Organisational Characteristics, Corporate Governance and Corporate Risk Disclosure: An Overview

Journal of Corporate Finance Research, Vol. 15, No. 1, pp. 77-92 (2021) For citation: Adamu, M. U. (2021) «Organisational Characteristics, Corporate Governance and Corporate Risk Disclosure: An Overview», Journal of Corporate Finance Research / Корпоративные Финансы | ISSN: 2073-0438, 15(1), сс. 77-92. doi: 10.17323/j.jcfr.2073-0438.15.1.2021.77-92. Received 15 October 2020 | Peer-reviewed 23 October 2020 | Accepted 24 October 2020


Introduction
Risk disclosure is the process of ascertaining, quantifying, handling, and disseminating organisational prospects and challenges that have the potential to impact present or future firm value to users of corporate reporting. Disclosure of this nature is usually facilitated in the 'risk review' section of annual reports (e.g. management discussion, chairman statement), interim reports, prospectuses, company websites, or other media, provided the users of financial statements can access the information for informed decision-making. A short time ago, and sparked by the financial and economic crisis, corporate risk disclosures considerably puffed-up the interest of regulators, standard setters, analysts and academic communities worldwide [1][2][3]. In light of the prominent corporate scandals involving companies with extraordinary reputations (e.g. WorldCom and the Enron Cooperation), the restoration of public self-confidence or faith has become one of the main agenda topics among today's business frontrunners [4]. These were the major factors that caused the release of IFRS 7, which requires corporate entities to disclose the risk associated with financial instruments for informed decision-making. These new regulations have been adopted by several companies operating in developed and emerging markets. For example, it is reported that the European Union (EU) requires all listed companies to disclose their risk profile and create more transparency in their annual reports [5]. According to earlier conceptions [6], only occurrences of bad or negative events are considered as 'risk' . However, the contemporary impression of risk embraces occurrences of both positive and negative events as well as uncertainties. According to [7], certain disclosed items have been acknowledged as 'risk disclosures' provided the person who reads the annual report is notified about every business prospect or negative challenge (e.g. danger, hazard, harm, threat and exposure, etc.) previously encountered by the corporation, or may be encountered by the corporation in the future, or proposed techniques to deal with business opportunity and negative challenges. The readers are thus informed through an extensive explanation of risk that comprises positive and negative factors, risks and uncertainties, and ways of managing risk. The relevance of studying risk disclosure cannot be overemphasised, as company transparency on risk related information is helpful for capital markets to behave optimally [8].
In order to accomplish and preserve a precise stock valuation, self-confident and conversant investors are required. In the absence of sufficient disclosures, a management team has greater information than outside stakeholders, who may not fully appreciate the fundamental risks and returns of an organisation's business [8]. As such, corporate risk disclosure can be vital in minimising investor uncertainty [9] thus decreasing the premium associated with risks that are required from the firm [9]. This study is aimed at analysing the literature on risk reporting. We focus mainly on corporate governance and organisational characteristics that seem to facilitate corporate risk disclosure for firms that are functioning in countries with advanced and emerging economies. As a result of the financial and economic crisis of 2008-2009, corporate governance has become one of the most extensively examined aspects of company activities [10]. Given the high exposure of financial firms to different risks, we firstly examine the relevant literature on the financial sector. The papers on non-financial firms from developed and emerging countries are analysed in section 3, our results are discussed in section 4, and section 5 concludes the study by proposing directions for future research.

