Risk Management in Corporate Governance: A Review and Proposal

Abstract

Manuscript Type: ConceptualResearch Question/Issue: In this paper we identify and discuss the relationship between corporate governance and risk management of high technology firms, with publicly listed Australian biotechnology companies as a case in point. We present a governance structure that better manages the numerous complex risks such companies face. Research Findings/Insights: Audit committees are traditionally responsible for oversight of auditing matters relating to the company's financial systems and risk management relating to financial reporting. While the audit committee needs to have a full understanding of the risk management system in order to be able to assess the overall risk profile of the company we illustrate that the complex risk and regulatory environment high technology firms face may necessitate the creation of a separate risk management committee to interface with and assist the board and audit committee. Theoretical/Academic Implications: We provide evidence that the traditional governance model is inadequate in today's complex business environment, particularly for high technology companies. By analyzing the legislative, industry, and complex risk environment faced by these firms, we posit that the traditional model may need to change to meet the demands of a wider definition of governance that specifically incorporates risk management. Practitioner/Policy Implications: Against a backdrop of corporate collapse, increasing corporate regulation and reporting, risk management and oversight has been a recent addition to the role of the board. It is not inconceivable that capital market regulators may require reporting on risk management and the creation of a separate risk management in the future.

Enterprise Risk Management: Review, Critique, and Research Directions

“…Several interesting lines of inquiry derive from prior work in strategic management and organizations that could inform research on ERM implementation. For example, corporate governance scholars could examine the role of boards, ownership concentration and executive compensation in ERM implementation (Brown et al, 2009;Carpenter et al, 2003;Isaksson and Kirkpatrick, 2009;Wright et al, 2007). While finance and accounting scholars have studied corporate boards, their emphasis on agency theory has restricted their view to emphasize boards' control function and ignored their advice function (Westphal, 1999).…”

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

“…Due to increased workloads and responsibilities, scholars have suggested that it has gone beyond the scope and capabilities of audit committees to oversee the risk management functions of companies (Brown, Steen and Foreman, 2009). Similarly, Daly and Bocchino (2006) revealed that audit committee members feel that they have too much responsibility and do not have the time or inclination to oversee risk management.…”

“…In general, audit committees are focused on the oversight of financial reporting risks and related compliance risks rather than a wider scope for risk management (Brown, Steen and Foreman, 2009;Xie, Davidson, and DaDalt, 2003). Therefore, it is suggested that audit committees may have insufficient skills for overseeing nonfinancial risks, such as operational, strategic, and regulatory risks (Brown, Steen and Foreman, 2009;Daly and Bocchino, 2006).…”

“…Therefore, it is suggested that audit committees may have insufficient skills for overseeing nonfinancial risks, such as operational, strategic, and regulatory risks (Brown, Steen and Foreman, 2009;Daly and Bocchino, 2006). One plausible solution to the issue is the creation of a separate RMC (Brown, Steen and Foreman, 2009 Due to the issues related to a combined risk and audit committee illustrated above, it is suggested that a separate RMC is required in order to efficiently manage companies' risks (Daly and Bocchino, 2006). Harrison (1987) suggested that a separate committee enables directors to focus on specific areas of responsibility, enhancing legitimacy and accountability in corporations.…”

“…Research suggests that the workload of audit committees has increased dramatically in recent years due to changes in regulation (Brown, Steen, and Foreman, 2009). Due to increased workloads and responsibilities, scholars have suggested that it has gone beyond the scope and capabilities of audit committees to oversee the risk management functions of companies (Brown, Steen and Foreman, 2009).…”