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The Role of Risk Management in Corporate Governance

Author

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  • Andrew Ellul

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405; Centre for Economic Policy Research, London EC1V 3PZ, United Kingdom; Center for Studies of Economics and Finance Department of Economics and Statistics, University of Naples, 80126 Naples, Italy; and European Corporate Governance Institute, 1000 Brussels, Belgium)

Abstract

Failures of banks' governance and risk management functions have been identified as key causes of the 2007–2008 financial crisis. This article reviews the empirical literature that investigates the relationship between governance structures and risk management functions as well as their impact on banks' risk taking and performance. I first discuss risk management's responsibilities and relevance for a value-maximizing bank. The business nature of financial institutions and their funding structure, together with explicit and implicit government guarantees, set them apart from nonfinancial firms. I argue that conventional governance structures alone may be unable to restrain risk taking in banks and thus the presence of a strong and independent risk management function becomes necessary to monitor and control enterprise-wide risk exposures. Recent evidence shows that a strong risk management function, compatible with the appropriate business model and culture, can restrain tail risk exposures at financial institutions and promote long-term value maximization.

Suggested Citation

  • Andrew Ellul, 2015. "The Role of Risk Management in Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 279-299, December.
    • Handle: RePEc:anr:refeco:v:7:y:2015:p:279-299
    DOI: 10.1146/annurev-financial-111414-125820
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    Citations

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    Cited by:

    1. Walter Gontarek & Ruth Bender, 2019. "Examining risk governance practices in global financial institutions: the adoption of risk appetite statements," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 74-85, March.
    2. Ritika Gupta & Jacqueline Symss, 2023. "Does Corporate Governance Impact Risk Disclosure? An Empirical Analysis in the Indian Context," Indian Journal of Corporate Governance, , vol. 16(1), pages 9-27, June.
    3. Walter Gontarek & Yacine Belghitar, 2021. "CEO chairman controversy: evidence from the post financial crisis period," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 675-713, February.
    4. Olusola David Fajembola & Nora Azureen Abdul Rahman & Rohani Md-Rus, 2018. "Audit Committee and Banking System Stability: A Conceptual Framework," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 8(6), pages 463-474, June.
    5. Choi, Wonseok & Chung, Chune Young & Wang, Kainan, 2022. "Firm-level political risk and corporate investment," Finance Research Letters, Elsevier, vol. 46(PA).
    6. Maya Finger & Mosi Rosenboim, 2022. "Going ESG: The Economic Value of Adopting an ESG Policy," Sustainability, MDPI, vol. 14(21), pages 1-15, October.
    7. Pankaj Kumar Gupta & Prabhat Mittal, 2020. "Corporate Governance and Risk Bundling: Evidence from Indian Companies," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 6(1), pages 37-52.
    8. Monika Wieczorek-Kosmala & Thomas Henschel, 2022. "The Role of ERM and Corporate Governance in Managing COVID-19 Impacts: SMEs Perspective," JRFM, MDPI, vol. 15(12), pages 1-28, December.
    9. Song, Fenghua & Thakor, Anjan V., 2019. "Bank culture," Journal of Financial Intermediation, Elsevier, vol. 39(C), pages 59-79.
    10. Haar, Lawrence & Gregoriou, Andros, 2021. "Risk management and market conditions," International Review of Financial Analysis, Elsevier, vol. 78(C).
    11. Balasubramanyan, Lakshmi & Daniel, Naveen D. & Haubrich, Joseph G & Naveen, Lalitha, 2024. "Impact of risk oversight functions on bank risk: Evidence from the Dodd-Frank Act," Journal of Banking & Finance, Elsevier, vol. 158(C).

    More about this item

    Keywords

    banking; board expertise; corporate governance; executive compensation; ownership structure; risk management; risk taking;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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