The Importance of Corporate Governance on Bank Risk Management - Assignment Example

?Examine the Importance of Corporate Governance on Bank Risk Management Table of Contents Table of Contents 2 Introduction 3 Importance of Corporate Governance on Bank Risk Management 5 Conclusion 8 References 9 Introduction Corporate governance refers to a set of regulations, philosophies and norms with the help of which a company is operated. In other words, it is a set of relations among the management of the company, shareholders, board members and other stakeholders in order to prevent the cumulative interest in an efficient way. Moreover, it also involves various procedures in reconciling the conflicts among different members of an organisation in order to enhance the performance and profitability in the long run (Colley, 2003). It is also a process to maintain proper supervision over the functions of the employees, thereby controlling the flow of information inside the hierarchy. Thus, corporate governance is mainly utilised by various organisations in order to endorse corporate equality, transparency and responsibility among the members, which helps to enhance their motivation and morale, thereby improving the efficiency of an organisation. Moreover, it also ensures that proper management information is transmitted among the employees in order to maintain uniformity and justice in the organisation. This would be beneficial both for the organisation and the employees. Thus, with the help of corporate governance, proper control mechanisms can be ensured in order to maintain the business operations in a systematic and effective way. Hence, it can be depicted that the framework of corporate governance is also utilised for retaining an appropriate balance among the members of an organisation (International Finance Corporation, 2010). Corporate governance signifies governing an association in an ethical mode, thereby ensuring loyalty and commitment among the employees and stakeholders, which would augment the integrity and the reliability of the particular brand in the market. Moreover, it also offers a positive impact on the stock prices of the organisations, thereby influencing the corporate image as well (Klein, 1999). Thus, it also facilitates in amplifying the level of confidence of international institutional investors which is not only noteworthy for an organisation but also for the economy of a country. It can be observed that the penetration of corporate governance increased by a considerable extent in this recent era in order to condense the corporate scandals occurring in global markets (The Economist Intelligence Unit Limited, 2002). The paper mainly describes the importance and the benefits of corporate governance in organisations. Along with this, it also highlights the significant impact of corporate governance in managing the risks associated with banks. Importance of Corporate Governance on Bank Risk Management Corporate governance is the system by which business conglomerates are directed and managed in order to attain business objectives. Moreover, in modern times, corporate governance is implemented in most of the organisations as a strategic policy in order to handle the threats in a challenging way. The prime objective behind this approach is to eradicate financial and other risks. Corporate governance is unswervingly related with risk management of any financial organisation, thereby acting as an umbrella to protect its perspectives (Colley, 2003). Risk management in financial institutions is most common as compared to other sectors. This is due to the fact that it mainly deals with fiscal instruments, thereby controlling both market and credit risks in a tactful way. It is so because financial risk can lead to economic downturn along with recession in the whole economy (The Economist Intelligence Unit Limited, 2002). Hence, corporate governance is extremely important in banks as it would enhance public faith and confidence, which is very essential for their efficient running. Thus, poor corporate governance in banks may lead to operations failure, which might cause considerable loss of public expenditures, thereby reducing the image of the banks in the market (Colley & et al., 2005). Due to this, it would lead to liquidity crisis, thus hindering the interests of its shareholders and depositors, which might prove detrimental for a bank. Apart from this, corporate governance also helps in drafting the rules and the guidelines of a particular bank, which remains the same in spite of alterations in the structure of the higher authorities. This is the other significant benefit of corporate governance over the financial institutions, which eliminates the risks. Furthermore, corporate governance also offers high concentration in bank risk management process. It is the process which helps the management of a bank to recognise, investigate and evaluate the problems in order to avert financial turmoil (Merna & Al-Thani, 2011). Moreover, after identification of the issue, corporate governance also provides necessary guidelines to resolve it. Corporate governance also facilitates the members of the risk management in preparing various norms and policies to cope up with financial disorders in an organised way, without hampering corporate image. In addition, corporate governance also helps the members of risk management to handle various other risks, namely technological and operational risk, insolvency risk and foreign exchange risks among others. In order to tackle the situation, specific training sessions are organised for the members in order to enhance their skills and potencies, thereby avoiding technological risks. Insolvency risks occur when a financial organisation fails in fulfilling the objectives of its lenders, which might also lead to legal proceedings. In such situation, corporate governance endeavours to reduce the expenses of the bank and to maintain a proper lending procedure in order to resolve the consequences of insolvencies (Zinkin, 2011). Apart from these, corporate governance also helps to reduce foreign exchange risks, which mainly occurs due to alterations in currency exchange rates in diverse countries. It highly hampers the satisfaction level of the customers, thereby encumbering the processes of financial