Financial Sector and Corporate Risk Disclosure
The research at reference number [7] argues that the finance and accounting fields have recently unfolded one of the most interesting areas of research, relating to 'corporate risk disclosure' . The fact is that several studies have been conducted over the last couple of decades with a focus on risk disclosure, due among other things, to improving corporate transparency. A prior long-time concern of regulatory authorities seemed to concern the management of risk disclosure in their jurisdictions [11], or the voluntarily reporting of same by corporate managers. Despite this, much of the existing research establishes that existing corporate risk disclosure is insufficient, and extensive regulatory improvement is required. Recently, the amount of research on risk related information disclosures has been increasing in the field of finance and accounting. For instance, various scholars [12][13][14][15] have explored diverse jurisdictions and evaluated the degree of risk disclosure practice in the content of companies' annual reports, interim-reports, and prospectuses. The financial sector remains one of the most important sectors in driving global economic activities. This can be evidenced from the 2007/2008 global financial crises. Stakeholders across the globe support the idea of incorporating corporate risk profile after the incidence. The financial sector is one of the most regulated industries, because entities are exposed to different regulations. Hence, most of the previous studies [7] suggested the studying of the financial sector independently. In addition to regulations, several factors have been identified in the literature as major drivers behind corporate risk disclosure in the financial sector. These drivers include liquidity, profitability, company size, leverage, dual listing, industry, and listing status. Corporate entities vary considerably in terms of the levels of asset base, annual profit, turnover, location, governance, financial architecture, and, clearly, several other factors. Consequently, previous studies [e.g. 7; 13; [16][17][18][19][20][21] found some of these characteristics to be major determinants of risk related information disclosure in the financial industry. The majority of these studies were conducted in both developed and emerging economies. For example, one the first studies conducted by [22] examines corporate risk reporting practice in the annual reports of Canadian and UK banks. Content analysis and regression methods were used as evaluation methods. It was established that the quantity of risk definition and company size are positively and significantly related with corporate risk disclosure, while profitability and degree of risk in the company was insignificant in explaining risk disclosure behaviour. They also found no significant difference in terms of the level of information disclosed by Canadian and UK banks. The 2007 global financial crisis has drawn several scholars' attention towards evaluating the effect of the crisis on the disclosure patterns of the banks. For example, [23] samples eight (8) German banks and evaluated their risk disclosure pattern. A total of 32 annual reports were taken from 2005-2006. The content analysis and regression result shows that profitability and bank size do not influence risk disclosure behaviour of banks from 2005 to 2006. However, it was interesting to discover the bank size variable driving risk disclosure upward from 2007 to 2008 -perhaps this is the influence of the global financial crisis. Nonetheless, GAS 5-10 might explain risk disclosure levels for the 2005-2006 financial years. Moreover, the result highlighted significant risk reporting improvements in terms of quality and quantity over the study period. The study at reference [13] evaluates the effect of a firm's governance as well as the demographic behaviour of top governing squads on voluntary corporate risk disclosure in the Saudi banking sector. The investigation employs the content analysis method in measuring the amount of risk information contained in the annual reports of listed bank between the years 2009 to 2013. They discovered that board size, profitability, size, gender, audit committee meeting and outside ownership are the most important factors that influence corporate risk disclosure. Meanwhile, [24] assesses the influence of governance attributes on risk disclosure practice in Jordan. The data was extracted from the 15 listed banks' annual reports over the period of 2008 to 2015. The study divides the disclosure into voluntary and mandatory risk disclosure categories, and utilises content analysis and OLS regression as analytical tools. The findings show that the presence of a non-executive director, and the variables of board size, separation of duties, and audit committee meetings had a statistically positive influence on voluntary risk disclosure, while this was not the case with the managerial ownership attribute. However, audit committee size and independent directors are positively significant in explaining mandatory risk disclosure. Table 1 below shows the summary of the prior empirical studies in the financial sector:

Evidence from Emerging Capital Markets
The contribution of emerging countries towards economic development is highly significant. Nevertheless, the extent of corporate transparency is not substantially relative to developed economies. The study referenced at [39] examines a sample of 6 years non-financial listed firms in India and evaluates the major factors that influence their risk disclosure. They examine the annual reports of 318 firms. The results conclude that large levels of independent directors, gender diversity, and board size quotients improve risk disclosure, although the dual function of CEO constrains maximum disclosure. A smaller amount of profit, less liquidity, and big firms are more likely to divulge better risk disclosure, especially historical disclosures. Furthermore, the study referenced at [40] evaluates the voluntary and mandatory risk disclosure quality among Indonesian firms. They examined 48 annual reports of listed firms for the period 2011 to 2012 as the sample. The results reveal that the major emphasis is still on quantity rather than quality. Firm size and industry competition determine the firm's preference on the maximum risk to disclose. In reference to South Africa, the study referenced at [1] examines the effect of firm governance on risk reporting. The study samples 169 listed firms for the years 2002-2011. It is reported that in instances where fewer persons hold significant ownership, they are reluctant to divulge much risk disclosure. Aside from this, a higher number of persons on the board, non-executive directors, and higher diversity levels on the board are enthusiastic in terms of increasing risk disclosure. Strangely, the presence of a CEO who also serves as chairman of the board has no influence on the amount of risk information to be disclosed. In another study, referenced at [41], the authors analyse the impact of having a member of royalty as a board member, as well as the features of the board on amount of risk information to be disclosed in Saudi Arabia. They evaluate 307 observations over the period of 2008 to 2011. The descriptive statistics result shows a moderate level of corporate risk disclosure practices among the companies. Moreover, board size, royal board member, firm size, independence, and frequency of board meetings each have a significant influence on corporate risk disclosure. Furthermore, the study cited at [42] assesses the quality of risk disclosure and its causes in Egypt. Based on the authors' framework, the disclosure can be qualitative, provided the risks disclosed are relevant, understandable, comparable and verifiable. They sampled 135 listed firms' annual reports for the year 2006-2010. The findings give the impression of being high quality, because the risk data unveiled are pertinent and comprehensible. Nevertheless, the data is incomparable and unverifiable. In addition, leverage and company size play a considerable role in generating qualitative risk confession, whereas audit firm size, profitability, and book-to-market values remain silent in providing any evidence that enriches risk disclosure quality. Table 3 below presents summaries of some of the existing studies focusing on emerging market economies:

