The Effect of Risk Management Committee Characteristics on Firm Performance: An Empirical Investigation

Abstract

This research investigates how the characteristics of a risk management committee (RMC), as a recently emerging sub-committee within the board of directors, impact firm performance indicators. The investigation employs a dataset encompassing service and manufacturing firms that are listed on the Amman Stock Exchange (ASE) over the period 2019–2022, comprising a total of 236 firm-year observations. The primary statistical technique utilised in the study is fixed-effect regression with Huber–White standard errors. The findings demonstrate that RMC attributes such as size, independence and meeting frequency exert a significant and positive effect on return on assets, return on equity and Tobin’s Q. These insights hold practical implications for stakeholders, regulators and policymakers in assessing the influence of RMC characteristics on firm performance within the context of the ASE. Understanding these dynamics can inform decision-making and regulatory frameworks, promoting effective risk management practices in publicly traded corporations. The current study represents the initial empirical exploration within the corporate governance literature concerning the nexus between RMC qualities and firm performance in Jordan.

Keywords

Agency theory corporate governance code firm performance Jordan risk management committee signalling theory

Introduction

In the contemporary fast-paced and intricately connected global corporate world, the effective management of risks has evolved as a key component of assuring organisational resilience, sustainability and growth. The dynamic landscape of contemporary business is marked by an ever-increasing array of risks and uncertainties that can profoundly impact organisational operations, stability and prosperity (Gordon et al., 2009; Karim et al., 2022). As firms navigate this hazardous environment, effective risk management emerges as a critical aspect, deeply linked to firm’s performance and success (Tao & Hutchinson, 2013). The management of risk is not only about minimising potential negative outcomes but also about strategically leveraging uncertainties to create opportunities for advancement (Battaglia et al., 2014; Sekome & Lemma, 2014). It means accepting risk as an essential component of the organisational fabric, an element that, when skilfully managed, may fuel innovation, drive transformation and ultimately set the stage for a competitive advantage (DuHadway et al., 2019; Jia & Bradbury, 2021).

The concept of corporate governance has gained attention in emerging economies (Arora & Sharma, 2016; Dzomira, 2020). Specifically, in the Jordanian context, corporate governance is becoming increasingly important as it is regarded as critical to the performance and competitiveness of Jordanian businesses in the global market (Alodat et al., 2022; Saleh et al., 2022). Notably, significant reforms have recently been implemented to conform to the shifting landscape of Arab and global financial markets, with the goal of strengthening investor protection and improving the investment environment in the country’s financial markets (SDC, 2022). Jordan is placing a strategic focus on economic reforms that foster sustainable economic growth (Mansour et al., 2022). An illustrative example of these advancements is the adoption of specific practices within the financial market to uphold a robust governance system. The Jordan Securities Commission (JSC) introduced new directives on corporate governance for publicly traded companies. The most recent requirements were introduced to replace the earlier corporate governance code (CGC) of 2009, which operated on a voluntary basis, unlike the current regulation that mandates strict compliance (Gerged et al., 2023). A central aspect of Jordan’s updated CGC is the transition from optional to obligatory adherence, with the goal of strengthening shareholder and investor protection. Furthermore, the new mandates require Jordanian public corporations to establish a risk management committee (RMC) as a subcommittee under the board of directors.

The rationale for investigating firm-level governance practices in a developing market like Jordan stems from the assumption that effective governance system contributes to country-level growth in the economy. The current study is prompted by both the economic reforms and the latest CGC put forth by Jordan. These regulatory shifts are designed to stimulate international investments and support local capital infusion, with a direct or indirect intention to improve corporate governance practices that can positively impact organisational financial performance. Mechanisms of corporate governance are intended to influence a company’s performance, a matter of significant concern for stakeholders (Ronoowah & Seetanah, 2023; Paul, 2017). These strategies have a significant impact, allowing stakeholders to distinguish and comprehend the several factors that have a direct impact on a company’s financial success. They regard these aspects as critical indicators of the company’s prosperity and financial well-being (Palaniappan, 2017).

The recent surge in attention towards corporate governance, especially in emerging economies, necessitates a thorough examination of its implications, particularly in the Jordanian context. With Jordan actively promoting economic reforms to boost sustainable growth and global competitiveness, corporate governance has become a cornerstone for the success of Jordanian businesses. The new implementation of stringent regulatory reforms, notably the mandatory adoption of CGC and the establishment of RMC, emphasises the need of this shift towards a more robust governance structure. Despite these advancements, there remains a research gap concerning the practical impact of these regulatory changes on the performance of Jordan’s publicly traded enterprises. Specifically, the role and effectiveness of the newly mandated RMC features in influencing firm performance within the unique institutional setting of Jordan are not yet comprehensively understood. Given the substantial disparities between Jordan’s governance landscape and that of more developed economies, an exploration of these dynamics is imperative.

