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Do Board Risk Committees Matter to Ratings Agencies and for Performance?

Dr. Jomo Sankara | Associate Professor, Accounting Department

Dr. Jomo Sankara

The 2008 financial crisis was the greatest financial crisis since the Great Depression and The Financial Crisis Inquiry Commission conclude that “ dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis” (National Commission, 2011).

Although the board of directors bears primary responsibility for risk management (Tonello, 2012), many insurers have delegated this obligation to stand-alone risk committees (board risk committees). In fact, board risk committees have become more common since the 2008 financial crisis, partly due to Dodd Frank Act 2010. This paper uses the insurance industry to investigate whether a board risk committee adds value from the standpoint of rating agencies and impacts firm performance.

The study finds that firms with a board risk committee report higher A.M. Best’s Financial Strength Ratings after controlling for corporate governance characteristics and other relevant factors. However, this result only holds during the post-financial crisis period. Dr. Jomo Sankara, accounting professor in the College of Business, and his coauthors, Dr. Daniel Ames and Dr. Christopher Hines, suggest that external evaluators may have responded stronger after the financial crisis began, when regulators monitored insurer board-level governance mechanisms more closely.

In addition, firms adopting a board risk committee experience an immediate increase in financial strength ratings and the presence of a board risk committee appears to be related to long-term firm performance (it takes at least five years for ROE to improve). However, financial strength ratings does not appear to be related to board risk committee age or short-run performance.

Ames, D., C.S. Hines, and J. Sankara. 2018. Board Risk Committees: Insurer Financial Strength Ratings and Performance. Journal of Accounting and Public Policy(forthcoming).

Jomo Sankara teaches cost and management accounting. His main research interests include reporting quality especially earnings management, organizational monitors of accounting information, and corporate social responsibility disclosures.

Sankara joined the faculty at Illinois State University in 2012. He earned his MBA and Ph.D. in Accounting from Florida Atlantic University.

2018-05-30T14:30:34.035-05:00 2018