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Corporate Governance and Risk Management in Financial Institutions

Part of the book series: Contributions to Management Science ((MANAGEMENT SC.))

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Abstract

This section reviews the relevant literature on corporate governance, risk management, and compliance as well as on financial institutions/banking and the latest financial crisis.The main body of literature relates to “household” questions of corporate governance, such as composition, structure and independence of boards, remuneration of top managers, information disclosure, auditing, shareholder involvement and ownership structure. Another related issue at stake is the increasing complexity of the financial system and the growing sophistication of its participants who act either as providers, users or intermediaries of corporate financing. The increasing significance of corporate governance topics over the past decades thus not only broadened the spectrum of areas covered, but also started to expand the spotlight from the United States to other markets, including important, consolidated economies such as the UK and Germany, as well as emerging markets like Russia, India, China and Brazil—the so-called BRIC countries.

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Notes

  1. 1.

    For alternative definitions, cfr. below in this and further sections.

  2. 2.

    O’Neill was head of global economic research at the time of that article’s publication and has meanwhile retired as chairman of Goldman Sachs Asset Management.

  3. 3.

    For a detailed analysis of dynamics in economic science, cfr. Pereira, Renato (Org.), A Dinâmica nas Ciências Económicas e Empresariais—Contributos para uma Visão Abrangente, Lisbon, 2010.

  4. 4.

    Cfr. Adam Smith (1776), David Ricardo (1817).

  5. 5.

    For a more detailed list on authors adopting a functional approach, please refer to Bodie and Merton (1995:4), footnotes 1–3.

  6. 6.

    The expression of “Verantwortungsethik” was introduced by Max Weber in his 1919 speech “Politik als Beruf” in differentiation to the expression “Gesinnungsethik” (ethics of conviction or dispositional ethics), following Max Scheler’s differentiation between “Gesinnungsethik” and “Erfolgsethik” (ethics of success).

  7. 7.

    The system of “checks and balances” was first used by the U.S. Constitutional Convention in Philadelphia which met between May and September of 1787. The model of government chosen relied upon a series of checks and balances by dividing federal authority between the Legislative, the Judicial, and the Executive branches of government. (U.S. Department of State, Office of the Historian, https://history.state.gov/milestones/1784-1800/convention-and-ratification)

  8. 8.

    According to Aguilera et al. (2011:391 ff.), Millar et al. (2005), “classify three different systems: (a) the Anglo-Saxon (i.e., market-based system), (b) the Communitarian system, which includes Continental European countries (i.e., stakeholder-based system), and (c) the Emerging Market system that comprises the East European countries, Asian countries such as China, Malaysia, Thailand, Indonesia, the Philippines, and some of the Latin American countries such as Mexico, Chile, and Brazil.”

  9. 9.

    Viviers et al. (2008:23) claimed that responsible investing, understood as the act of “considering environmental, social and corporate governance issues in making investment decisions, is more consistent with a deontological construct than a utilitarian one”. (Klonoski 2012).

  10. 10.

    Die DIN ISO 26000 – Leitfaden zur gesellschaftlichen Verantwortung von Organisationen” – Ein Überblick, in: http://www.bmas.de/SharedDocs/Downloads/DE/PDF-Publikationen/a395-csr-din-26000.pdf?__blob=publicationFile

  11. 11.

    http://www.arbeitgeber.de/www/arbeitgeber.nsf/res/Stn-spitzenverb-iso26000.pdf/$file/Stn-spitzen verb-iso26000.pdf

  12. 12.

    Plamper (2010:129f.) distinguishes between confidence and trust, which according to him can both be necessary for a working relationship under those terms. Confidence is described as experience from earlier interaction with the other party while trust is a forward-looking “act of faith” in someone who is as yet not known to the partner.

  13. 13.

    Chernenko et al. (2012) show that if equity is overvalued, mispricing offsets agency costs.

  14. 14.

    E.g. Carl Icahn, Bill Ackman, David Einhorn, Nelson Peltz, to name but a few.

  15. 15.

