the

composition of boards and their relationship to risk management will continue to evolve.

For the GICS, we find significant coefficients observed for GICS 35 – Health

Care (B = −0.024281, p = 0.007), and GICS 50 – Communication Services (B =

−0.032544, p = 0.007). This suggests that these industry sectors have adopted a risk

management committee compared to the other sectors. Holding other variables constant,

the negatively significant coefficient for the health care and communication service

industry sector suggests that companies within these sectors are less likely to have a

VRMC compared to companies in other industry sectors. Lastly, we examine the

significance of the number of directors within a firm. We find the coefficient (B =

0.005618, p = 0.000) indicates a significant positive relationship between the number of

directors and the firm possessing a VRMC. This indicates that more directors on the

board are associated with an increase in the adoption of a risk management committee.

The 2 × 2 chart in Figure 8 depicts the relationship between the number of board

directors and the probability of having a risk management committee.

Figure 8. Gender and the Probability of Adopting a VRMC.

As illustrated, the chart indicates a positive correlation. As the number of board

directors increases (moving from left to right on the x-axis, which represents a

normalized scale of the number of directors), the probability of having a VRMC also

increases (moving from bottom to top on the y-axis). Holding other variables constant, an

increase in the number of directors’ ratio on the board is associated with an increase in

the probability of possessing a VRMC. As the number of board directors increases, the

likelihood of having a VRMC increases.

CHAPTER 4

STUDY 2

Background

Risk managers are often accountable to make risk-based decisions, steering the

enterprise through strategic, operational, or financial crisis to support the firm’s longterm

success (Liu, 2021). Adding a combination of compliance, reputational, cybersecurity,

and environmental uncertainties, risk managers must carefully manage and mitigate these

significant challenges to protect the current sustainability and future growth of the firm.

In recent years, scholars have highlighted the Global Financial Crisis (GFC) as a call for

firms to establish credit risk within their normal risk-based forecasting and operational

decision-making as a vital piece of their risk management practices. But the focus has

been primarily on financial firms (Mushafiq et al., 2021). Up until the financial crisis, and

now within some sectors, risk management frameworks varied widely in practice and

application; much less, account for extreme events and occurrences. Underestimating the

importance of a firm’s credit ratings can pose significant consequence as credit ratings are

critical factors that can impact the financial health, stability, and overall success of a

firm’s operations. Moreover, failure to adequately monitor credit ratings can potentially

lead to the firm’s inability to manage its cash flow and inventory, which may cause a

severe impact on its current operations. Credit risk among small- and medium-sized

organizations has been shown to be more impactful in enabling organizations to navigate

uncertainties. Liu (2021) has found that small- and medium-sized enterprises have

experienced a variety of challenges in understanding the competitive advantages of credit

utilization due to the lack of effective credit risk management. Thus, this challenge has

seriously restricted the future development of the firm. Poor management of the firm’s

credit ratings can impact its ability to obtain the lowest borrowing rates to increase

profitability, meet financial obligations, and maintain solvency. And additionally, credit

ratings are critical data inputs that investors and other market participants use to evaluate

future growth as part of their decision-making analysis (S&P). As such, poor credit

ratings can deter investor confidence and trust in the firm’s ability to manage its financial

obligations, while limiting its ability to invest in growth initiatives. Additionally, poor

credit ratings can hinder the firm’s ability to fund growth strategies and invest in research

and development opportunities. While default risk, higher borrowing costs, low investor

confidence, and limited access to financing are the antecedents for poor credit risk

management, overall, they provide loose management/internal controls over the firm’s

ability to manage its operations adequately. This critical risk management role leads us to

ponder whose important responsibility in the firm is to monitor the firm’s credit risk (i.e.,

credit rating) from an enterprise risk perspective. As we discussed within Study 1, the

role of the risk management committee is to monitor, assess, and mitigate inherent risk

that threatens the firm’s ability to meet its operational objectives. Moore and Brauneis

(2008) and Schlich and Prybylski (2009) identify credit risk as an integral part of a firm’s

enterprise framework that should be heavily monitored to ensure operational practices are

aligned with the organization’s goals and strategies. Credit ratings are directly tied to the

firm’s financial health, performance, and stability. It affects a firm’s liquidity while

ensuring that the continuity of operations and supply chains is fully operational to sustain

the firm’s operating income. Thus, credit ratings remain a critical element of the firm’s

operations to address ongoing conditions and should be monitored in parallel with

management’s enterprise risk strategies.

As discussed in Study 1, several firms monitor risk oversight at the board level,

while other firms either utilized the audit committee, a separate risk committee, or

embedded risk identification and mitigation practices within various operational

components in the firm. Additionally, the debate over whether a separate or voluntary

development of a risk management committee provides the maximum oversight to

enhance detection of oncoming risk events continues to remain relevant in the risk

management literature. Scholars assert that the establishment of a voluntary risk

management committee (VRMC) still remains minimally investigated (Ishak & Nor,

2017; Hines, 2012). Similar to Study 1, our research pivots to examine data from the

Standard & Poor’s (S&P) 1500 index firms to evaluate the relationship of a risk

management committee on a firm’s credit ratings. We examine this existence with a

mixture of small (S&P 600), medium (S&P 400), and large (S&P 500) firms, which

accounts for approximately 90% of all U.S. stocks (Vairavan & Zhang, 2020; Abebe &

Acharya, 2022). These firms offer a wide array of diverse organizational sizes and

industry segments across both financial and nonfinancial sectors. Secondly, we shifted

our research momentum to evaluate the presence of risk management committees using

resource dependency theory to offer insight into the relationship between VRMCs and

credit risk. This intersection in operational theory allows our research to examine how

organizations manage their dependencies on financial resources, particularly in terms of

accessing credit, in order to secure the financial means necessary for operational growth.

Earlier accounts of empirical studies explored the linkage between credit ratings

and common accounting and financial ratios (Horrigan, 1966). More recent studies

examine other determinants like environmental, social, and governance measurements

(Chodnicka-Jaworska, 2021), corporate social responsibility (Jiraporn et al., 2014), board

education levels (Papadimitri et al., 2020), and environmental efficiency (Chabowski et

al., 2019). We also found studies evaluating corporate governance and its relationship on

credit ratings (Ham & Koharki, 2016; Khatami et al., 2016), which are more aligned with

our study. However, our review of past and current literature did not provide any studies

that evaluate the correlation of a firm’s creation of a VRMC on its credit ratings. Due to

the study of board committees still relatively remaining an under-researched area within

academia, we endeavor to close this gap in the literature. The closest we found was a

study by Ashbaugh-Skaife et al. (2006), which found empirical findings to support the

enhancement of the firm governance, ultimately providing favorable credit ratings.