This study holds significant academic and practical importance, focusing on the nexus between RMC characteristics and firm performance in the corporate world. The study offers valuable insights crucial for informed decision-making among organisational leaders, policymakers and stakeholders by demonstrating how these attributes might enhance firm performance. This research is expected to catalyse the development of robust risk management frameworks, encouraging a culture of informed risk-taking that motivates organisations towards sustained growth, resilience and a competitive edge. Moreover, the study addresses a notable gap in research regarding the impact of corporate governance on company performance in developing nations. It examines how RMC features affect the performance of publicly traded firms in Jordan, shedding light on corporate governance system in Jordanian context. The institutional framework of Jordan, which is radically different from the world’s most developed countries, adds to the significance of this investigation. Utilising data from a domestic setting, this research provides evidence regarding the consequences of new corporate governance instructions. These findings are anticipated to be useful to policymakers, stakeholders and regulators concerned about the implications of the current edition of CGC in Jordan.

This research contributes new perspectives on corporate governance within Jordan’s evolving market, concentrating on RMC attributes and their influence on performance in service and industrial sectors listed on the ASE. This is the initial research to investigate the impact of RMC attributes on company performance in Jordan, presenting a unique framework distinct from prior studies. Consequently, this study has the potential to fill a knowledge gap in the literature of corporate governance. In regard to the methodology applied, the statistical rigor of a single performance metric may be lacking. The financial performance of a company has typically been assessed by many prior researchers studying the effect of corporate governance system on company performance using only one or two indicators (e.g., Alodat et al., 2022; Ayoush et al., 2021; Khamis et al., 2015; Langan et al., 2022). On the contrary, three distinct proxies—return on equity (ROE), Tobin’s Q and return on assets (ROA)—were used in the current study to define how well a company performed. This approach offers a more comprehensive view and a robust foundation for exploring how company performance and corporate governance are related.

The remainder of this article is structured as follows: the second section presents the literature review and hypotheses development. The third section articulates the study methodology, which includes sample selection and data, variables construction, as well as model specifications. The fourth section discusses the major results, encompassing summary statistics, panel data assumptions, fixed-effect regression and robustness analyses. Finally, the conclusion is provided in the last section.

Literature Review and Hypotheses Development

Corporate governance contributes significantly to a company’s economic growth and increases investor confidence. A robust corporate governance system may build trust not only among investors, but also among consumers, employees and the broader community. When a corporation follows sound governance principles, it exhibits a commitment to ethical behaviour, social responsibility and sustainability (Abu Afifa et al., 2022; Gulzar et al., 2020). The recent CGC requirements issued by the JSC are assumed to enhance the Jordanian practices of corporate governance. A good corporate governance system ought to have an influence on the company performance, which is among the primary concerns for stakeholders because it allows them to recognise the aspects that influence the performance and use those aspects as metrics to evaluate the company’s operations (Buallay et al., 2017; Ronoowah & Seetanah, 2023). Various indicators, including market and accounting parameters, were utilised to assess how corporate governance influences company performance. Among these, common accounting-based assessments like ROE and ROA were frequently used, providing insights into a company’s historical earnings (Karim et al., 2022). In addition, the most popular market metric in scholarship was Tobin’s Q, which evaluates an organisation’s potential value to its existing and future investors (Ciftci et al., 2019; Toumeh et al., 2023).

The transfer of direct control of a company’s operations from owners to management results in the rearrangement of a business’s capital, which is in accordance with the reduction of ownership. These businesses were no longer run by owners; instead, capable executives who are not the owners took charge. This change in oversight served as the foundation for what is now known as an agency theory (Eisenhardt, 1989). This offers the fundamental tenet of the agency theory, which holds that when management is functioning as an agent, they pursue their own objectives that are distinct from those of the shareholders (Naz et al., 2022; Toumeh et al., 2020). In this context, agency theory advocated for the need for supervisory mechanisms. Several researchers (e.g., Chen et al., 2023; Langan et al., 2022; Yassin, 2017) incorporating this theory into their investigations concluded that corporate governance measures such as sub-committees established by the board of directors were impactful means to mitigate agency-related problems by aligning the interests of managers with those of shareholders. Jensen and Meckling (1976) emphasised that by aligning incentives and improving monitoring of managerial conduct, there was a positive correlation with enhanced firm performance. The premise can be drawn that once a company effectively addresses the agency problem and ensures alignment of interests, it is likely to operate more efficiently and proficiently, consequently enhancing its value and performance (Fama & Jensen, 1983).

