In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law in response to the meltdown of ’08.
Many people involved in creating that legislation looked at how companies were controlled.
“Corporate governance was under the microscope at financial institutions,” Hines said. “People wondered if one of the main reasons something went wrong was related to the way boards were functioning.”
As part of Dodd-Frank, publicly traded banks that met a list of criteria, including holding $10 billion or more in assets, were required to create a board-level “risk committee” that included independent directors.
In business terms, “risk” is any threat to profits and assets. Assets may range from cash to consumer data, intellectual property to land or equipment. For banks, assets primarily consist of loans.
Threats to assets vary, but include financial downturns, security breaches, lawsuits, accidents, natural disasters and human error.
Risk committees try to help companies identify, analyze and change any factors that could harm profitability and assets.
Hines’ research focus since 2012 has been to examine the short-term outcomes of adopting these committees.
“In my PhD dissertation, I looked at financial institutions that voluntarily formed a risk committee at their board level.”
He wanted to see if profitability and risk measures were better or worse about a year or two after the company formed the committee.
Since Dodd-Frank was so new, Hines’ work broke fresh ground.
He has looked at several issues surrounding risk committees, including how having a committee affects auditors’ perceptions.
He and co-authors have published in peer-reviewed journals including the Journal of Accounting and Public Policy as well as Auditing: A Journal of Practice & Theory.
Dr. Adi Masli, a University of Kansas assistant professor who met Hines in the PhD program at the University of Arkansas, was a co-author on one paper.
“He provides great insights, and is knowledgeable about this field of research,” Masli said. “We hope to work together again on future projects.”
So far, Hines said, “there really isn’t a whole lot of strong evidence that forming the risk committees affected banks’ risk or profitability in the short-term. However, there is evidence that risk committees, and the specific way they are structured, do affect auditor perceptions in the short-term. I think more research needs to be done to say anything about the long-term.”
However, “not all risk committees are created equal.”
The people who sit on the board (i.e., whether they have a large stake in the company or are more independent, and whether they have risk expertise), the questions the board asks, the ways the board reports findings and more could make a committee more or less effective.
Some industry experts, he said, contend that risk oversight should really be the responsibility of a company’s full board, even if the company has a specific risk committee.
“Researchers had not focused on risk committees in the past, so there wasn’t a lot of background for me to incorporate.” — Dr. Christopher Hines
Dodd-Frank is likely to be re-examined in Washington, D.C., since new U.S. President Donald Trump has said he would like to dismantle it.
Hines holds a College of Business Endowed Research Professorship, so it’s probable he will be doing more analysis of this topic. It’s possible that his current and future work could be used by lawmakers who hope to learn about best practices as they craft public policy.
His new research will be conducted from his alma mater: He is a 1994 and 2001 Missouri State alumnus, and has worked here since 2013.
“There’s a very collegial atmosphere and supportive environment in the College of Business. Missouri State is a great place to enjoy all aspects of being a professor.”