Following Ashbaugh-Skaife et al. (2006) approach and reasoning, the establishment of a

firm’s decision to set up a VRMC would create an internal management structure to

monitor the overall performance of the firm. S&P Global states that a firm’s culture and

attitude toward management and governance are among the leading factors for rating

scores. Furthermore, it confirms that management and governance factors are explicitly

reviewed for each credit rating provided. From this viewpoint, we address the following

research question:

RQ 2: To what extent has the formation of risk management committees related to

enhancing the firms’ management of credit ratings?

We believe effective firm management and overall governance include

influencing the organization’s credit factors. And effective organizational management

and strategic oversight include leveraging credit to increase the firm’s competitiveness.

Further, effective oversight active monitoring to know when the firm should utilize credit

rather than equity to prompt a future credit rating change, which supports strategic

expansion opportunities (Kisgen, 2007), should be directly monitored in line with the

firm’s future operational activities. Thus, active board involvement remains critical in

overseeing the organization’s credit risk profile in order to make effective financial and

strategic decisions, while executing operational initiatives to support the organization’s

financial goals. The board must dedicate effective oversight resources to manage its

credit risk, which includes the oversight of credit ratings. Thus, the responsibility for

monitoring credit ratings matters and is vital to the success of the organization. S&P

Global also confirms that poor management and governance contributes to reductions in

credit ratings. In simpler terms, S&P Global states that:

“if an enterprise has the ability to manage important strategic and operating

risks, then its management plays a positive role in determining its operational

success. Alternatively, weak management with a flawed operating strategy or an

inability to execute its business plan effectively is likely to substantially weaken its

firm’s credit profile.”

Considering this, the role of the firm’s risk management committee is to oversee and

manage various types of operational and strategic risk to sustain an organization during

unforeseen operational adversity. Hence, the management of credit risk and the

associated quality of credit ratings are crucial to the overall risk landscape of the

organization, which the risk committee integrates into its risk management process. The

adoption of a separate risk management committee can dedicate expert resources to

mitigating risk, making it one of its highest priorities to influence the credit quality of the

organization. Our research is timely and provides valuable insights for practitioners on

the strategic importance of a firm adopting a separate risk management committee to

uniformly manage the organization’s credit risk, as well as for developing and

implementing effective strategies to manage its credit ratings.

Hypothesis Development

The majority of academic studies, coupled with applicable theoretical

frameworks, highlight risk management committees as a crucial element of boards of

directors’ efforts toward enhancing a firm’s efficiency characteristics (Yatim, 2010; Jia &

Bradbury, 2020). Scholars contend that risk management committees, operating as

subcommittees, are aptly positioned to oversee the trajectory of organizations and

enhance the overall effectiveness of the firm’s risk management practices (Subramaniam

et al, 2009; Malik et al, 2020). Given the specialized knowledge required to oversee the

inherent and residual credit risk of the firm, resource theory supports the key role of the

risk management committee as an essential component of overall risk management of the

firm (Bathala & Rao, 1995; Jensen and Meckling, 1976; Fama and Jensen, 1983; Jones,

2013, p. 32). This committee is tasked with determining “risk management strategies,

evaluating risk management operations, and assessing the appropriateness of risk

management procedures” (Subramaniam et al., 2009; Jia, 2019, p. 1053). These

procedures include continuous ongoing monitoring of credit risk to maintain an excellent

credit rating, prompting a competitive advantage to access credit in support of its major

operations. With Jia et al. (2021) and Rimin et al. (2021) asserting that firms with a

distinct (i.e., voluntary) risk management committee exhibit superior performance

compared to those without this function, we endeavor to argue that credit risk being

managed by a separate risk management committee would illustrate the same positive

results. This argument leads to the following H1 and H2 hypotheses:

H1 – The existence of a voluntary risk management committee is related to the

short-term credit ratings of an organization.

H2 – The existence of a voluntary risk management committee is related to the

long-term credit ratings of an organization.

Our research focuses on two leading credit risk indicators – short-term and

longterm credit ratings. Additionally, we used S&P Global ratings as a widely recognized

industry benchmark to review potential correlations between both long-term and

shortterm credit ratings and the existence of a VRMC. We observed the short-term credit

ratings as an indicator of the firm’s creditworthiness to pay its short-term debt

obligations. Similarly, we observe long-term credit ratings as indicative of the firm’s

creditworthiness to manage its long-term debt obligations. Taken together, both leading

indicators provide the organization’s financial credit health and stability in both the near

and future terms. Thus, we expect the presence of a VRMC to have a favorable

relationship on the firm’s credit ratings, enabling the firm’s operational decision-makers

with the strategic credit tools to secure access to essential resources needed to make

profitable business decision for current and future strategic acquisitions.

Methodology

Sources of Data

Similar to Study 1, our initial approach involves a review of the BoardEx global

database (BoardEx), which provides an extensive listing of executive profiles pertaining

to both public and private companies (BoardEx, 2021). This resource is widely employed

by researchers and practitioners conducting academic research within areas such as

“leadership, management, diversity and inclusion, governance, compensation, and

networks” (Wharton Research Data Service (WRDS)). The suitability of BoardEx data

has been acknowledged by scholars in their research regarding various competencies,

including firm performance, compensation, and the demographics of finance committees

(El-Khatib et al., 2017; Basu and Lee, 2021; Kim, 2021). To explore the potential

influence that voluntary risk management committees have on organizations, we

extracted firm board data files from Compustat. We explored both presently active and

inactive (unbalanced) publicly traded companies within the S&P 1500 index, spanning

the calendar years 2009 to 2020. We found 190,294 company observations.

Next, we queried the BoardEx database platform to procure data pertaining to

board subcommittees. Utilizing the same parameters for consistency in our approach with

Compustat, our investigation encompassed both currently active and inactive

(unbalanced) publicly traded companies within the S&P 1500 index throughout the

calendar years 2009 to 2020. Utilizing BoardEx’s North America catalog portal, we

identified 203,328 company observations for both financial and nonfinancial firms. Once

we identified organizations’ subcommittees, we found entities, both financial and

nonfinancial, that possessed risk management committees.

To further refine our analysis, we separated the data into only nonfinancial

organizations to focus our examination on the presence of voluntary risk management

committees. We identified firms with risk management committees bearing titles as

“Risk,” “Risk Assessment,” “Risk Evaluation,” “Risk Management,” “Risk Management

and Finance,” “Risk Oversight,” and “Risk Policy.” Once we identified these committees,

we applied the S&P organizational ticker marker as a unique identifier to establish a

connection between BoardEx committee files and Compustat financial data. This resulted

in our dataset being reduced to 18,546 company line observations, which are associated

with 1,494 distinct companies; of which 93 had a separate risk management committee.

