Corporate Governance and Its Impact on Risk Management

Rabia Kanwal Department of Management Sciences Islamia University Bahawalpur, Pakistan E-mail: rabiakanwal9@hotmail.com

Abstract:
The aim of the research is to explore Corporate Governance and its impact on Risk Management. Corporate governance is the system, by which the organization is directed and controlled at its most superior levels and need of corporate governance arises for legal protection of stakeholder and improve the level of economic and financial development. Risk management involve rapidly changing in technology, developments in the global business environment. The research is a complex one, integrating both quantitative and qualitative information. The qualitative study used in this paper we use an empirical and theoretical study and methodology is taxonomy while the qualitative one includes variables reflecting the agency and monitoring costs which govern the relationship between management and shareholders. The relationship between corporate governance and risk management involves a significant relationship and explore future research directions. The research demonstrates which firms adopt the corporate governance low involvement of management risk correlates with high performance. The topic of risk management and corporate governance principles are strongly interrelated. An organization implements strategies in order to reach their goals. Each strategy has related risks that must be managed in order to meet these goals. Corporate governance is independent variable and risk management is dependent variable. Corporate governance prevented from worst aspects of crisis and controls the management risk. Corporate governance valid for those organizations which have a major societal impact and its a valid tool to measure the management risk and give protection to stakeholders. Management create a culture which flourish the organization and minimize the risk. Shareholders use the voting right because their decisions influence the corporate governance. Corporate governance encourage board of directors more clearly risk audit functions and they company being accountable for stakeholders and others stockholders. Risk management process will continue strengthen its role within the strategic planning process. Organizations disclosed all information about risk which is helpful for investment decisions. Five organisational elements culture, leadership, alignment, system and structure. These assessment tools provide direction to minimize the management risk and organizational and technological opportunities improve risk management process and easily risk assessment. This research paper provides important contribution in our knowledge and strong foundation provide to explore this topic in future. In this research paper we find out how corporate governance effects on risk management. We explore management use various ways to reduce the management risk with efficient use of corporate governance. Its an exciting time for further governance research.

Key words: Corporate Governance, Risk Management, Five Dimensional Control,

Principles of Corporate Governance, Wealth of Nations, Financial Institutions, Firm Performance,

Problem Identification:
Corporate governance is not only the cause of current financial crisis. Corporate governance could prevent the risk. If corporate governance effectively operated throughout the period of time during which the problem were developing and before they crystallised. Corporate governance takes a more pro-active stance in overseeing the risk management framework. Four dimensions people, strategy, task, and detail which control the management risk and explore which firms adopt the corporate governance low involvement of management risk correlates with high performance.

Independent VAR

Dependent VAR

Corporate Governance

Risk Management

Corporate Governance = f (Risk Management) Corporate Governance manage the firm Risk Risk management firm experience the strong Corporate governing authorities

Introduction:
Corporate governance is the system, by which the organization is directed and controlled at its most superior levels, in order to achieve its objectives and assemble the necessary standards of accountability and openness. Risk management involve a systematic approach to the identification and assessment of risk which could hinder the achievement of strategic objectives. The topic of risk management and corporate governance principles are strongly interrelated. An organization implements strategies in order to attain their goals. Each strategy has related risks that must be managed in order to meet these goals. Countries maters so much of corporate governance because it influences the cost of firm because the investor expects the firm to be well governed after the funds have been raised. Corporate governance as the system of rules, laws and factors that controls operations at a company. Corporate governance mechanisms falls into two groups: internal and external. If firms appreciating the value of institutional corporate governance practices than risk can be managed. Risk management is not only important for individual organization it also provides the link between organization and environment which they operate. Risk management

organizations are being organized, legalized, and made audited. The current research explore risk management consider the social, institutional, and organizational context somewhat just focusing on procedural aspects of risk management. Our paper aims to provide an inclusive indication of promising influences that key players of corporate governance Board of Directors, Executive Management and shareholders reduce the firm risk. The board access and manage the risk management culture, risk management maturity and it stresses the overall importance of ethics to the management of risk.

Independent variable:
Corporate governance is an independent variable.

Dependent variable:
Risk management is a dependent variable. Its depends on corporate governance.