    The study asked over 114,000 people in 107 countries for their views on corruption. – http://www.wingia.com/en/news/global_corruption_barometer_2013_report/61/

  16. 16.

    http://www.gallup.com/poll/165476/government-corruption-viewed-pervasive-worldwide.aspx

  17. 17.

    On corruption, cfr. 2.1.18 above.

  18. 18.

    On institutional investors and corporate governance in Latin America, see Blume et al. (2007).

  19. 19.

    http://dealbook.nytimes.com/2014/09/14/fallen-brazilian-mogul-accused-of-insider-trading/?_php=true&_type=blogs&_r=0

  20. 20.

    For indicators, please refer to section 2.1.20.1 above.

  21. 21.

    Ruchir Sharma is the head of emerging markets and global macro at Morgan Stanley Investment Management. (http://www.morganstanley.com/views/perspectives/thought-leadership-07072012.html)

  22. 22.

    Regarding portfolio performance, see Blume (1968).

  23. 23.

    “Der Vorstand hat geeignete Maßnahmen zu treffen, insbesondere ein Überwachungssystem einzurichten, damit den Fortbestand der Gesellschaft gefährdende Entwicklungen früh erkannt werden.” – “The management board has to take adequate measures, particularly to establish a surveillance system, so that developments which might put the continuation of the company at risk be recognized at an early stage.” (Section 91 II AktG)

  24. 24.

    Reputational risk can be defined as “the range of possible gains and losses in reputational capital for a given firm” or as “a stakeholder’s overall evaluation of a company over time”, being this evaluation “made up from the stakeholder’s experience of the visible behavior of the company, as well as the images based on the company’s communication and in addition its symbolism in comparison with its major competitors” (Jacob 2012:263, quoting Fombrun et al. 2000 and Gyomlay and Moser 2005).

  25. 25.

    For a good overview on KPIs in German, cfr. http://www.controllingportal.de/Fachinfo/Kennzahlen/Key-Performance-Indicators-KPI.html

  26. 26.

    For details on hedging, please refer to Froot et al. (1993:1629 ff.).

  27. 27.

    Please refer to Sect. 2.2.7 for more detail.

  28. 28.

    Brühwiler (2009e) describes the function of a risk manager in quite some detail and based on ONR 49001/49003, highlighting that this is not an officially recognized profession and comparing the risk manager with his inter-disciplinary and multi-task activity, a specific toolset, and the necessity to communicate and analyze across an organization’s functions and areas to a “Superman”. An important part is his cooperation with risk owners by whom he has to be respected and accepted despite of not necessarily mastering their business. The risk manager should also be well integrated into the organization and its decision processes and therefore needs not be as independent as, for instance, an auditor. However, the effective application of the “four-eyes-principle” should be ensured. Another important trait is the direct link (reporting line) to the top management via an “appointee” or directly to the Chief Risk Officer/Head of Corporate Risk Management (or, in absence of such a position, often the Chief Financial Officer).

  29. 29.

    For an overview on risks in the finance area, cfr. Keitsch, Risikomanagement (2007).

  30. 30.

    Golub and Crum (2010:38) identify policy risk as a major contributor to market volatility and see it as a primary source of risk in many markets.

  31. 31.

    On risk management in small and medium sized enterprises (SME), cfr. Brühwiler (2009d).

  32. 32.

    http://www.kpmg.com/br/pt/estudos_analises/artigosepublicacoes/paginas /release_pesquisa_gerenciamento_de_risco.aspx

  33. 33.

    Risk factors differ by work area, geography, and over time. An extensive list of risk factors regarding mergers and acquisitions was presented by Nwogugu (2005:23 ff.).

  34. 34.

    http://www.garp.org/media/991488/theroleofriskgovernanceineffectiveriskmanagement_tunji_adesida_071312.pdf

  35. 35.

    “An option to enter into an interest rate swap where a specified fixed rate is exchanged for floating.” (Hull, 2010:529)

  36. 36.

    “Banks that were driven by investment banking were much more problematic in terms of contagion and counterparty risk regardless of their balance sheet size.” (Blundell-Wignall et al. 2009:22)

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    Robert C. Gericke

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Gericke, R.C. (2018). Literature Review. In: Corporate Governance and Risk Management in Financial Institutions. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-319-67311-0_2

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