The impact of expertise in the chief risk officer and risk committee roles



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Enterprise Risk Management (ERM) has received increased focus in recent years, yet practically speaking, high quality ERM is difficult to define and poorly understood. Researchers have begun to examine the determinants and implications of ERM, but mixed results in this area suggest that further research is needed to understand whether and how ERM adds value to the firm. In this dissertation, I investigate whether the expertise of the Chief Risk Officer (CRO) and other high level risk personnel (e.g. a corporate risk committee) significantly influence the success of an ERM system, and further, lead to lower levels of risk for the firm. I conduct two single-industry studies, examining risk management roles in the insurance and banking industries. Both industries are crucial to the proper functioning of the greater economy and have implemented ERM at high rates. Results from my first study, examining the insurance industry, show that expertise of the CRO, but not risk committee, is associated with higher quality ERM. Both CRO and risk committee expertise are associated with lower levels of risk in my full sample, but splitting the sample shows that the CRO is significant for firms that receive an S&P rating, while the risk committee is significant for firms that do not receive the rating. This suggests a potential trade-off between the two roles among different types of firms. My second study builds on prior work from the banking industry and utilizes principal component analysis to creates several risk management indexes, capturing the overall risk management function for each firm. Findings show that expertise of the CRO provides additional explanatory power when compared to measures using the sole presence of the role. Risk committee expertise is only significant when combined with CRO and full board measures. My dissertation contributes to a growing body of literature attempting to better understand ERM processes and how they add value to the firm. I show that expertise in key risk management roles is associated with both higher quality ERM and lower levels of risk. In addition, I take the first steps toward creating a more granular measure of ERM quality, which is particularly important as the presence of the CRO and risk committee become more prevalent, reducing variation in measures using the sole presence of the role.

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Enterprise Risk Management, Chief Risk Officer, Risk Committee