By doing so, this narrows our research to highlight only firms within the nonfinancial

sector.

As mentioned in Study 2, we contend that financial and nonfinancial firms are

subjected to unequal regulatory requirements, with the financial industry being imposed

with more stringent regulations such as those outlined in the Dodd-Frank Act, requiring

the establishment of risk management committees for financial institutions (Malik et al.

2020). Thus, an equitable comparison between the two sectors would be one-sided,

rendering such a contrast methodologically unsound. Thus, we excluded all financial

firms from our dataset, resulting in a refined dataset comprising of 14,702 observations

across 1,099 firms. Subsequent to the elimination of all blank and duplicate cells, our

final sample consisted of 10,247 corporate line entries within 1,091 companies; of which

30 firms possessing a risk management committee remained for evaluation. Lastly, we

merged the credit ratings, which were limited to data up to 2017, along with incomplete

data fields for several firms. After merging and cleaning the data, our final sample for

review comprised 5,973 firm observations, including 903 firms, of which 21 firms had

adopted a risk management committee.

Variables and Model Specification

To test the two hypotheses, we utilize the Probit regression model for modeling

binary outcome variables based on one or more predictor variables. Below is an

illustration of the variables for H1 and H2: We also provide the listing of all variables in

Table 6.

VRMC = α + β1(Short-Term Credit Ratings) + β2(Year) + β3(GICS) + β4(Number of

Directors) + β5(Number of Director Qualifications) + β6(Gender) + ε

VRMC = α + β1(Long-Term Credit Ratings) + β2(Year) + β3(GICS) + β4(Number of

Directors) + β5(Number of Director Qualifications) + β6(Gender) + ε

Variables Descriptions

Utilizing the BoardEx committee data and adhering to the same framework

established by Ling et al. (2014), we employed a dichotomous coding system for both

VRMC frameworks. A value of one (1) was assigned if a risk management committee

existed, and zero (0) denoted nonexistence. In evaluating the firm’s relationship to adopt

a VRMC, we measured the firm’s short- and long-term credit ratings as dependent

variables.

Independent Variable - Voluntary Risk Management Committee

The focal independent variable in this study pertains to VRMC. This variable

represents a dichotomous value indicating the presence or absence of this board

committee within a firm. Scholars have empirically found that firms with a VRMC

posture themselves effectively to navigate the governance of risk oversight for the firm

(Ling et al., 2014; Sekome et al., 2014). We evaluate this variable to comprehend the

intrinsic value of VRMCs while understanding the potential impact on a firm’s risk

management and creditworthiness.

Table 6

Listing of Variables

Category Variables

Type

Voluntary risk management committee

Dichotomous

• 0 = Board’s absence of

VRMC

• 1 = Board VRMC presence

DV1

Short-term credit ratings

Ordinal

DV2

Long-term credit ratings

Ordinal

CV1

Years (CY2009–2017)

Scale

CV2

Gender

Nominal

CV3

GICS

Nominal

CV4

Director qualifications

Continuous

CV5

Number of directors

Continuous

Dependent Variables

Short-Term Credit Ratings

Short-term credit ratings are organizational assessments provided by credit rating

agencies that provide indicators of the potential for default on financial obligations,

typically within a year (S&P Global Ratings, n.d.). These indicators provide stakeholders

with insights into whether firms have the ability to repay its short-term obligations based

on their current financial condition and metrics. We utilized the S&P scale, ranging from

“A-1” for the highest level of creditworthiness in the short-term category to “D” for

entities that are in default, and converted them into an ordinal variable for regression

analysis. By doing so, we evaluate this variable to observe the relationship between the

adoption of a risk management committee and its association with the firm’s short-term

credit ratings.

Long-Term Credit Ratings

Long-term credit ratings are evaluations provided by credit rating agencies that

assess the firm’s creditworthiness and ability to cover its debts over an extended time

frame typically beyond a year. These ratings also assess the probability of default while

projecting future financial losses in the event of default (S&P Global Ratings, n.d.).

Additionally, long-term credit ratings evaluate the firm’s financial strength, repayment

history, along with future earnings that could potentially affect the firm’s ability to repay

its debts. Also, using the S&P scale, we applied a dichotomous range from “AAA” (the

highest level of creditworthiness) to “D” (default) and converted them into an ordinal

variable to apply regressions. This provides the avenue to observe the relationship

between the adoption of a risk management committee and its association with the firm’s

long-term credit ratings.

Control Variables

Years

Years as a control variable is a methodological approach used by Hines et al.

(2015) to enhance the impact of time-related factors using the predictor and response

variables being evaluated. Using the period 2009–2017 provides a better understanding of

the relational variables by controlling for the effects of time after the GFC of 2008.

Gender

Gender as a control variable enhances the rigor and validity of research by

accounting for the potential influence of gender-related factors within the VRMC. As

used by Francoeur et al. (2008), controlling for gender provides a platform to isolate and

examine the effects of other variables without the confounding impact of gender-related

differences. This aids in drawling more accurate conclusions about the relationship of

gender between variables (Francoeur et al. 2008).

Number of Directors

Using the number of directors on the VRMC considers the potential impact of the

size of the board of directors on the relationship between the VRMC and short- and

longterm credit rating variables within our study. Following Bédard, Chtourou, and

Courtea (2004) approach, using the quantity of the directors may enhance the validity of

research findings by accounting for the potential influence of board size on the variables

studied.

Director Qualifications

Director qualifications, as a control variable, measure the impact of the

qualifications that directors possess on the relationship between VRMC-independent

variables and short- and long-term credit ratings in this study. Using the example of Sila,

Gonzalez, and Hagendorff (2016), we employed this control variable in the context of

corporate governance and board effectiveness. Further, it accounts for the potential

influence of the expertise and qualifications of the board in adopting a risk management

committee while examining the observed variables.

Global Industry Classification Standard Sectors

Global Industry Classification Standard (GICS) is a widely accepted classification

system for categorizing companies into different sectors and industries. Incorporating

GICS sectors as a control variable accounts for the potential impact that industry-specific

factors cause, irrespective of other sectors. Following Dalziel’s (2007) lead, this control

helps researchers draw more accurate conclusions about the relationships being evaluated

while considering the unique characteristics of different sectors in the global economy.

Research Model

Figure 9 provides a graphical representation of the research hypotheses being

explored in this study. The visual diagram illustrates the hypothesized effect of an

adopted voluntary risk management committee on the short-term and long-term credit

ratings of an organization. Additionally, the diagram illustrates the control variables that

further explain the relationship between voluntary risk management committees and the

short- and long-term credit ratings of an organization.

Figure 9. Research Model.

