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Should Your Company Consider Creating A Finance Committee?

Sudipta Basu and Eunju Ivy Lee (current PhD student) analyzed over 20,000 firms to research the differences between firms with and without finance committees. They find that firms with more complex financial contracts are more likely to have a finance committee. Furthermore, firms tend to create a finance committee when their audit committees are overburdened.

The results also indicate that on average finance committees have a marginal positive impact on financial performance. However, they had a larger positive impact for a subset of firms with small audit committees and fully independent finance committees.

Basu and Lee conclude that finance committees are no panacea for success, but they can be beneficial in the right context. Firms should consider the dynamics between their mandatory board committees (audit, compensation and governance) when deciding whether they would like to add another.