The Effectiveness of Operational Risk Management and the Composition of the Board

This thesis focuses on the association between the effectiveness of operational risk management and the composition of the board. We build our hypotheses on the agency theory and the resource dependence theory. Using the data from TEJ operational risk database, we investigate how the composition of the board could affect the occurrence of operational risk events, the loss of such events, and the market reactions to the events. Our results demonstrate that as the percentage of independent directors and, institutional holdings increases, the effectiveness of operational risk management decreases. On the contrary, the size of the board and the board duality improve the effectiveness of operational risk management. Our findings suggest that firms should hire appropriate directors and supervisors based on the consideration of improving the firm’s performance and better managing operational risks. The firm needs to have a balanced composition of outside/independent and inside directors in order to manage operational risks while achieving earnings goals at the same time.