Data Analysis and Results

To empirically analyze the research questions and hypotheses posed in this study,

a quantitative approach was chosen to discover the effects of risk management

committees while evaluating the association between research variables (Creswell, 2012).

This section begins with descriptive statistics and industry analysis and concludes with

hypothesis testing. Table 2 (on page 32) represents the descriptive statistics for

nonfinancial firms’ data collected from 2009 to 2017. Table 2 also illustrates our sample

with 5,973 observations, listing 105 firms with a VRMC. Exploring the trends since the

enactment of Dodd-Frank (2010), risk management committees increased by 41% for

nonfinancial firms listed with this function.

Business Sector Descriptive Statistics

We examined the sectors identified for each of the corresponding 903 firms

represented in this study. To facilitate this analysis, we utilized the GICS, which is a

financial industry standard to categorize companies into sectors and industries. Jointly

developed by Morgan Stanley Capital International (MSCI) and S&P, the GICS provides

a comprehensive and uniform system for global industry classification into distinct

sectors, which is widely used by both industry practitioners and scholars in academia.

Figure 2 (on page 34) illustrates the GICS dataset, representing the top three predominant

sectors in our dataset as follows: industrials, with 3,273 observations, comprising 32% of

our sample; consumer discretionary, with 1,953 observations, accounting for 19%; and

health care, with 1,132 observations, contributing 11% of our sample.

Table 7.

Descriptive Statistics

We also extended our examination to S&P U.S. sector indices listed within our

study. We found in Figure 3 (on page 35) that 37.7% of the companies in our sample were

classified as S&P SmallCap 600 index (comprising 3,792 companies). Additionally,

25.7% of firms were listed within the S&P MID CAP 400 (totaling 2,590 companies).

Lastly, 24% of the firms listed were designated as S&P 500 index (encompassing 2,418

companies). Collectively, these classifications account for approximately 87.4% of the

firms being evaluated in our research.

Descriptive Statistics

The descriptive statistics data shown in Table 7 provides insights into several

characteristics of the observed entities, such as the frequency of risk management

committees, credit ratings, and fiscal year observations, gender ratios, industry

classifications, and the composition of the boards. In terms of the voluntary risk

management committee, it has a mean of 0.0178 that suggests on average a small

proportion of organizations opted to establish a voluntary risk management committee.

The low mean suggests that the adoption of voluntary risk management committee is

small within our review. The S&P short-term credit rating values ranging from 3 to 7

have a mean of 5.423, which indicates that the entities have a relatively high short-term

credit rating worthiness across the entities being researched. Additionally, the narrow

standard S&P long-term credit rating values range from 2 to 21. The mean of 12.43

indicates a moderate to highly favorable average of long-term credit ratings. However,

the standard deviation (2.974) suggests some variability in long-term credit ratings

among the entities.

Table 8

Correlation Analysis 2

Variables

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(1) Voluntary risk management committee

1.000

(2) S&P short-term credit ratings

0.075*

(0.005)

1.000

(3) S&P long-term credit ratings

0.030

0.921*

1.000

(0.067)

(0.000)

(4) Fiscal year

0.010

0.000

0.009

1.000

(0.423)

(0.989)

(0.568)

(5) Gender ratio

0.019

−0.084*

−0.298*

−0.250*

1.000

(0.146)

(0.002)

(0.000)

(6) Global Industry Classification Sector

−0.036*

−0.090*

0.099*

−0.016

−0.078*

1.000

(0.006)

(0.001)

(0.000)

(0.219)

(0.000)

(7) Number of directors

0.078*

0.187*

0.398*

0.119*

−0.348*

−0.017

1.000

(0.000)

(0.185)

(8) Number of director qualifications

0.039*

0.089*

0.411*

0.107*

−0.319*

0.034*

0.671*

1.000

(0.002)

(0.001)

(0.000)

(0.008)

(0.000)

Significance at p < .05

The fiscal year increasing trend in mean values over the years (2009 to 2017)

suggests a possible increase in observations or data availability during each time period

observed. The gender ratio ranges from 0.25 to 1, representing the dominant contrast of

men ratio within the VRMCs. The high mean of 0.8535 indicates a predominantly high

men ratio, illustrating a narrow standard deviation of 0.1068 that suggests a relatively

low variability of women representation on the board. Binary variables for the GICS

indicate the presence (1) or absence (0) of entities in various industry sectors. The

mean for each sector provides insights into the proportion of entities in each industry.

The number of directors indicates the count of directors in organizations ranging from

3 to 19. The mean of 9.558 suggests a moderate average number of directors, with a

standard deviation (2.204), indicating some variability across the firms being explored.

Number of directors qualification represents a numerical value related to the

qualification of directors ranging from 0 to 94. Exhibiting a mean of 25.48 indicates a

moderate average qualification level among directors. However, conversely, the

relatively high standard deviation (11.704) suggests substantial variability between

director qualifications. The GICS interpretation provides insights into the distribution

and variability of entities across different industry sectors. The industrial sector (GICS

20) has a high mean of 0.2209, suggesting the majority of firms we reviewed are within

this sector. Additionally, it has the largest standard deviation (.4149), indicating greater

variability. Firms within the consumer discretionary (GICS 25, μ = 1793, σ = 3836),

information technology (GICS 45, μ = 0.1793, σ = 0.3648), and health care (GICS 35,

μ = 0.1237, σ = 0.3292) sectors showed a moderate mean presence, with standard

deviations suggesting some variability within entity distribution between these sectors.

Materials (GICS 15, μ = 0.0838, σ = 0.2772), consumer staples (GICS 30, μ = 0.0723,

σ = 0.2590), and utilities (GICS 55, μ = 0.0606, σ = 0.2386) sectors displayed a

moderately low presence, with variability in standard deviation. Lastly, the energy

sector (GICS 10, μ = 0.0498, σ = 0.2177), communication services sector (GICS 50, μ

= 0.0339, σ = 0.1812), financials sector (GICS 40, μ = 0.0123, σ = 0.1106), and real

estate sector (GICS 60, μ = 0.0048, σ = 0.0695) illustrated very low means, suggesting

a limited presence of firms we reviewed falling within these sector, with a moderate to

small standard deviation indicating low variability.

Hypothesis Testing

Correlations Analysis

The correlation matrix in Table 8 provides insights into the interrelationships

between the variables in the dataset. The presence of a voluntary risk management

committee shows a positive correlation with both S&P short-term credit ratings of B =

0.075, p < 0.005, and S&P long-term credit ratings of B = 0.030, p < 0.07, suggesting

that entities that adopted such a committee tend to have slightly higher credit ratings.

