Corporate Governance and Firm Risk

This study explores the relationship between the board governance structure and firm risk. Specifically, we develop a ‘Governance index’ based on four different aspects of the board: 1. Board composition, 2. Board leadership structure, 3. Board member characteristics and 4. Board processes and examine how the overall index relates to firm risk.
The study is conducted using a sample of 268 UK firms from the FTSE 350 index, over the period 2005 to 2010. An index is constructed to capture the overall governance structure of the firm. Regressions of the index on three risk measures are examined.
We find that the governance index that aggregates the four sets of board attributes is significantly negatively related to firm risk. Robustness tests confirm this result.
A large number of studies have explored the relationship between the attributes of corporate boards and firm performance, with mixed results. A much smaller number of studies have looked at board attributes and firm risk, but these have either focused on financial sector firms alone, or have included only a single or a limited number of attributes. This study, utilizing a broad agency framework, seeks to extend the work on firm risk and board attributes, by both expanding industry sectors examined and employing a comprehensive set of board attributes.
The findings have policy and practical implications for investors, regulators, and chairmen of boards of governors to the extent that they inform these constituencies about the set of board attributes that are associated with firm risk. This study is the first to utilize a comprehensive measure of governance and relate it to firm risk.