On the other hand, the signalling theory (Spence, 1973) proposes that the signals emanating from a company’s actions and communications impart crucial insights into its intentions and capabilities. In the context of this study, the primary principle of the signalling theory is that information asymmetry leads external stakeholders to rely on diverse signals when forming assessments regarding the company’s corporate governance mechanisms and procedures (Bae et al., 2018). Therefore, the signalling theory asserts that a company is motivated to reveal positive or enhanced corporate governance efforts and procedures, or the adherence of its corporate governance structures to applicable laws and optimal standards (Subramaniam et al., 2009). This disclosure is driven by the objective of cultivating a positive perception of the company within the market (Pillai & Al-Malkawi, 2018). However, it has been proposed that instituting an RMC will enhance the overall health and robustness of the industry. An effective RMC should aid organisations in improving the quality of financial reporting, reaching their goals and safeguarding their reputations (Abdullah & Said, 2019). Jia and Bradbury (2021) reported that companies with an RMC demonstrated superior performance compared to those without an RMC.

Building upon both agency and signalling theories, the present research concentrates on three aspects of the RMC mandated by the recent Jordanian CGC, and their effects on company performance. These aspects encompass the size, independence and the frequency of meetings.

The Size of an RMC and Company Performance

A larger committee, due to its diverse composition and wider representation of expertise and viewpoints, enriches the decision-making process within a company (Ciftci et al., 2019). With a greater number of members, each possessing unique insights and experiences, the committee is more likely to consider a broader spectrum of factors and potential outcomes when making critical decisions (Arora & Sharma, 2016). This inclusive approach can lead to more comprehensive discussions, thorough evaluations, and ultimately, well-informed and strategic choices for the company (Mertzanis et al., 2019). Accordingly, organisations with a larger committee often experience improved overall performance as a result of this enriched decision-making process, reflecting in their operational efficiency, innovation and adaptability to market dynamics (Albitar et al., 2020).

According to the agency theory, a larger RMC can enhance firm performance by mitigating agency conflicts and reducing information asymmetry between stakeholders and managers. A substantial RMC size is viewed as a proactive measure in ensuring adequate oversight, thus aligning the interests of the managers with those of the shareholders. Moreover, signalling theory posits that a larger RMC can convey a positive signal to external stakeholders and the market. A sizable RMC suggests that the firm is committed to effective risk management and corporate governance practices, potentially attracting investors and enhancing the company’s reputation. Abubakar et al. (2018) asserted that an RMC with a larger size can effectively handle risk-related issues. Also, using a sample of 368 Australian listed companies for the period from 2007 to 2014, Jia and Bradbury (2020) discovered that RMC size had a significant and positive association with firm performance.

Therefore, drawing from this argument, the study posits the following hypothesis:

H₁: A larger risk management committee size is positively related to company performance.

Independent RMC and Company Performance

The presence of an independent committee within a firm is critical to guaranteeing ethical governance and accountability (Dzomira, 2020). Independent committee members, who have no personal or financial ties to the company, play an important role in overseeing executive actions (Koji et al., 2020). Their independence from the organisation enables them to evaluate choices, policies and initiatives objectively. This unbiased viewpoint encourages transparency, objectivity and equitable treatment of all stakeholders (Buallay et al., 2017; Palaniappan, 2017). Furthermore, an independent committee serves as a check and balance mechanism, ensuring that shareholders’ and stakeholders’ interests are effectively represented and protected. Their supervision aids in the prevention of potential conflicts of interest and unethical behaviours, ultimately building a culture of trust and integrity within the organisation. Overall, the existence of an independent committee enhances corporate governance, contributing to the long-term sustainability and success of the organisation (Fama & Jensen, 1983).

Having an independent RMC functions as a tool to align managerial decisions with the best interests of shareholders, in line with the agency theory. The RMC’s independence guarantees that risk management choices are made objectively and without conflict of interest, which helps to mitigate agency difficulties. While signalling theory posits that an autonomously developed RMC signals to both internal and external stakeholders the company’s commitment to robust risk management techniques. This communication conveys a good message about the company’s dedication to ensuring excellent risk management, which may attract investors and strengthen the company’s reputation (Pillai & Al-Malkawi, 2018). Tao and Hutchinson (2013) emphasised the importance of RMC independence in advancing effective risk management procedures, sustaining stakeholder trust and enhancing company performance. Using a dataset comprising 368 publicly traded enterprises in Australia during the period 2007 to 2014, Jia and Bradbury (2021) found that independent RMC was significantly and positively associated with firm performance.

Thus, based on this line of reasoning, the research formulates the following hypothesis:

H₂: A higher level of risk management committee independence is positively related to company performance.