Additionally, the positive correlation of B = 0.078, p < 0.00, for the number of directors

indicates that organizations with more directors are more likely to adopt a voluntary

risk management committee. The gender ratio shows a weak positive correlation of B =

0.019, p < 0.14, with the presence of a voluntary risk management committee,

indicating that a higher gender ratio of men on the board is associated with an increase

probability of adopting such a committee. In addition, the gender ratio also

demonstrates negative correlations with short-term credit ratings of B = −0.084, p <

0.002, and long-term credit ratings of B = −0.298, p < 0.00, suggesting that a higher

gender ratio of men on the board of directors is associated with slightly lower credit

ratings. The GICS of B = −0.036, p <

0.006, is negatively correlated with the presence of a voluntary risk management

committee, indicating that certain industry sectors are less likely to have adopted this

committee. The number of director qualifications displays positive correlations of B =

0.039, p < 0.002, with the presence of a voluntary risk management committee, along

with both short-term credit ratings of B = 0.089, p <0.001, and long-term credit ratings

of B = 0.411, p < 0.00, emphasizing the potential influence the qualifications of

directors have on these factors.

Table 9

Probit Regression Analysis– Short-term Credit Ratings

Voluntary Risk Management

Committee

Coef.

St. Err.

t-value

p-value

[95%

Conf

Sig

Interval]

S&P short-term credit rating

.2032

.1131

1.80

.072

-.0189

.4249

2009 (base)

2010

-1.296

.4637

-2.80

.005

-2.205

-.3873

***

2011

-1.292

.4685

-2.76

.006

-2.210

-.3736

***

2012

-1.311

.4703

-2.79

.005

-2.233

-.3890

***

2013

-1.279

.4698

-2.72

.006

-2.232

-.3580

***

2014

-1.371

.4813

-2.85

.004

-2.314

-.4271

***

2015

-1.215

.4714

-2.58

.010

-2.139

-.2909

***

2016

-1.197

.4729

-2.53

.011

-2.124

-.2699

2017

-1.353

.4957

-2.73

.006

-2.325

-.3813

***

Gender ratio

2.738

1.204

2.27

.023

.3781

5.098

Global Industry Classification

Standard:

20 – Industrial

-.1672

.2354

-0.71

.478

-.6286

.294

30 – Consumer staples

-.2122

.2634

-0.81

.420

-.7286

.304

55 – Utilities

-.5778

.3170

-1.82

.068

-1.199

.0435

Number of directors

.1925

.0465

4.14

.000

.1013

.2837

***

Number of directors qualifications

-.0114

.0103

-1.11

.268

-.0317

.0088

Constant

-5.394

1.494

-3.61

.000

-8.322

-2.467

***

*** p < .01, ** p < .05, * p <. 1

Lastly, we found that both S&P short-term credit ratings of B = 0.921, p < 0.00,

are highly correlated with S&P long-term credit ratings. To mitigate any

multicollinearity issues, we will regress both variables separately.

Regression Analysis

The Probit regression analysis in Table 9 offers significant insights into the

determinants influencing the adoption of a voluntary risk management committee

within the organizations we reviewed. In testing Hypothesis 1, we explore whether the

existence of a voluntary risk management committee is associated with the firm’s

credit ratings. To evaluate this hypothesis, we utilized the S&P short-term credit ratings

of the firms within our scope.

The S&P short-term credit ratings of B = 0.2032, p <0.072, suggest a positive

relationship between short-term credit ratings and the likelihood of having a risk

management committee, although the statistical significance is borderline. The 2 × 2

chart illustrates in Figure 10 the relationship between S&P short-term credit ratings

and the probability of a firm adopting a risk management committee. The chart

suggests that as S&P short-term credit ratings improve (moving from left to right on

the x-axis, which represents a normalized scale of credit ratings), the likelihood of the

firm adopting a risk management committee also increases (moving from bottom to

top on the y-axis). Each quadrant depicts a hypothetical scenario based on the

combination of these variables. While holding other variables constant, a higher S&P

short-term credit rating is linked to an increased probability of possessing a voluntary

risk management committee. Thus, as S&P short-term credit ratings improve, the

likelihood of having a risk management committee increases.

This data suggests that the presence of a voluntary risk management

committee indicates the firm is actively managing its corporate governance over its

financial operations, thus yielding enhanced oversight of the firm’s creditworthiness.

Figure 10. S&P Short-term Credit Ratings and the Probability of Adopting a VRMC.

For fiscal years 2009 through 2017, we observed negative coefficients ranging

from −1.197 to −1.371, all of which are statistically significant (p-values < 0.004 to

0.011). This indicates a consistent and significant decline in the likelihood of a firm

adopting a risk management committee over the years being observed, compared to the

base year of 2009. Figure 11 provides a 2 × 2 chart depicting the relationship between

the fiscal years reviewed and the likelihood of firms possessing a voluntary risk

management committee. As time progresses (moving from left to right on the x-axis,

which represents normalized fiscal years), the likelihood of firms having adopted a

voluntary risk management committee decreases (moving from top to bottom on the y-

axis), illustrating a negative relationship.

Figure 11. Fiscal Year and the Probability of Adopting a VRMC.

Holding all other variables constant, the negatively significant relationship

between the fiscal years and the presence of voluntary risk management committee

implies that there is a statistical association indicating a decreased likelihood of firms

possessing voluntary risk management committees as time progresses. Undoubtedly,

with continually escalating volatility and global disruption in our world economy, this

appears alarmingly and should prompt firms to secure their organizational assets and

growth with effective risk management. Chapelle (2023) compounds this statement by

adding, “risk management has never been so important.” However, since risk

management continues to evolve dynamically within perpetual stages within the firm,

firms may be moving toward embedding more internal controls within operational

processes rather than establishing potentially costly oversight risk mechanisms with a

separate VRMC.

The gender ratio of B = 2.738, p < 0.023, suggests that a higher gender ratio is

associated with an increased likelihood of adopting a risk management committee.

Figure 12 presents a 2 × 2 chart illustrating the relationship between the gender ratio of

men on the board and the probability of establishing a voluntary risk management

committee.

Figure 12. Gender and the Probability of Adopting a VRMC.

We observed that as the proportion of men on the board increases (moving from

left to right on the x-axis), the likelihood of the board possessing a voluntary risk

management committee also increases (moving from bottom to top on the y-axis),

demonstrating a positive relationship between both variables. A higher gender ratio

(i.e., more men represented on the board) is associated with an increase in the

probability of establishing a voluntary risk management committee. As such, we found

that as the number of men on the board rises, the likelihood of these firms adopting a

voluntary risk management committee also increases. An extensive body of literature

has shown that men and women may perceive and tolerate risks differently (Byrnes et

al., 1999). Men, on average (Faccio et al., 2016), might be more inclined to take risks

and may leverage the strength of a formal risk management committee to oversee and

mitigate risk more effectively, thus balancing their liberal risk appetite practices.

