Financial risk-taking is lower in boards which have fewer than eight directors.

However, the proportion of non-executive directors on the board and the existence of risk committees does not have a significant effect on corporate risk.

How to lower financial risk taking

Financial risk-taking is lower where executive directors have served for much longer than non-executives.

Some evidence suggests that companies take higher financial risks where executive director pay is significantly greater than non-executives.

Companies take lower financial risk where non-executives were active in board meetings and prepared for those meetings. Financial risk taking is also lower when there is frequent dialogue between executives and non-executives.

Directors who have healthy differences of opinion over key company issues and the tasks facing the board also take lower financial risks.

Who takes the business risk?

Business risk management is primarily an executive function or task.  Business risk management seems to takes place away from main board processes. If this is the case it suggests that that the corporate governance of business risk management is poor.

Closely-related risk

A board’s process of strategic decision making for financial and business are closely related.  They fuse together within the processes of reaching board decisions. This is particularly true when economic conditions where liquidity is a significant restraint in strategic decision making.

Non-executives and boards need to be able to use these opportunities to convert their understanding of the business and contact with executives into effective influence.

Board effectiveness draws on qualities of both sides of the executive and non-executive director relationships.

On the one hand, it is important that executives enable, and see the value in, as challenging an environment as an effective board can provide. On the other hand, the non-executives need to exercise their influence by behaving in ways that combine host company understanding, insight and skill.

About Jamie Lyon, lead author, ACCA