RMC Meeting Frequency and Company Performance

While having a well-structured independent RMC adhering to corporate governance best practices is crucial, its effectiveness heavily relies on the active participation of its members. This emphasises the significance of activity criteria in determining the committee’s functionality and its contribution to its intended role (Subramaniam et al., 2009). In this research, the engagement of the committee in risk management is gauged through the annual frequency of RMC meetings. Committee meetings are a crucial cornerstone in enhancing firm performance. These gatherings provide a dedicated space for collaboration, decision-making and strategic planning (Gulzar et al., 2020). However, addressing risks immediately and effectively can lead to more robust operations, better resource allocation and increased financial stability, all of which contribute to the firm’s overall performance and sustainability (DuHadway et al., 2019).

The agency theory proposes that regular committee meetings serve as a dynamic tool to align executive decisions with the best interests of shareholders. These meetings guarantee that decisions are made impartially and to the benefit of shareholders by providing a venue for regular examination and adjustment of risk management measures, thereby eliminating agency conflicts (Naz et al., 2022). Simultaneously, signalling theory suggests that an increase in the frequency of committee meetings sends a significant signal about the company’s proactive approach to effective risk management practices. Consistent communication with both internal and external stakeholders demonstrates the company’s commitment to stringent risk management (Appuhami, 2018). This forward-thinking strategy can attract investors and boost the firm’s reputation while also encouraging a culture of continual development and innovation, ultimately increasing firm performance (Paul, 2017). In this respect, based on a sample of Chinese and Indian banks, Battaglia et al. (2014) discovered a positive association between the number of RMC meetings and business performance. They concluded that holding meetings more frequently can improve the effectiveness of risk management efforts.

Consequently, using this rationale, the study establishes the following hypothesis:

H₃: A higher number of risk management committee meetings is positively related to company performance.

Research Methodology

Sample Selection and Data

The present research includes service and manufacturing companies listed on Amman Stock Exchange (ASE) during the period 2019 to 2022. Financial firms were eliminated from the analysis since they are subject to distinct rules and regulations than non-financial companies (Abu Afifa et al., 2022; Mansour et al., 2022; Toumeh, 2022). Nevertheless, incorporating the service sector alongside manufacturing in the sample is essential for a comprehensive analysis. This approach allows for a more thorough understanding of how different sectors, with varying operational dynamics and risk profiles, navigate risk management practices. It enables the study to provide insights that can be applied to both service and manufacturing industries. Additionally, as the service sector continues to play an increasingly significant role in modern economies, its inclusion aligns with the evolving landscape of global business, making the study more relevant and insightful.

The chosen study period of 2019–2022 is justified based on the period selection criteria, considering the need to give companies sufficient time to implement the new regulatory requirements, particularly the establishment of RMC as stipulated by the CGC introduced in 2017. Given that the regulation was passed in 2017, it is critical to provide businesses time to adjust to and fully integrate the mandatory changes into their organisational structures and practices. Commencing the investigation in 2019 ensures that organisations have had ample time to establish and operationalise their RMCs in accordance with the regulatory requirements. This extended term provides for a thorough evaluation of the committee’s characteristics, functioning and impact on business performance following its establishment.

Further, the selected entities must meet particular conditions in order to be considered in the course of the investigation. These conditions include the requirement that the company’s financial reports correspond to the study’s timetable and be accessible via the ASE website. Also, organisations must retain their listing and functioning status throughout the period of the examination. During the study period, all companies involved in acquisitions or mergers were eliminated from the analysis. Following these criteria, the research confined the sample to 59 publicly-traded businesses during a 4-year period, resulting in a dataset of 236 firm-year observations for examination. Data on RMC characteristics were collected from the corporate governance disclosures reported in the annual reports of the sampled firms. In addition, the ASE website served as a valuable repository, providing the needed data related the proxies for business performance and control variables that were utilised in the analysis.

Variables Construction

This study aims to investigate how the characteristics of RMC impact different dimensions of company performance. Contrary to earlier research (e.g., Alodat et al., 2022; Ayoush et al., 2021; Christensen et al., 2010; Khamis et al., 2015), utilising a range of three distinct parameters to evaluate “that” firm performance establishes a more robust basis for investigating the relationship between company performance and governance mechanisms (Mertzanis et al., 2019). An example of potential deception stemming from relying solely on a single performance metric can be found in Dalton et al.’s (1999) emphasis on the limitations tied to using accounting performance indicators, given their susceptibility to manipulation. Accordingly, this study utilised ROA indicator to gauge the operational performance, defined as a company’s annual net income divided by its total book value of assets (Saleh et al., 2022), ROE to gauge the financial performance, operationalised as a firm’s annual net income divided by the shareholder’s equity (Buallay et al., 2017). Finally, Tobin’s Q is to gauge the market performance and indicate a company’s competitive advantages, calculated as the market value of the company’s assets to its book value of total assets (Ronoowah & Seetanah, 2023).