Motivational variables:
Following are the motivational variables: Decision Process of Shareholders, BOD, Stakeholders and Management Organization Structure and Policies Internal and External Financing Internal and External Monitoring Efficient Allocation of Resources Internal Auditing Efficient Incentive Plans Transparency Principles of Corporate Governance Financial Institutions Foreign Business Environment Purchase Derivatives to Hedge the Risk

Literature Review:
Corporate governance exits when the corporations operate all around the world. Corporate governance is an intrinsic feature of organization which separated ownership and control. Its research area is considered 30 years ago. The separation idea of ownership and control was revisited by berle and means (1932) it their paper The Modern Corporation and Private Property. Corporate governance includes a set of relationship management members, shareholders, stakeholders and company board of directors. Corporate governance is important to find out which conditions the company will attract external financing and how

effectively allocation of resources in organization and how distribute profit among members. Risk management is a part of decision making process within a companies in traceable to the late 1940 and early 1950. Risk management follow a top down approach which determines the policies and organizational structure through senior management. Corporate governance plays a major role in firm performance. If the corporate governance exists in a firm no doubt its lead to better operating performance but risk factor is directly engaged. Firms are more risky and generate high returns when firms adopted corporate governance. Corporate governance associated with two strands of literature internal monitoring and external monitoring. It is uneasy to distinguish internal and external monitoring between incentive and effort. Literature proved negative relationship between corporate governance and firm values which result is risk. Recent research explores corporate governance and its impact on risk management. Corporate governance set of institutional mechanism which induces the controller to maximize the residual cash flows of firm behalf of owner. One thing common to most papers written on corporate governance is the fact that they point out that this fundamental insight dates back at least as far as 1776. Adam smith write in Wealth of Nations Being the managers of other peoples money [rather than their own] it cannot be expected that they should watch over it with the same concerned vigilance. Risk Management is a systematic approach a total risk that a company faces. Risk management practice two important risk, insurance risk and financial risk. Companies identify the solution against the risk if they purchase the insurance and purchase of derivatives to hedge financial risk. We reduce the management risk through efficient allocation of resources, internal auditing, proper monitoring and efficient incentive plans. Management face the takeover threats, pressure from unions and competition on the product market. Enron Case 2001explore a new topic Gender Diversity their result is lack of heterogeneity in composition of board. This topic also explore the female directors perform better, positive influence on the quality and performance result is higher as compared to man directors. Corporate activities and responsive increase the company financial reporting accountability and strategic decision transparency. When the role of directors fulfilled, fulfil all tasks efficiently, transparency achieved, managers motivated and productive then we reduce the management risk and implement a corporate governance program properly implemented. Our key donation to the literature is an inclusive and econometrically justifiable analysis of the relation between corporate governance and performance. We take into account the endogenous nature of the relation between governance and performance. Also, with the help of a simultaneous equations framework we take into account the relations among corporate governance, performance, capital structure, and ownership structure. Efforts to get better corporate governance should focal point on stock ownership of board members since it is absolutely related to equally future operating performance, and to the prospect of corrective organization turnover in poorly performing firms. When we affectively manage the management risk to avoid strategic risk. We identify the five elements which engage in Corporate Governance and manage the risk: Leadership, Culture, Alignment, System, and Structure. These elements positively reinforce others and strengthen risk management. Organizational culture shaped by leadership practices. System support organizational structure and shaped its culture. Alignment ensures each element is harmonized. These