institutions. Thus, it also offers high impact on the position and the reputation of the banks in global scenario (Tandelilin et al., 2007). Hence, it can be said that proper corporate governance helps in mitigating risks, thereby offering proper financial standards and rules. Corporate governance also encourages proper adoption of Sarbanes-Oxley Act (SOX) in the financial institutions in order to maintain the free-flow of their operations. Also known as ‘public accounting reform’, it helps to prevent individual expenses. It was introduced by the government of the United States in order to decline corporate financial penalties. The SOX Act also improves corporate responsibilities which augment the welfare of both employees and stakeholders (Laeven & Levine, 2008). It also amplifies internal control which adversely assures better accuracy in maintenance of financial reports and disclosures, which is highly beneficial for any bank. As a result, it assists in securing the fiscal assets in an appropriate way, thereby diminishing the chances of financial risks. The implementation of the SOX Act also offers specific guiding principles for auditing companies in order to resist accounting deceits (Laeven & Levine, 2007). Thus, the SOX Act helps in enhancing the confidence of general public over the financial institutions, thereby improving their acceptability among others. As a result, it reduces the prospects of diversification of general public to other financial lenders in the market (Tien Loi, 2004). Hence, it also improves the economic condition of a country, which helps in enhancing the living standards and income earnings of the citizens as well. Therefore, the SOX Act is highly advantageous for risk management board members of a financial institution as it helps to maintain the stability and the consistency of the banks in the market. It would also facilitate the banks in enhancing their productivity and competencies of the employees, thereby attracting increased number of customers. Moreover, it would also augment customer retention and organisational sustainability in the long run (Tsorhe et al., n.d.). The SOX Act also diminishes capital associated risks of the financial institutions enhancing the requirements of assets, which, in turn, increases the interests of shareholders and stakeholders. Hence, the SOX Act is one of the significant factors, which helps in proper management of risks. For this reason, corporate governance is also accepted and adopted by Basel Committee members for enhancing bank supervision (Basel Committee on Banking Supervision, 2010). Thus, from the above discussion, it can be evidently revealed that corporate governance plays a considerable role upon bank risk management. Conclusion Corporate governance plays a pivotal part in reducing risks of financial institutions. Corporate governance is the set of rules which helps in enhancing the performance of an organisation, thereby maintaining its business dealings in an apt way. Moreover, corporate governance also helps in implementation of SOX Act laws within the organisation in order to decline the frauds associated with white-collar professionals. Along with this, it also motivates the management of any financial organisation to offer various types of training programs in order to improve the knowledge bases and technical skills of the employees. This would help to improve the identity and the uniqueness of the organisations among other leading players of the market. This can be possible only by reducing industry risks and threats, thereby augmenting the opportunities. Moreover, corporate governance also facilitates in enhancing the sustainability and the dependency of the organisations leading to economic growth and steadiness. Hence, according to the above mentioned particulars, corporate governance highly influences the functions of the risk management of a financial organisation such as banks. References Basel Committee on Banking Supervision. (2010). Principles for enhancing corporate governance. Bank Corporate Governance. [Online] Available from: http://www.bis.org/publ/bcbs168.pdf [Accessed: March 27, 2012]. Colley, J. L. (2003). Corporate Governance. McGraw-Hill Professional. Colley, J. L. et al. (2005). What Is Corporate Governance? Tata McGraw-Hill Education. International Finance Corporation. (2010). Corporate governance. Corporate Governance Code. [Online] Available from: http://www.ifc.org/ifcext/corporategovernance.nsf/AttachmentsByTitle/CGTerms/$FILE/CGTerms.pdf. [Accessed: March 27, 2012]. Klein, G. P. (1999). Entrepreneurship and corporate governance. The Quarterly Journal of Austrian Economics. 2 (2). Laeven, L. & Levine, R. (2007). Corporate governance, regulation, and bank risk taking. Bank Risk. [Online] Available from: http://www.ecb.int/events/pdf/conferences/ecbcfs_conf9/bank_stability_4_14.pdf. [Accessed: March 27, 2012]. Laeven, L. & Levine, R. (2008). Bank governance, regulation, and risk taking. Bank Stability. [Online] Available from: http://www.econ.brown.edu/fac/Ross_Levine/Publication/Forthcoming/bank_stability_RFS.pdf. [Accessed: March 27, 2012]. Merna, T. & Al-Thani, F. F. (2011). Corporate Risk Management. John Wiley and Sons. The Economist Intelligence Unit Limited. (2002). Corporate governance: the new strategic imperative. The Blunt Instrument of Regulation. [Online] Available from: http://www.kantakji.com/fiqh/Files/Companies/l152.pdf. [Accessed: March 27, 2012]. Tandelilin, E. et al. (2007). Corporate governance, risk management, and bank performance: does type of ownership matter? Final Report of an EADN Individual Research Grant Project. [Online] Available from: http://www.eadn.org/eduardus.pdf. [Accessed: March 27, 2012]. Tsorhe, J. S. et al. (n.d.). Corporate governance and bank risk management In Ghana. Banks and Financial Risk. [Online] Available from: http://www.csae.ox.ac.uk/conferences/2011-EDiA/papers/651-Aboagye.pdf. [Accessed: March 27, 2012]. Tien Loi, H. (2004). Insolvency systems and risk management in Asia. Trends and Developments in Insolvency Systems and Risk Management - The Experience of Vietnam. [Online] Available from: http://www.oecd.org/dataoecd/2/7/33930098.pdf. [Accessed: March 27, 2012]. Zinkin, J. (2011). Challenges in Implementing Corporate Governance: Whose Business Is It Anyway? John Wiley & Sons. Read More