The impact of political connection and risk committee on corporate financial performance: evidence from financial firms in Malaysia

Abstract

Purpose This study aims to examine the association between the effectiveness of risk committee (RC) and firms’ performance in Malaysian context. It also explores whether political connection has an impact on the relationship. Design/methodology/approach This study, using a principle components analysis, derives a factor score for RC attributes to proxy the effectiveness of RC. It also uses both accounting and market performance to measure the company performance. Findings Using a sample of financial firms from 2004 to 2018, this study finds that both accounting and market performance are higher for firms with an effective RC. It also finds that the effectiveness of RC in monitoring and management of risks is more pronounced for politically connected firms (PCFs). In further tests, the paper finds that RC attributes (i.e. RC independence, qualification and gender) are positively and significantly associated with accounting performance, while those of RC existence and overlap are positively and significantly related to market performance. The study also finds that RC size (RC diligence) has a positive (negative) impact on financial firms accounting and market performance. The further analysis also shows that PCFs with a separate as well as larger RCs experience both higher accounting and market performance. This study’s results are robust for concerns of endogeneity. Practical implications The findings of this study resolve the ongoing debates surrounding political connection by suggesting financial firms not to have politically connected board members as doing so may deteriorate their performance. This study’s results are also useful for investors, regulators and policymakers. Originality/value To the best of the authors’ knowledge, this study, for the first time, introduces on the interaction term between the effectiveness of RCs and political connection to empirically explore how an effective RC may reduce the potential risk of political ties. As such, this study adds to the literature and sheds light on an aspect of risk (i.e. risk stems from establishing close link with the government) that is growing in importance.

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

“…Companies need to process business activities with good management and establish the right policies. Minimizing business failure can be done by implementing good corporate governance to monitor risks that may occur for financial companies (Aldhamari et al, 2020). Company failure can be caused by many factors such as failure in risk monitoring.…”

“…Generally, prevention of company bankruptcy can be done through risk management involving the audit committee. However, there are many special tasks carried out by the audit committee, so companies are required to form an organizational structure that carries out risk management tasks specifically through the risk committee (Aldhamari et al, 2020). The presence of an effective risk committee (RC) in this study will be analyzed to see its effect on company performance.…”

“…This is because the company has its own vision that is different from government regulations, especially in the social and political world. Previously, research on the effect of the effectiveness of the risk committee and political relations on financial performance in Malaysia has been conducted (Aldhamari et al, 2020). Meanwhile, the data of this study uses financial companies in the banking sector listed on the Indonesia Stock Exchange (BEI) for the 2017-2019 period.…”

“…Company performance is measured based on the ROA value and Tobin's Q value (Aldhamari et al, 2020). ROA is calculated based on the comparison of the value of net income and total assets (Elamer & Benyazid, 2018).…”

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