elements are best tool to access the strategic risk. We explore how each interconnected elements relates to strategic risk and corporate governance. We suppose that a firm can get better governance, but at a cost. The cost of firm includes the out of- pocket costs of acquiring better governance mechanisms as well as the cost in management time. In order to achieve effective protection of assets, risk evaluation needs to take place across the organization. This, in turn, means that risk management needs to be implemented across the whole organization. Management of risk is a set of principles which is essential for the development of good risk management practices. Traditionally, financial institutions, insurance companies used risk management techniques to hedge financial exposures. Risk managers rarely discussed or access the company overall risk profile. If we describe corporate governance as the method a company behaves on the way to its owners, changes in a companys corporate governance performance contact first and foremost the owners, i.e. shareholders. The company owner majority shareholders (outsiders) and manger owners (insiders) to restructure their firms to maximize their value. Even owners concerned in the long-term performance of their enterprises did not essentially try hard to improve corporate governance. Under the socialist vital planning system, enterprises externalized business functions to government ministries and other organizations. Therefore, owners had to put right the enterprises lack of capital and capacities. It has been claimed that financial institutions in post-socialist countries play no pertinent role in corporate governance issues, as they are underdeveloped and they badly regulated. Improvements in corporate governance may also effect from cultural knowledge. In the postsocialist cases, where the home economies were initially obvious by the presence of corporate governance regulations, the main basis of learning was activity on foreign markets considered by higher corporate governance principles. When a company wants to come in a foreign market, it must struggle to settle in to the foreign business environment, potentially including the acceptance of foreign corporate governance principles. In other words, the more significant foreign markets happen to the company, i.e. the more the company becomes internationalized; the likelier it is to at least partly suppose foreign corporate governance practices. In this review collection of research on corporate governance which effect on risk management. The aim of the review done is to check the effectiveness of corporate governance and check the mechanism in running and managing the business operations. Effective corporate governance reduces the ownership and control problems and reduces the management risk. Risk management will prolong to reinforce its role within the strategic planning process. Since it has become part of the corporate governance plan, and because boards of directors and senior managers are now more immediately accountable for the risks that the company takes, it will likely receive sufficient financial resources for it to develop fully. Risk management also provides a logical framework within which the insurance and financial risks that the firm faces can be evaluated and managed. The corporate governance structure specifies the distribution of rights and responsibilities between different participants in the corporation, such as the Board, managers, shareholders and other stakeholders, and spells out the rules and procedure for build decisions on corporate associations. Corporate governance provides means how to attain the objectives and monitoring performance and reduce the management risk.

Network Diagram:
Corporate Governance and its impact on Risk Management

Independent variable
c

Dependent variable Risk Management

Corporate Governance
c

Motivational variable

Methodology:

Principles of Corporate Governance, Internal & External Financing, Efficient Allocation of Resources, Internal Auditing, Transparency, Financial Institutions, Foreign Business enviornment

Methodology is a procedure which we solve a particular research dilemma. In this paper we investigate the correlation between corporate governance and its impact on risk management. The data is collected from previous research paper and is study is used in paper is Empirical/theoretical but we used a taxonomy study. Paper evaluates corporate governance through governance codes and Regression analysis.

Research Hypothesis:
Hypothesis 1. A higher level of corporate governance provisions is not associated with company value and decrease the firm risk. Hypothesis 2. A higher level of corporate governance provisions is not associated with reward for the management.

Table No 1
Taxonomy of study
Sr.No Types of Research Name of (empirical/conceptual) Author Relationship Indicator Sign CG used in Study Risk Management Indicator used in Study OLS Regression CGQ Risk metrics ROA

Empirical study

Conceptual study

Craig Doidge, G. Andrew Karolyi (2007) Gerhard Schnyder (2012)

Benjamin Balsmeier, Andreas Bermig Alexander Dilger(2013)

Positive (+)

CLSA S&P Six variable index OLS Regression

Neutral

Empirical study Theoretical study

Positive (+)

Theoretical study Empirical study Empirical study

Empirical study Observational study Empirical study

Chen-Wen Positive (+) Chen Victor W. Liu(2013) David H. Negative (-) Erkens Mingyi Hung Pedro Matos(2012) Editioral Positive (+)

OLS Regression OLS Regression

Regression analysis Descriptive Statistics

Theoretical study

Collins G. Ntim Positive (+) Sarah Lindop , Dennis A. Thomas (2013) Ana-Maria Positive (+) Ghirana, Vasile Paul Bresfelean (2012)

Contingency Theoretical Model Regression Analysis COSO COBIT ISO ITL Five Dimensional Control Model CAPM

Derivatives

Univariate Bivariate Analysis Derivatives

Descriptive study
Richard Anderson

Positive (+)

10

Empirical study

Abdullah Alam Syed Zulfiqar Ali Shah

Positive (+)

Five Dimensional Control Model Beta Analysis

Table No 2
The relationship sign between CG and Risk Management
Sr No 1 2 Paper Craig Doidge, G. Andrew Karolyi (2007) Gerhard Schnyder (2012) Result Positive (+) Neutral Variable Shares, Dividends Six variable index Sample and Method 495 firms 25 countries Firms performance 1980 to 2012 240 companies Financial firms World bank data 2005 to 2011 4766 Financial firms 169 non financial firms 2002 to 2012 Enron, SOA 106 Pakistani firms (2005 to 2010)