In terms of industry sectors, only the utilities category (55) with B = −0.5778, p

< 0.068, indicates a potential negative association with the presence of a risk

management committee, albeit the statistical significance is borderline. When

controlling for all variables, the negatively significant coefficient for the utilities sector

suggests that companies within this sector are less likely to adopt a voluntary risk

management committee compared to companies in other industry sectors. We believe

this may be due to the utilities sector remaining in a highly regulated environment that

requires ongoing stable performance. As such, this sector’s stringent regulatory

oversight (Priest, 1993) can lend itself to a belief that external regulations are

sufficient for managing risks. In addition, controls must be sufficient in order to

provide ample services to the consumer. Thus, there might be a propensity for this

industry sector to dedicate a separate risk management committee, as its operational

and financial risks are more manageable and constant.

The number of directors of B = 0.1925, p < 0.001, indicates that organizations

with a larger number of directors are more likely to adopt a voluntary risk management

committee. The 2 × 2 chart illustrates, in Figure 13, the relationship between the

number of board directors and the probability of establishing a risk management

committee. As the number of board directors increases (moving from left to right on

the x-axis), the likelihood of adopting a voluntary risk management committee also

increases (moving from bottom to top on the y-axis), demonstrating a positive

relationship between both variables. Thus, an increase in the number of directors on the

board is associated with an increase in the probability of creating a separate risk

management committee. Subramaniam et al. (2009) found that the numbers of directors

provide increased diversity, knowledge, and experience to recognize the critical need to

develop a voluntary risk management committee. Thus, the more diverse the board of

directors is, the more emphasis the board can focus its efforts on governance, which

can promote the formation of a voluntary risk management committee.

Figure 13. Number of Directors and the Probability of Adopting a VRMC.

Now, as we transition from short-term credit rating results to evaluating long-

term credit ratings, Table 10 provides the regression analysis, offering insights into the

determinants to establishing a voluntary risk management committee within the scope

of firms we reviewed.

Table 10

Probit Regression Analysis – Long-term Credit Ratings

Voluntary Risk Management Coef. St. Err. t-value p-value [95% Sig

Committee Conf Interval]

S&P long-term credit rating

.01765

.0193

0.91

.362

-.0203

.0556

2009 (base)

2010

-.7442

.2986

-2.49

.013

-1.329

-.1589 **

2011

-.7651

.2992

-2.56

.011

-1.352

-.1786 **

2012

-.7251

.2960

-2.45

.014

-1.305

-.1448 **

2013

-.6731

.2938

-2.29

.022

-1.249

-.0971 **

2014

-.6600

.2938

-2.25

.025

-1.236

-.0841 **

2015

-.5378

.2883

-1.87

.062

-1.103

.0273 *

2016

-.6037

.2920

-2.07

.039

-1.176

-.0313 **

2017

-.5589

.2928

-1.91

.056

-1.133

.0149 *

Gender ratio

1.776

.6126

2.90

.004

.5754

2.977 ***

Global Industry Classification

Standard:

10 – Energy (base)

15 – Materials

-.157

.2217

-0.71

.478

-.5921

.2771

20 – Industrial

-.066

.1890

-0.35

.725

-.4368

.3040

25 – Consumer discretionary

-.097

.2015

-0.48

.630

-.4920

.2978

30 – Consumer staples

.015

.2183

0.07

.946

-.4131

.4428

45 – Information technology

-.153

.2236

-0.68

.494

-.5910

.2854

55 – Utilities

-.127

.2303

-0.55

.581

-.5786

.3243

Number of directors

.149

.0314

4.75

.000

.0875

.2106 ***

Number of director qualifications

-.012

.0066

-1.74

.081

-.0247

.0014 *

Constant

-4.185

.7883

-5.31

.000

-5.729

-2.639 ***

*** p < .01, ** p < .05, * p < .1

With Hypothesis 2, we explore whether the existence of a voluntary risk

management committee is related to the firm’s level of credit ratings. To evaluate this

hypothesis, we utilized the S&P long-term credit ratings. Notably, we found an S&P

long-term credit rating of B = 0.0176, p < 0.362, suggesting that there is no statistically

significant relationship between long-term credit ratings and the likelihood of

establishing a voluntary risk management committee. The lack of a significant

relationship between long-term credit ratings and the establishment of a voluntary risk

management committee may be due to subcommittees being formed in response to

internal operational or governmental needs rather than external credit evaluations.

Companies might prioritize risk management based on strategic, operational, or

regulatory considerations, which do not necessarily align with the factors relating to

their long-term credit ratings. Additionally, the importance of long-term credit ratings

depends on the firm’s specific strategic goals. While short-term ratings are important

for businesses that rely heavily on short-term borrowing to meet their operational

challenges through short-term financing, long-term ratings are more relevant for firms

looking to engage in long-term financing or strategic investments. Although the

creation of a risk management committee could evaluate both the short- and long-term

financial health and stability of the firm, more emphasis may be placed on short-term

goals to support the immediate operational performance of the firm. The fiscal year

variable shows a significant relationship of p < −0.1786 to 0.0273 with each

subsequent year from 2009 to 2017 associated with a decrease in the likelihood of

establishing a voluntary risk management committee, as evidenced by negative

coefficients ranging from r = −0.5378 to −0.7651. Further, the fiscal years from 2010

through 2016 are statistically significant, indicating a consistent decline in the firm’s

appetite to establish a risk management committee over this review period.

The 2 × 2 chart illustrates, in Figure 14, the relationship between the fiscal

years reviewed and the likelihood of firms adopting a voluntary risk management

committee. As time progresses (moving from left to right on the x-axis, which

represents normalized fiscal years), the likelihood of firms adopting a voluntary risk

management committee decreases (moving from top to bottom on the y-axis). While

holding other variables constant, the negatively significant relationship between the

fiscal years and the establishment of voluntary risk management committees

statistically implies the decreasing likelihood of firms possessing a voluntary risk

management committee as time elapses.

Figure 14. Fiscal Years and the Probability of Adopting a VRMC.

The gender ratio variable of B = 1.776, p < 0.004, indicates a positive

coefficient, displaying that a higher gender ratio is associated with an increased

likelihood of establishing a voluntary risk management committee. The 2 × 2 chart

depicted in Figure 15 shows the relationship between the gender ratio of men on the

board and the probability of having a risk management committee. It illustrates that as

men on the board increases (moving from left to right on the x-axis), the likelihood of

the board adopting a voluntary risk management committee also increases (moving

from bottom to top on the y-axis). As more men are on the board, the likelihood of

having a risk management committee increases. Similar to the previous finding on

short-term credit ratings, a substantial amount of literature suggests that, on average,

men tend to take more aggressive risks and could potentially benefit from establishing

a conservative board subcommittee to monitor and balance the firm’s risk acceptance

and tolerance levels (Faccio et al., 2016; Byrnes et al., 1999).

