Boards of Directors and Financial Risk During the Credit Crisis Essay

17969 WordsMay 11, 201372 Pages
Boards of Directors and Financial Risk during the Credit CrisisTerry McNulty1, Philip Ormrod and Chris Florackis University of Liverpool, UK ABSTRACT Research Question/Issue: This research examines the relationship between board processes and corporate financial risk. Using a unique questionnaire survey about board behavior, several measures related to board processes are developed and used to explain certain aspects of financial risk during the recent crisis. Research Findings/Insights: In a sample of 141 companies with complete data collected from company chairs on both board structure and process, board process is found to be an important determinant of financial risk during the crisis of 2008-2009. In particular, financial risk is lower where non-executive directors have high effort norms and where board decision processes are characterized by a degree of cognitive conflict. The impact of cognitive conflict is however found to be less pronounced in boards with high levels of cohesiveness. Theoretical/Academic Implications: The study provides theoretical and empirical advancement of the governance literature towards an understanding of group processoriented views of boards’ work and effectiveness. This study identifies the significance of board processes and their impact on financial risk supported by quantitative empirics. Findings of a strong relationship between board process and financial risk augment existing theories to suggest that the effects of boards work through group processes that bring executives and non-executives together in relations laced with control and collaboration. Practitioner/Policy Implications: Regulators, acting post the financial crisis have produced governance codes that emphasize risk management as a key responsibility of boards. The link between board process and financial risk established in this paper provides evidence for

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