Corporate Governance, Enterprise Risk Management, and Inter-temporal Risk Transfer

Abstract

This work is an initial attempt to describe the interconnections among corporate governance, enterprise risk management, and the phenomena of inter-firm risk transfer that occurs in combination with firms’ income smoothing. Corporate governance is conceived as a set of rules according to which a firm is managed and governed by its top managers. Extant literature on corporate governance has pointed out the benefits of the adoption, at a firm level, of a comprehensive enterprise risk management process. We note that, although such an adoption favors the smoothing of a firm’s income, in smoothing the income a firm, it also gives rise to an inter-temporal transfer of risk from the firm itself to its stakeholders, specifically to suppliers and employees. Such transfer of risk depends on the strength of a firm contractual power and on the structural relationships established by a firm with its stakeholders. We therefore argue that larger-sized organizations affiliated with a business group are likely to smooth income to a greater extent than smaller-sized organizations unaffiliated with a business group. The paper also offers some discussions of the findings and points out some important issues to be addressed in future studies.