The relationship between entity related corporate governance factors and the establishment of separate risk management committee in South Africa

M.Com. (Computer Auditing)This dissertation aims to explore the entity characteristics associated with the implementation of the board-level stand-alone risk management committee (RMC) in South Africa. We developed a battery of econometric models based on triangulation of corporate governance theories which linked an entity’s decision to set up a separate risk management committee (RMC) in its board structures as a dependent variable and a host of entity-specific factors as independent variables. Data collected from audited annual reports of 181 JSE-listed non-financial entities was analysed using logistics regression estimation procedures. Our results show a strong positive relationship between the likelihood that an entity would establish a separate RMC, on the one hand, and board independence, board size, entity size, and industry type, on the other. Our study fails to find support for the hypothesis that an entity’s characteristics – such as the independence of the board chairman, the use of Big Four audit firms, financial reporting risks, and levels of financial leverage – do influence an entity’s decision to form a separate RMC. Our findings emphasize the role that information asymmetry between executive and non-executive directors, agency cost and potential damage to reputation capital of directors; diversity in background, expertise, and skills of directors; economies of scale in absorbing RMC costs; and industry-specific institutions and norms play in an entity’s decision to form a separate RMC. The implication of our findings is that policy-makers should consider the size and composition of boards and also take cognizance of entity size and industry-specific idiosyncrasies in setting recommended corporate governance practices