The recent CGC stipulated by the JSC stated that

The risk management committee shall consist of at least three members, provided that one of them is an independent member who shall be the chairman of the committee, and it may include members of the senior executive management. Also, the risk management committee shall meet periodically, provided that the number of its meetings shall not be less than two meetings per year. (CGC, 2017)

Therefore, the current study defined the RMC size (RMC_SIZE) as the number of directors serving on the committee. RMC independence (RMC_IND) is measured through a binary variable that has the value of 1 if the committee members uphold independence in accordance with Jordanian CGC, and 0, if otherwise. The frequency of the RMC meetings (RMC_MEET) referred to the number of the committee’s meetings conducted within a year.

Three variables that might influence the relationship between RMC attributes and performance proxies were included as controlling variables. These comprise: debt ratio (DEBT) measured as the total debt ratio of a firm to its total assets (Toumeh et al., 2021); firm age (FAGE) calculated through the natural logarithm of the number of years since its establishment (Koji et al., 2020); and firm size (FSIZE) represented the natural logarithm of the firm’s total assets (Ciftci et al., 2019).

Models Specifications

A Hausman test was conducted to determine the appropriateness of employing either a fixed-effect or random-effect model for the regression (Baltagi, 2008). The test outcome indicated a Chi-squared value of 17.29 at a significance level of 1%, favouring the adoption of the fixed-effect model. Thus, the study formulated three fixed-effect regression models to analyse the nexus among company performance proxies and RMC characteristics, as outlined below:

{R O A}_{i t} = β_{0 i} + β_{1} {R M C_S I Z E}_{i t} + β_{2} {R M C_I N D}_{i t} + β_{3} R M C_M E E T + β_{4} {D E B T}_{i t} + β_{5} {F A G E}_{i t} + β_{6} {F S I Z E}_{i t} + u_{i t}

(1)

{R O E}_{i t} = β_{0 i} + β_{1} {R M C_S I Z E}_{i t} + β_{2} {R M C_I N D}_{i t} + β_{3} R M C_M E E T + β_{4} {D E B T}_{i t} + β_{5} {F A G E}_{i t} + β_{6} {F S I Z E}_{i t} + u_{i t}

(2)

{T o b i n_Q}_{i t} = β_{0 i} + β_{1} {R M C_S I Z E}_{i t} + β_{2} {R M C_I N D}_{i t} + β_{3} R M C_M E E T + β_{4} {D E B T}_{i t} + β_{5} {F A G E}_{i t} + β_{6} {F S I Z E}_{i t} + u_{i t}

(3)

where β0 represents the constant factor, while β1– β6 symbolise the parameters corresponding to the independent and control variables. ROA and ROE stand for the financial performance, $T o b i n_Q$ stands for the market performance and u represents the combined time series and cross-sectional error component. The specifications of the independent and control variables have been previously outlined.

Results and Discussion

Summary Statistics

Table 1 provides an overview of the descriptive statistics for the variables used in this research. The ROA indicator averaged 3.8%, with minimum and maximum values of −22% and 29.4%, respectively. The mean of ROE was 5.5% which indicates that, on average, firms are gaining JD5.5 profit for every JD1 of shareholders’ equity. Further, Table 1 demonstrates that Tobin_Q ranged from 0.2% to 12.6%, with an average value of 1.4%. In terms of RMC features, the average of RMC_SIZE was 3.144 implying that, typically, non-financial firms in Jordan have three boards of directors forming an RMC. The mean value of RMC_IND was 0.741 suggesting that 74% of the sampled companies complied with the requirement of having an independent RMC in line with the Jordanian CGC. The average of RMC_MEET yielded 2.669 meetings with minimum of 0 and maximum of 5 meetings, suggesting that members of the RMC in non-financial listed companies approximately held three meetings per year. Additionally, it’s worth noting that some observations showed no recorded meetings.

Table 1.

Summary Statistics.

Variables	Observations	Mean	SD	Minimum	Maximum
ROA	236	0.038	0.066	−0.220	0.294
ROE	236	0.055	0.099	−0.292	0.424
Tobin_Q	236	0.014	0.018	0.002	0.126
RMC_SIZE	236	3.144	0.693	2	4
RMC_IND	236	0.741	0.438	0	1
RMC_MEET	236	2.669	1.600	0	5
DEBT	236	0.371	0.250	0.001	0.953
FAGE	236	2.282	0.460	1.096	3.258
FSIZE	236	17.650	1.361	14.295	21.010

Source: Author’s analysis using STATA.