Figure 15. Gender and the Probability of Adopting a VRMC.

Among the industry sectors, none of the coefficients was found to be

statistically significant. This indicates that the industry classification may not have a

significant relationship on the board’s decision to voluntarily establish a risk

management committee. This may also be due to the firm embedding risk management

into the organization’s operations to manage potential risk procedurally, while

embracing risk management as an integral part of their overall business processes,

therefore, minimizing the need for a separate risk management committee.

The number of directors variable shows a positive coefficient of B = 0.149, p <

0.000, indicating that organizations with a larger pool of directors are more likely to

establish a voluntary risk management committee. Figure 16, represented in a 2 × 2

chart, illustrates the relationship between the number of board directors and the

probability of establishing a voluntary risk management committee. There is a positive

correlation, where an increase in the number of board directors is associated with an

increase in the probability of the board establishing a risk management committee. As

such, as the number of individual board directors increases, the likelihood of the firm

establishing a voluntary risk management committee also increases.

Figure 16. Number of Directors and the Probability of Adopting a VRMC.

Lastly, we found that the number of director qualifications of B = −0.012, p <

0.081, has a negative coefficient, suggesting a significant negative relationship between

the number of director qualifications and the establishment of a voluntary risk

management committee. The 2 × 2 chart visualized in Figure 17 displays the

relationship between the number of qualifications among the board directors and the

probability of a firm establishing a voluntary risk management committee. The chart

shows that as the number of qualifications (normalized on the x-axis) increases among

the board of directors, the probability of the firm developing a voluntary risk

management committee (y-axis) decreases. Our findings align with the logical

conclusions drawn by Papadimitri et al. (2020), who, using a dataset of 1,618 firms

across 39 countries, explain how the firms’ credit ratings are positively related to the

education levels of the board leadership.

This explains a potential phenomenon where the more the board leadership has education

and qualification characteristics, which are seen as higher cognitive abilities for better

decision-making, the less inclined the board is to establish a separate voluntary risk

management committee to assist with strategic decisions. Thus, it may be perceived that

a board of directors with an increased knowledge pool of qualifications has less need for

a separate voluntary risk management committee to oversee the firm’s credit ratings.

Figure 17. Number of Directors Qualifications and the Probability of Adopting a VRMC.

Summary of Findings and Introduction into Concluding Chapter

This research explores the relational association of risk management

committees (RMC) on S&P short- and long-term credit ratings. The results suggest that

the existence of a voluntary risk management committee is correlated with an increase

in a firm’s short-term credit ratings, but oddly enough, not significantly related to its

long-term credit ratings. As mentioned in Study 1, previous research has discussed the

importance of RMC as a vital element of a firm’s corporate governance (Moore and

Brauneis, 2008; Schlich and Prybylski, 2009). But questions continue to surface

regarding the inconsistent findings regarding the presence of RMCs (Malik et al.,

2020). Although, in philosophy and in application, risk management committees should

provide reasonable assurance for organizations to understand and manage risk

effectively in both the short and long term, our findings show the application of this

essential role merely depends on the unique credit circumstances within short-term and

long-term strategic priorities of each firm. Moreover, the board of directors within

these firms believes perceived lowrisk levels or risk exposure exists that does not

warrant a dedicated risk management committee, considering their extensive level of

qualifications for managing the firm. Although we are encouraged that our findings

reveal risk management committees to have a relationship with increase short-term

credit ratings, we believe our results remain consistent with a body of recent research

performed by other scholars (Hines et al., 2015; Ali et al., 2017; Alkilani et al., 2020;

Stulz, Tompkins, Williamson et al., 2021) who also indicate that the implementation of

a board-level risk committee does not strategically support the organization’s goals

through risk reduction.

CHAPTER 5

CONCLUSION, LIMITATIONS, AND APPLICATIONS

Chapter Introduction

This chapter reintroduces the purpose of this study and provides a summary

conclusion of the overall key findings for both studies (Section 5.2.1). The subsequent

discussion provides the research contribution relating to how risk practitioners utilize

the development of a voluntary risk management committee (Section 5.3). Finally, this

chapter concludes this research with our study limitations along with suggested future

research avenues (Section 5.4).

Purpose of the Study and Summary Conclusion

Summary Conclusion of Both Studies

This investigation was crafted to particularly study the importance of the

adoption of a voluntary risk management committee and their role in corporate

governance after the major financial crisis in 2008. After the 2008 GFC, risk

management committees became more prevalent to address deficiencies identified

during and after this crisis. These board-level established committees are tasked with

developing more sophisticated and proactive risk management strategies to prevent

future financial disasters. The effectiveness of a firm’s board of directors hinges on

their ability to monitor financial and operational changes. Thus, the evolution of board

committees, in response to financial sector failures, prompted regulators, along with

specialized corporate governance committees, to establish requirements for the

formation of board-level risk management committees to enhance corporate

governance practices and address complex matters, including systemic risks. Motivated

by this plausible corporate structure, Study 1 evaluated whether the establishment of a

voluntary risk management committee is related to the risk governance of the firm

(RQ1). Through this exploration, we also explored the firm’s impending credit risk

vulnerabilities brought about by the GFC. In Study 2, we evaluate the establishment of

a voluntary risk management committee and its relationship with the firms’ credit

ratings through effective oversight and strategic risk management practices (RQ2). To

evaluate the hypotheses developed from the research questions, this study utilized

regression analysis as a statistical method to ascertain the relationships among these

variables.

In regard to RQ1, we found that firms with long-term debt compared to their

total liabilities are less likely for the board to adopt a risk management committee.

However, we found that if the firm’s total liabilities compared to total assets increase,

the likelihood of the firm adopting a risk management committee also increases. Over

time, the trend is toward fewer voluntary risk management committees, especially in

health care and communication industries. We also found that having more board

directors, and more men on the board, increases the likelihood of having a risk

management committee.

With regard to RQ2, we found that firms with better short-term credit ratings,

more male board members, or larger boards are more likely to adopt a voluntary risk

management committee. Additionally, more qualified directors also tend to lead to the

creation of these committees. Furthermore, we observed that there was no relational

connection between long-term credit ratings and the creation of a voluntary risk

management committee. Moreover, similar to Study 1, the interest in forming these

committees was shown to drop over time, particularly in the utilities sector.