4 5 6 7 8 9

Benjamin Balsmeier, Positive (+) Andreas Bermig Alexander Dilger(2013) Chen-Wen Chen Victor W. Positive (+) Liu(2013) David H. Erkens Mingyi Negative (-) Hung Pedro Matos(2012) Collins G. Ntim Sarah Positive (+)
Lindop , Dennis A. Thomas (2013) Ana-Maria Ghirana, Vasile Paul Bresfelean (2012)

OLS Regression OLS Regression OLS Regression Regression analysis Codes Five Dimension Control Model CAPM Beta

Positive (+) Positive (+) Positive (+)

Richard Anderson
Abdullah Alam Syed Zulfiqar Ali Shah

Result and Discussion:

In this research paper we use a taxonomy study which describe in table 1 which shows the relationship between corporate governance and risk management. The table 1 shows a relationship signs between CG and Risk management. The positive relationship exists in much research papers and methodologies are CAPM, Beta analysis, Regression analysis, OLS model and Five Dimensional control Model are used. Table 2 shows a relationship between variables and sample. Research paper used financial and non financial firms data which increase the firm performance through corporate governance and minimize the risk. In Pakistan SECP and KSE are corporate authorities and minimize the firm risk.

Conclusion:
In this paper we focus on several aspects of corporate governance and we judge the multiple governance mechanisms and how they interrelate will become more important as a governance research evolves. The governance research falls into three groups: performance as a function of governance, governance as a function of governance and the impact of governance on performance. We record the most significant risk that could negotiation the achievement of the goals set out in our strategic plan. Risk management is the elementary element of a decision making process, both within the governance bodies and the management of the business as a whole. Risk and compliance office, executive management committees, audit committee and group internal audit unit are regulatory bodies which identify the risk, establish the control procedures, and management mechanisms that ensure and decreased risk. Corporate governance practices at both the firm and country level can concern the firm value. Higher risk due to the lack of widespread investor security and law enforcement can be remunerated by good corporate governance practices. We describe the dimensional control approach which developing or accessing the risk by looking the five dimension strategy, people, detail, tasks and drivers. Management of risk provides organization with the suitable level of guidance to facilitate them to adopt the best corporate governance practices. Corporate governance is difficult in MNEs because increase in an international expansion, global competition and globalization provide with additional challenges and opportunities for corporate governance. In this paper we use a taxonomy study which shows a relationship between corporate governance and its impact on risk management. Our paper provides an important contribution to our knowledge of corporate governance and provides a strong groundwork on which future research can construct.

Bibliography:
1. STUART L. GILLAN * (2006) Recent Developments in Corporate Governance: An Overview. Journal of Corporate Finance, 12, 22. 2. (2009) Risk management, corporate governance and management Accounting: Emerging interdependencies. Management Accounting Research, 20, 4.

3. (2013) Risk and risk management in management accounting and control. Management Accounting Research, 24, 6.

4. ALAM*, A. & SHAH, S. Z. A. (2013) Corporate Governance and its Impact on Firm Risk. Corporate Governance and its Impact on Firm Risk, Vol. 2(2), 23. 5. ALEXANDRINA, C. (2011) Do corporate governance actors features affect banks value? Evidence from Romania. Procedia Social and Behavioural Sciences, 24, 11. 6. ANA-MARIA GHIRANA, V. P. B. (2012) Compliance Requirements for Dealing with Risks and Governance. Procedia Economics and Finance, 3, 5. 7. ASSOCIATES, R. A. RISK MANAGEMENT & CORPORATE GOVERNANCE. 8. BENJAMIN BALSMEIERA, B., , ANDREAS BERMIGC 1, ALEXANDER DILGERB, (2013) corporate governance and employee power in the boardroom: An applied game theoretic analysis. Journal of Economic Behaviour & Organization, 91, 24.