Panel Data Assumptions

This research utilises panel data analysis, which offers several benefits when compared to exclusively cross-sectional or time-series data. These benefits include richer and more informative data, increased variability, reduced collinearity, enhanced efficiency and greater degrees of freedom (Baltagi, 2008). In line with panel data analysis, several prerequisites, such as the absence of no multicollinearity, homoscedasticity and no serial correlation, need to be satisfied before conducting regression analysis.

Multicollinearity occurs when the independent variables within a regression model exhibit a high level of correlation with one another. In this regard, Table 2 offers the correlation matrix between the variables used in the study. The pair-wise correlations between all RMC characteristics and the ROA proxy were significant at the 1% level. Nevertheless, examining the pair-wise correlation values revealed relatively small correlations between the independent variables. None of the correlation coefficients among the variables exhibited a significant correlation exceeding 0.80, confirming the absence of multicollinearity issue. Moreover, Table 2 displays tolerance values and variance inflation factor (VIF) for the independent variables, serving as an additional diagnostic examination for multicollinearity. None of the tolerance values were below 0.10, and none of the VIFs exceeded 10, providing further confirmation that multicollinearity was not present in the model (Sekaran & Bougie, 2016).

Table 2.

Pearson Correlation and Multicollinearity Tests.

Variable	ROA	RMC_SIZE	RMC_IND	RMC_MEET	DEBT	FAGE	FSIZE	Variance Inflation Factor	Tolerance Value
ROA	1
RMC_SIZE	0.602***	1						1.86	0.538
RMC_IND \|	0.396***	0.360***	1					1.20	0.830
RMC_MEET	0.555***	0.629***	0.350***	1				1.77	0.564
DEBT	−0.229***	−0.177***	−0.038	−0.038	1			1.05	0.954
FAGE	0.173***	0.184***	0.144**	0.083	−0.092	1		1.06	0.941
FSIZE	0.006	0.068	0.072	−0.071	−0.055	−0.078	1	1.05	0.954

Source: Author’s analysis using STATA.

Note: * significant at the 10% level; **significant at the 5% level; ***significant at the 1% level

The assumption regarding homoscedasticity implies that the variance of the predictor variables around the regression function is consistent (Stockemer, 2018). Table 3 shows the results of modified Wald test for group-wise heteroscedasticity in fixed-effect regression model. The derived p value from this test was below the significance level of 0.05, suggesting that the data exhibit heteroscedasticity. This means that the error variances were not constant, deviating from the assumption of homoscedasticity.

Table 3.

Modified Wald Test for Group-wise Heteroscedasticity.

Chi-squared	2.8
p value	0.000

Source: Author’s analysis using STATA.

Another critical assumption is that the error terms are scattered independently to maintain the statistical validity of inferences. This assumption within panel data analysis requires that the error components must exhibit no correlation and should be distributed independently. Failure to meet this condition introduces a serial correlation issue (Field, 2013). In this respect, the study utilised the Wooldridge test to assess the serial correlation in the data. As observed in Table 4, the null hypothesis indicating the absence of serial correlation was validated, suggesting that the data did not exhibit an autocorrelation problem.

Table 4.

Wooldridge Test for Serial Correlation.

F-value (1, 58)	0.910
p value	0.344

Source: Author’s analysis using STATA.

Regression Findings

The Hausman specification test revealed that the fixed-effect estimation approach was more suitable compared to the random-effect model. Consequently, the present study utilised fixed-effect regression to investigate the relationships among the studied variables. Nevertheless, due to the presence of heteroscedasticity, Huber–White standard errors were applied in this study. This approach was adopted to ensure robustness against heteroscedasticity (Wooldridge, 2010). Table 5 provides the results of fixed-effect models concerning the nexus between RMC characteristics and various proxies representing company performance, namely ROA, ROE and Tobin’s Q. In these models, the R² values were approximately 10%, 19% and 18%, respectively. This signifies that the independent variables satisfactorily accounted for these percentages of variations in the dependent variables.

Table 5.

The Huber–White Standard Errors for Fixed-Effect Models.

Variable	ROA Model		ROE Model		Tobin_Q Model
Variable	Coefficients	t-stat	Coefficients	z-stat	Coefficients	z-stat
RMC_SIZE	0.019	3.17***	−0.005	−0.41	−0.001	−0.04
RMC_IND	0.021	2.90***	0.034	2.54**	0.001	0.06
RMC_MEET	0.007	2.49**	0.010	1.84*	0.004	4.71***
DEBT	−0.015	−0.72	0.006	0.16	−0.007	−1.36
FAGE	0.013	0.96	0.004	0.15	0.004	1.15
FSIZE	−0.039	−2.37**	0.019	0.61	0.002	0.40
Constant	0.620	2.09**	−0.334	−0.60	−0.034	−0.42
F-statistic (p value)	6.78***		1.96*		4.17***
R ²	0.098		0.191		0.177
Observations	236		236		236

Source: Author’s analysis using STATA.