The findings of this study, as mentioned earlier, revealed mixed results

concerning the establishment of a voluntary risk management committee in relation to

assessing the firm’s financial health (i.e., financial soundness). We found that as the

longterm debt/total liabilities ratio increases, the likelihood of having a risk

management committee decreases. Further, we discovered when the total

liabilities/total assets ratio increases, the likelihood of having a risk management

committee also increases. It appears that firms are less concerned with developing a

risk management committee when using long-term debt, possibly due to the firm

focusing on more strategic shortterm operations. However, in contrast, we observed

that when a firm uses more debt than assets to operate its activities, firms are more

inclined to establish a voluntary risk management committee, as this may indicate a

higher risk of default. But more notably, we also observed that several financial ratios

related to risk, solvency, and efficiency did not provide a clear relationship with the

decision for a firm to adopt a voluntary risk management committee. This argument is

consistent with previous research that suggests firms using financial ratios in a

standardized way may cause inaccurate estimation of business risk (Lucic, 2014). This

was a major finding of our study, as financial ratios may not be the best way to

measure a firm’s risk within nonfinancial firms. Considering these findings, we would

argue that both quantitative and qualitative measures should be assessed to

comprehensively measure a firm’s enterprise risk.

Regarding our findings on short- and long-term credit rating, we observed that

as the S&P short-term credit ratings increase, the likelihood of having a risk

management committee increases. This data illustrates the firm’s deliberate measures

to actively and effectively manage its creditworthiness to secure the best financial

terms for borrowing funds to support its strategic operations. Surprisingly, our results

indicated that long-term credit ratings did not demonstrate any relationship with the

adoption of a voluntary risk management committee. This may possibly be due to the

development of a voluntary risk management committee not often being directly tied to

a firm’s long-term credit ratings, as many of these committees are developed due to

internal strategic, operational, or regulatory goals that may not directly correlate with

the firm’s credit ratings. The relationship to short-term credit ratings and the

development of a voluntary risk management committee often has a more immediate

impact on operational finance decisions, while long-term ratings are more regarding

long-term strategic investments (Güttler & Wahrenburg, 2007).

Lastly, we found, consistent with both studies, that the likelihood of having a

risk management committee increases when there are more men on the board

(Alemany et al., 2020). The negatively significant relationship between the fiscal years

under review and the presence of voluntary risk committees implies that there is a

statistical association indicating a decreasing likelihood of firms possessing a voluntary

risk committee as time progresses (Fraser & Henry, 2007; Ashby et al., 2019). The

negatively significant coefficient for the utilities sector suggests that companies within

this sector are less likely to have a voluntary risk management committee compared to

companies in other industry sectors. As the number of board directors increases, the

likelihood of having a risk management committee increases. This further supports the

arguments of Subramaniam et al. (2009) that suggest a risk management committee is

more likely to exist in firms with larger boards.

Application for Practice

Our research regarding the rewards of a voluntary risk management committee

contributes to the ongoing gap in research within board-level corporate risk governance

literature, as argued by Mushafiq et al. (2023) in several ways. It provides yet another

footprint within the growing body of empirical literature that offers mixed evidence

that the adoption of a voluntary risk management committee has a direct relational tie

with the financial risk ratios of the firm. Although our research finds a similar moderate

increase in nonfinancial firms creating a separate risk management committee (Bugalla

et al., 2012; Malik et al., 2020) after the GFC in 2008, they still remain underestimated

and underutilized. And possibly because of this underutilization, our research supports

that the financial risk ratio alone cannot predict the establishment of a voluntary risk

management committee. We lean into Lee’s (2020) argument that there still remains

limited knowledge on how firms organize their board committees. Considering this, we

assert that the adoption of a voluntary risk management committee should not be

identified through traditional financial risk ratios alone (i.e., accounting ratios) as a

measurement for risk identification but requires additional quantitative and qualitative

measures to fully understand its determinants and relationship for establishing a risk

management committee. Thus, our research continues to assert that risk management

committees need separate key risk indicators to be advantageous in determining the

value of the firm. Specific metrics should be required for VRMC to identify providing

a significant relational tie to the financial risk and health of an organization.

Lastly, in light of short-term credit ratings, we found a relational increase with

the establishment of a risk management committee. This provides great insight to the

board of directors that nonfinancial firms that voluntarily elected to adopt a risk

management committee have reflected better short-term credit ratings. As a result,

firms are traditionally more apt to receive lower borrowing costs, providing greater

access to capital markets, which is vital for operational stability and confidence among

investors, lenders, and other stakeholders.

In all, this study adds to the developing risk governance literature, indicating

that the creation of a voluntary risk management committee within nonfinancial firms

is more than a mere procedural perfunctory compliance function. It also follows Hines

et al. (2015) assertion that more specific parameters are needed for VRMC to be

effective in providing a significant relationship on the financial risk and health of an

organization.

Limitation and Future Research

With all research comes some limitations, and I believe they should be

discussed in this context.

First is the small sample size. With regard to the adoption of a separate

voluntary risk management committee for nonfinancial firms, in the absence of

regulatory requirements, it poses a challenge for a small number of firms with an

appetite to develop such a committee. We presume that as the interest in establishing a

risk management committee increases, or if a government mandate is issued, more data

will be available for evaluating in the future. Secondly is the time frame evaluated.

During the review period, only credit history data up until 2017 was available from

WRDS. As additional data becomes available, or if another platform with updated

ratings emerges, it may provide additional results.

As business risk strategies continue to evolve regarding the firm’s ability to

remain profitable and outperform its competitors, future researchers could further

study sectors individually to determine the relationship of a VRMC within varies

industries. Another avenue of research, which follows Lee’s (2020) assertion, is that

empirical work could be helpful to further understand specifically how VRMCs

operate within the firm to capture specialized metrics to evaluate their relation to risk

reduction. This includes exploring the maturity of a VRMC when assessing the

relationship with risk reduction outcomes (Fisher, 2021). Ames et al. (2018)

complement Lee and Fisher’s assertions by arguing that it takes the establishment of a

risk management committee five years to see an impact on firm performance. As such,

because our research only examines the relationship between the adoption of a risk

management committee within nonfinancial firms using secondary quantitative data,

researchers may find additional correlations using richer data points depending on the

maturity of the VRMC by employing a combination of both quantitative and

qualitative data. Lastly, another critical aspect that may warrant additional research

comes from observing the temporal U-shaped trend with the adoption of VRMCs

during the enaction of the Dodd-Frank Act of 2010. Amid the significant VRMC

increase between 2009 to 2015, to the sharp decline after 2016 suggests that firms may

be moving towards embedding risk management more seamlessly into their internal

operational processes. This evolution from a broad-level committee to a more strategic

integrated process-level approach underscores the need for further research into how

risk management practices are effectively adapted and integrated within corporate

governance structures.

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