9. BHIMANI, A. (2006) Special issue of Management Accounting Research: Risk management corporate governance and management accounting. Management Accounting Research, 17, 2. 10. CHEN-WEN CHEN , V. W. L. (2013) Corporate governance under asymmetric information: Theory and evidence. Economic Modelling, 33, 12. 11. CHRISTOPHER J. ROBERTSON A, ABDULHAMID A. DIYAB B, ALI ALKAHTANI C (2013) A cross-national analysis of perceptions of corporate governance principles. International Business Review 22,11

12. COLLINS G. NTIM A, SARAH LINDOP B, DENNIS A. THOMAS B (2008) corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre- and post-2007/2008 global financial crisis periods. International Review of Financial Analysis, 21.

13. CRAIG DOIDGEA, G. A. K., RENE M. STULZ (2007) Why do countries matter so much for corporate governance? Journal of Financial Economics, 39.

14. DAN R. DALTON *, C. M. D. & KELLEY (2006) Spotlight on corporate governance. Business Horizons 49, 5.

15. DAVID H. ERKENS A, M. H. A., PEDRO MATOS B (2012) Corporate governance in the 20072008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18, 23.

16. DENIS*, G. E. D. K. (2001) Twenty-five years of corporate governance research . . . and counting. Review of Financial Economics, 10, 22.

17. GONGMENG CHEN A, M. F. B., *, DANIEL N. GAO A, C, OLIVER M. RUI (2005) Ownership structure, corporate governance, and fraud: Evidence from China. Journal of Corporate Finance, 12, 25. 18. GOVERNANCE, R. M. C. (2011) Barriers to Effective Risk Management. Global Economic Crisis, 40, 44. 19. WASAKI, I. (2013) Global financial crisis, corporate governance, and firm survival: The Russian experience. Journal of Comparative Economics, 34 20. KEVIN C.W. CHEN A, Z. C. B., K.C. JOHN WEI (2009) Legal protection of investors, corporate governance, and the cost of equity capital. Journal of Corporate Finance, 15, 17. 21. LAWRENCE D. BROWN A, MARCUS L. CAYLOR (2006) Corporate governance and firm valuation q. Journal of Accounting and Public Policy, 25, 26. 22. LUO, Y. (2005) corporate governance and accountability in multinational enterprises: Concepts and agenda. Journal of International Management, 11, 18. 23. LUO*, Y. (2005) How does globalization affect corporate governance and accountability? A perspective from MNEs. How does globalization affect corporate governance and accountability? A perspective from MNEs, 11, 23.

24. NGOC BICH TAO, M. H. (2013) corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, 9, 17. 25. R.M. HANIFFA A, T. E. C. B., * (2005) The impact of culture and governance on corporate social reporting. Journal of Accounting and Public Policy, 24, 40.

26. RAFAEL LA PORTA!, F. L.-D.-S. & ANDREI SHLEIFER!, ROBERT VISHNY (Received 16 June 1999; received in revised form 11 October 1999 Investor protection and corporate governance. Journal of Financial Economics 1 to 25. 27. RENNEBOOG, M. G. L. (2008) Contractual corporate governance. Journal of Corporate Finance, 14, 17. 28. REZAEE, Z. CORPORATE GOVERNANCE ROLE IN FINANCIAL REPORTING. Research in Accounting Regulation, 17, 43 29. ROBERT M. BUSHMANA, ABBIE J. SMITHB (2001) financial accounting information and corporate governance$. Journal of Accounting and Economics.

30. SANJAI BHAGAT A, BRIAN BOLTON B (2008) Corporate governance and firm performance. Journal of Corporate Finance, 14, 17. 31. SIRI ANDERSEN A, BODIL AAMNES MOSTUE (2011) Risk analysis and risk management approaches applied to the petroleum industry and their applicability to IO concepts. Andersen, B.A. Mostue / Safety Science, 50, 10.

32. STEPHEN A. DREW A, PATRICIA C. KELLEY B, TERRY KENDRICK (2006) CLASS: Five elements of corporate governance to manage strategic risk. Business Horizons (2006), 49, 12. 33. STUART L. GILLAN A, JOHN D. MARTIN (2007) corporate governance post-Enron: Effective reforms, or closing the stable door? Journal of Corporate Finance, 13, 30. 34. VINCENT AEBI A, G. S. B., MARKUS SCHMID (2011) Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36, 14. 35. WEI-KANG WANG A, WEN-MIN LU B, YI-LING LIN C (2012) Does corporate governance play an important role in BHC performance? Evidence from the U.S. Economic Modelling, 29, 10.