Note: * significant at the 10% level; **significant at the 5% level; ***significant at the 1% level.

As per Table 5, the RMC size was positively and significantly related to ROA indicator at the 0.01 level. This means that a larger RMC size is linked to improved performance, aligning with H₁. However, this relationship was found to be insignificant in the models related to ROE and Tobin’s Q. In addition, the analysis revealed a positive association between RMC independence and both ROA and ROE proxies, significant at the 0.01 and 0.05 levels, respectively. These results indicate that the more independent RMC, the higher company performance, which is consistent with H₂. The frequency of RMC meetings variable demonstrated a positive relationship and each of ROA, ROE and Tobin’s Q models, with significance levels of 0.05, 0.10 and 0.01, respectively. This implies that an increased number of meetings held by the committee members result in enhanced performance, supporting H₃. In terms of control variables, FSIZE had a negative and significant influence on ROA indicator at the 0.05 level, whereas the ROE and Tobin’s Q models revealed insignificant effect. In contrast, the impact of DEBT and FAGE, across all models, was not statistically significant.

The analyses’ findings offer insightful information based on both agency and signalling theories. The positive and significant relationship between RMC features and company performance resonates with agency theory (Eisenhardt, 1989; Jensen & Meckling, 1976). A well-organised RMC serves as a tool for aligning managerial actions with what is best for shareholders because of its effective evaluation and analysis of the risks associated with a company in the competitive business environment (Abdullah & Said, 2019; Battaglia et al., 2014; Jia & Bradbury, 2021). This prompt risk management can lead to improved resource allocation and increased financial stability, consequently improving the firm’s sustainability (DuHadway et al., 2019; Langan et al., 2022). Furthermore, a larger and more independent RMC that regularly holds meetings represents an efficient monitoring tool that minimises agency conflicts and improves business performance (Tao & Hutchinson, 2013).

On the other hand, signalling theory (Spence, 1973) posits that having a well-functioning RMC that is distinguished by its size, independence and proactive meetings sends out a good signal to both internal and external stakeholders (Karim et al., 2022). According to this theory, companies that operate in complex industries or face significant levels of uncertainty are more inclined to establish RMC to signal their dedication to sound governance practices (Subramaniam et al., 2009). This effective functioning of the RMC creates a positive image of the company in the marketplace, demonstrating its commitment to upholding high standards of corporate governance (Sekome & Lemma, 2014). This signal demonstrates the company’s dedication to effective risk management procedures, which inspires confidence and, thus, improves company performance (Bae et al., 2018; Gordon et al., 2009). In conclusion, the observed positive associations are consistent with the theoretical predictions of both agency and signalling theories, emphasising the critical role that an effective RMC plays in supporting firm performance.

Robustness Analyses

To assess the sensitivity of the empirical findings, a variety of robustness tests were performed. Using the random-effect model offers an alternative viewpoint on the relationship between the variables under investigation, acting as a robustness analysis for the fixed-effect model. The fixed-effect model controls for unobserved time-invariant influences while capturing individual differences. The random-effect estimation method assumes that the intercept values are not stable but are instead randomly selected from a much larger population, which provides a more comprehensive understanding of the association (Gujarati & Porter, 2009). Table 6 demonstrates that the outcome of the Huber–White standard errors for random-effects models were found to be broadly consistent with those estimated using the fixed-effect models. RMC characteristics showed a significant positive relationship with performance indicators. Nevertheless, a few exceptions were noted. RMC size that showed insignificant impact on ROE in the fixed-effect model, turns out to be significant at 0.10 level in the random-effect model. Although the magnitude of some variables varied, the direction and significance of their influence remained similar in all models.

Table 6.

The Huber–White Standard Errors for Random-Effects Models.

Variable	ROA Model		ROE Model		Tobin’s Q Model
Variable	Coefficients	z-stat	Coefficients	z-stat	Coefficients	z-stat
RMC_SIZE	0.025	4.63***	0.018	1.77*	0.001	0.33
RMC_IND	0.024	3.44***	0.044	3.55***	0.001	0.23
RMC_MEET	0.010	3.90***	0.012	2.69***	0.003	4.93***
DEBT	−0.029	−1.99**	−0.049	−2.07**	−0.010	−2.24**
FAGE	0.014	1.64*	0.037	2.67***	0.005	1.84*
FSIZE	−0.001	−0.42	0.014	2.58**	0.003	1.91*
Constant	−0.078	−1.13	−0.370	−3.63***	−0.050	−1.98**
R ²	0.457		0.344		0.187
Wald χ2 (p value)	101.03***		68.03***		39.35***
Observations	236		236		236

Source: Author’s analysis using STATA.

