Importance of Corporate Governance
Corporate governance has had a great importance on the bank risk management for many years. It refers to the structures, the processes and the information used to direct and oversee the management of an institution (Colley, 2005). Corporate governance calls for accountability on all the stakeholders involved and clearly spells out the powers division mechanisms. Risk management that in its littlest effort averts impacts of the same, is clearly and vividly represented in the way that the banks need corporate governance in their role as well as in the funding they receive.
Ideally, it is taken that shareholders interest are safeguarded and are the guiding principles of the managers as is part of corporate governance. In that case, the assurance that that will happen is given to the shareholders of the company. Shleifer Vishny (1997) defines this to be a method where the finance suppliers have control over the managers so as to ensure that their capital is not expropriated so that they have some earnings in the form of return on investments. The contractual form of the banks necessitates that the corporate governance include the depositors as well as the shareholders (Young, 2005).
Corporate governance and Banking
Protection of the cash deposited is a virtue well known in the banking sector. Governments further sweeten the package by holding onto some of that deposit that is made by the banks as noted from the International Financial Symposium (2001), so that the economic agents are encouraged to create a saving culture that has a peg on the investment capability of the country. This means even if the government explicitly provides deposit insurance, the managers of the banks would maybe still have an incentive to increase their risk-taking opportunistically of which it will bear the government’s expense.
The corporate governance has ensured that there is accountability, there is monitoring and that there is control of the management of the firm as far as the use of resources and risk-taking is concerned according to Yocam and Choi (2008). In curing the long time that is taken in government redemption of deposits, this will avert situations where the persons do not incur loses of the time value of money or an investment opportunity. Arguably the situation points to internal corporate governance rather than external ones.
Corporate governance will reduce operational risk. This is defined as the exposure of the company or the business to potential losses, which may result from the shortcomings or the failures in the operational execution which may have resulted from the internal failures which are the people, the structures or even the failing systems (Konishi and Yukihiro, 2004). Effective corporate governance will ensure that these do not come to happen. Arguably, this is achievable by analyzing the cause of the risks and inadvertently mitigating the causes of the risks and putting up the control measures even for future occurrences.
O’Hara and Macey (2001), stipulates that the dealing of corporate governance should be the duty of specific departments such that it is their role and responsibility to ensure that operational risk management is minimized at all times as is required in corporate governance. There is politics and procedures which act as a pillar in risk management so as to provide consistency as well as discipline in an organization. This has also the role of defining the duties and allocating the different roles and responsibilities in managing the risks.
In its term of service, corporate governance ensures that policies are formulated and set forth in a way that the procedures which include risk management cultures are introduced within the controlled parameters in the banking sphere (UNECA, 2002). Management supervision in and accountability enforcement raises the confidence that shareholders or the depositors and confidence or the stakeholder as the source.
There will be adequate assessment of the banking activities whether they involve the balance sheet or they are off the balance sheet. This will help the bank to control its investment activities and to know what to hedge against and what not to invest in (Murphy and Kevin, 1985). It is in this that the banks have to control the investment activities to a level which is manageable so as not to end up inflating the economy with too much money chasing too few goods.
Corporate governance ensures that the key control activities like the segregation of duties and approvals, reconciliations, verifications and the reviews of the operating performance are not left out but are included from the beginning (Basel Committee on Banking Supervision, 2003). This ensures that the risks that would have occurred are mitigated and those that occur, there are curative measures to deal with them. It is imperative that we understand that the bank does not face corporate governance blindly but in calculated steps which dilute those impacts.
With corporation in the banking sector, the structures work efficiently as there is adequate communication of information in the different levels of management. This communication ensures the flow of activities and events as there are no or little delays (Monks and Minow, 2011). Personnel and structures are have been put in place so that the negative causes that are identifiable have been known in accordance with their role and the information that they have to a particular task. Current status in economic terms is by default an area of interest for the bank especially in the communication part (Levin, 2003).
Monitoring activities effectively play a role in the governance of the banking sector. Standards set for doing work are kept in check using these activities which may be inclusive of audit program here and there. Also this has something to do its documenting its financial affairs as per the required standards and requirements (King Committee and Commission on Corporate Governance, 2002). Particularly, it is important that the reliability of the information is such that the shareholder can make sound decisions by citing the audits and other documentation presented as noted by key professionals.
MIS (Management Information Systems) have a central role in risk management such that risk reporting in the company is made easier and at time even to the external individuals of interest to the company (Basel Committee on Banking Supervision, 2004). Apparently, the foundation laid by this in corporate governance is its assistance inaccurate and effective decision making. This will reducing the risk that has been there in most of the countries where for example, elections have not been smooth with many people even in other countries being disenfranchised, it is a pointer that shows there has been poor risk management and poor corporate governance (Colley, 2003).
Corporate governance has acceptable links to risk management especially in the banking sector as we have exhumed in the article, as a conclusion. In addition to this, it has been seen that if institutions like banks can give assurance of complying with the mentioned requirements of corporate governance by making them their pillars in operation, then there can be great investment activities as the investors would greatly be attracted (Finance Sector Charter Council, 2002). It is important to bring the financial sectors up to the standards of international financial architecture which would help improve the decision making of which a good environment for saving and investing would be created (Shleifer and Vishny, 1997). There is better mobilization and allocation of capital in good governance as well as improved performance, not only for banks but also for any other institutions which would embrace it (OECD, 2004).