The effect of a separate risk management committee (RMC) towards firms' performances on consumer goods sector in Malaysia

Abstract

PurposeThis paper aims to examine the effect of setting up a separate risk management committee (RMC) on the performance of listed companies in Malaysia's consumer goods sector. The study considers several firm characteristics as control variables to influence the establishment of the RMC, such as firm size and leverage.Design/methodology/approachThe sample comprises 169 observations throughout a nine-year time frame starting from 2010 to 2018. The current study used a dichotomous variable of “1” to represent a listed company that establishes a separate RMC and “0” as otherwise. The data analysis is based on a static panel data technique, which utilised the fixed effects model (FEM) and random effects model (REM).FindingsThere is a significant positive relationship between a separate RMC and Tobin's Q which suggests that the establishment of a separate RMC that consists of a majority of independent non-executive directors would significantly improve the firm's performance. The current work supports agency theory which suggests that independent non-executive directors can enhance the transparency of corporate boards as they improved the firm's compliance with the disclosure requirements.Originality/valueProper risk management and internal control are critical aspects of a company's governance, management and operations that can influence a firm's performance. The empirical evidence contributes to the knowledge of corporate governance within the context of a RMC’s role in monitoring a company's risk management framework, policies and its implementation. The formation of a separate RMC as a board committee will help to enhance the effectiveness of the risk oversight role of the BOD.