Note: * significant at the 10% level; **significant at the 5% level; ***significant at the 1% level.

Further, the population-averaged model was conducted as the second robustness test for the fixed-effect model. This model used a generalised estimating equation, designed to accommodate generalised linear models, and allows to specify the correlation structure within the groups for the panels (Aloisio et al., 2014). As illustrated in Table 7, the findings on performance indicators revealed consistent estimates with the regression outcomes that were presented in the fixed-effect model, except for the RMC size, which emerged as a significant factor in enhancing the company performance proxied by ROE. However, even though specific variables showed different levels of impact, their direction and significance remained mostly similar. Thus, the consistency between outcome of the fixed-effect model and the sensitivity analyses affirms the robustness of the major results.

Table 7.

Population-Averaged Model.

Variable	ROA Model		ROE Model		Tobin’s Q Model
Variable	Coefficients	z-stat	Coefficients	z-stat	Coefficients	z-stat
RMC_SIZE	0.025	4.70***	0.017	1.73*	0.001	0.35
RMC_IND	0.024	3.49***	0.044	3.59***	0.001	0.24
RMC_MEET	0.010	3.97***	0.012	2.73***	0.003	4.99***
DEBT	−0.029	−2.03**	−0.049	−2.07**	−0.010	−2.29**
FAGE	0.014	1.67*	0.037	2.69**	0.005	1.88*
FSIZE	−0.002	−0.43	0.014	2.58**	0.003	1.96*
Constant	−0.079	−1.16	−0.369	−3.62***	−0.050	−2.04**
Wald χ2 (p value)	105.00***		67.70***		40.76***
Observations	236		236		236

Source: Author’s analysis using STATA.

Note: * significant at the 10% level; **significant at the 5% level; ***significant at the 1% level.

Conclusion

The recent mandate to establish RMC is presenting a significant change in the corporate governance practices. There has been no prior research on the impact of RMC features in Jordan. Therefore, this study contributes by analysing the effects of RMC attributes on Tobin’s Q, ROA and ROE as indicators for company performance among service and manufacturing companies listed on ASE for the period of 2019–2022. Panel data analysis was applied, utilising fixed-effect regression with Huber–White standard errors as the principal statistical technique for hypotheses testing. The current study provides conclusive evidence that RMC characteristics were significantly and positively related to company performance. Particularly, characteristics such as RMC size, independence and meeting frequency have shown a significant impact on various performance proxies, confirming the vital role that RMC plays in improving the operational and market performance of publicly traded firms.

These results carry substantial practical implications for different stakeholders. For instance, listed companies should strive to establish and maintain an effective RMC that can be characterised by its size, independence and regular meetings. Optimising these features ensures that risk management strategies are carefully developed and implemented, resulting in enhanced the organisational performance. Additionally, shareholders and investors should consider the characteristics of the RMC in a company when making investment decisions. Establishing a robust and proactive RMC with independence, proper size and regular meetings can improve organisational performance. Such committee can efficiently assess and reduce risks, allocate resources appropriately and improve financial stability, all of which are key components of a company’s overall sustainability and success in a competitive market. For regulators and policymakers, the results of this study revealed a critical challenge in the corporate governance implementations—not every publicly traded company follows the requirements regarding committee size, independence criteria and the meeting frequency for their RMCs. This highlights a crucial area where regulators need to make improvements. Regulators should impose strict penalties for firms that do not meet to the stipulated RMC requirements. These penalties could include fines or restrictions on specific corporate activities until compliance is reached.

Despite the potential contribution of the current research, it is critical to recognise certain limitations. The study was based on a specific sample size and focused mainly on non-financial firms in Jordan. Future researchers may consider other sectors and contexts, providing a more comprehensive knowledge of the association between RMC qualities and firm performance. Moreover, this study did not investigate all areas of corporate governance, such as the characteristics of audit committee and nomination and remuneration committee leaving potential for future research to examine these factors and their influence on company performance. Exploring these aspects in future studies would be beneficial, as it could shed light on their potential impact on firm performance, adding depth to the comprehending of corporate governance structure. In addition, corporate governance dynamics encompass a complex interplay of several components. Thus, further investigation into the intricate interactions of various governance mechanisms is encouraged.

Footnotes

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author received no financial support for the research, authorship and/or publication of this article.

ORCID iD

Ahmad A. Toumeh

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