Value of ERM: Board Risk Oversight Associated with Lower Taxes

Using annual proxy disclosures regarding the level of board involvement in risk oversight, faculty from NC State University (Mark Beasley, Nathan Goldman, and Christina Lewellen) and Northern Arizona University (Michelle McAllister) observe that companies where the board is most engaged in important risk-oversight activities pay lower taxes, on average, and face a lower risk of regulatory scrutiny or reputational damage, as evidenced by less-aggressive shifting of income abroad and 31.0% less-volatile income taxes relative to similar companies with lower levels of risk oversight. These observations provide some support that engaged boards set a tone and provide leadership that can maximize positive outcomes, such as lower tax payments, while minimizing potential negative outcomes, such as higher tax risks. The underlying research is summarized by the authors in a recent Harvard Business Review article “Make Tax Planning a Part of Your Company’s Risk Management Strategy ” (HBR, November 13, 2020). They outline three things boards might consider to improve their overall enterprise-wide risk oversight.

1. Take responsibility for risk oversight. That is, boards should acknowledge that they “own” the overall responsibility for ensuring the organization’s enterprise-wide risk management oversight is effective.
2. Engage in risk-monitoring activities on a regular and systematic basis. Ongoing engagement in holistic, enterprise-wide risk monitoring activities can help boards make risk-informed strategic decisions, including decisions to take more risks in some cases.
3. Foster an appropriate mindset. Boards cannot overlook the important role they play in setting the right attitude and culture that supports effective risk oversight across the entire organization.

You can also hear a podcast interview of one of the co-authors, Nathan Goldman, who describes the underlying research in more depth.  

Listen to podcast.

You can view the article in Harvard Business Review here. 

Note if you have trouble accessing the article, visit www.hbr.org and search for the article “Make Tax Planning a Part of Your Company’s Risk Management Strategy” published on November 13, 2020.

Note: The underlying academic research study is forthcoming in the Journal of Management Accounting Research.