RESULTS AND DISCUSSION
Corporate risk disclosure is among the most popular current research topics in finance and accounting. Our study illustrates that current risk disclosure practices involving developed and emerging countries are not sufficient to meet stakeholder demand, although, it is observed this trend is gradually moving in a positive direction. Our review of the existing literature highlighted that financial news, forecasts, and information on negative developments are the major sources of information required by interested parties. Nevertheless, directors often prefer to release non-financial news, old news, and information on positive developments. This practice has reduced the relevance of the information disclosed by firms. The financial sector is more likely to release risk information more than the non-financial sector, although firms operating in the financial sector experience more regulations (CBN, insurance commission etc.) than other sectors. We have uncovered a lack of uniformity in risk disclosure practices, as many researchers employed different approaches in their study. Moreover, the major problematic issue found is the risk disclosure coding process. Scholars have extensively discussed the difficulty in the coding procedures, its labour-intensive nature, the level of time consumption, and the element of subjectivity. For example, labour-intensive content analysis is inefficient and causes the selection of smaller sample sizes in most of the prior studies. We hereby postulate that perhaps such constraints could be resolved by research that employs an automated procedure to analyse their textual data. This study also identifies a greater use of small sample sizes in risk disclosure research. Perhaps this is connected with manual content analysis, which is considered highly stressful. Nevertheless, several scholars [2; 43; 53; 55-56] are still encouraging researchers to consider a wider sample in their respective studies in order to validate or refute earlier findings. Moreover, the study uncovered a greater use of cross sectional data on which single-time year duration data is considered. Nonetheless, [13; 53] contend that the use of single-year data has the limitation of not generalising the findings, and consequently they motivate studies to elongate the time-frame beyond a one year period. Accordingly, this can strengthen research findings and help with the analysis of risk disclosure trends. Despite the numerous avenues by which firms can release information for informed decision-making, our study found that annual reports constitute the most common document considered by previous studies in sourcing their study data. However, [13; 53; 56] recommend the use of other media, including the internet, press releases, prospectuses, and interim reports, as these could also potential be the vehicles for transmitting significant data relevant to corporate risk disclosure. Meanwhile, regardless of the suggestion of some scholars [9; 13; 21; 27; 43; 55-57] in favour of comparative studies between two or more countries, our study discovered few research papers that explored more than one country. The comparative study concept is very important as it would clarify our understanding about risk disclosure variance across geographical borders. Diverse regulatory and accounting policies, economic and political systems, cultural, religious and social settings as well as the extent of countries' interactions with international communities would certainly shape the firms' risk disclosure pattern across national boundaries.

CONCLUSION
This study analyses literature focusing on the effect of corporate governance and the organisational characteristics of corporate risk disclosure. It generally appears that risk disclosure practice is not adequately disclosed by firms, as there is no static regulatory framework that can be used as a term of reference. Therefore, researchers are regularly developing or adopting risk disclosure analysis instruments (e.g. checklists) used by earlier studies in order to identify and code risk information. Consequently, the pattern under which firms divulge their risk profile in annual reports is vague. Moreover, despite the lack of risk disclosure regulation in many jurisdictions, various directors are enthusiastic about disclosing less essential risk information (past information, non-monetary information and positive information) rather than most valuable risk information (future information, financial information, and negative information) predominantly to impress stakeholders who aspire to see risk information in corporate reporting. Although risk disclosure practices do not meet the demand of investors and other stakeholders, developed countries and financial firms are fair in terms of risk disclosure relative to emerging countries and non-financial firms, respectively. Although corporate risk disclosure is amongst the most popular research topics in finance and accounting, nonetheless data generating procedures have influenced many prior studies to focus on cross sectional data and small sample sizes. This practice has created space for future research studies to consider wider sample and panel data especially in emerging countries. Likewise, the listing status of the companies has been identified as one of the foremost aspects that effect corporate risk disclosure. The non-listed firms studied deliver a fascinating direction for future research, as promoted by scholars [2; 21]. Potentially-omitted variables include ownership structure [53], cost of capital [43] and management team characteristics [13], each of which are worthy of being explored in future studies.