The Relationship Between Chief Risk Officer Expertise, ERM Quality, and Firm Performance

Abstract

Financial volatility and the most recent financial crisis turned the spotlight on enterprise risk management (ERM), yet, high-quality ERM is difficult to define and in many ways, poorly understood. Furthermore, little is known about the individuals occupying key risk management positions within the firm and their relationship to ERM system quality and outcomes. Although the resource-based theory of the firm suggests that expertise in key risk management positions will be beneficial, institutional theories of corporate governance suggest that these positions might be created simply as “window dressing” in response to pressure from regulators and investors. This study examines expertise in the chief risk officer (CRO) role. I examine seven individual expertise areas, as well as broad-based expertise measures. Results show that supervisory and industry expertise of the CRO, as well as an MBA degree and internal promotion are associated with higher ERM quality. Risk and actuarial expertise are associated with higher levels of return on assets (ROA), whereas financial expertise, supervisory expertise, and an MBA degree are associated with higher levels of Tobin’s Q. Broad-based CRO expertise measures are also associated with ERM quality and firm value. Additional results show that expertise in the CRO role was particularly important during the financial crisis. Findings should inform investors and regulators of the importance of the individuals occupying key risk management roles within the firm and help further understanding of the determinants and benefits of high-quality ERM.