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4 THE ROLE OF RISK MANAGEMENT IN THE LIGHT OF THE THEORY OF THE

CORPORATE GOVERNANCE..........................................................................................................6 Chapter One: Introduction.....................................................................6

Introduction:..................................................................................................6 1.2. Background:.............................................................................................6 1.3. Aims & Objectives:.............................................................................7 1.3.1. Research Aim:.......................................................................................7 Research Objectives:......................................................................................8 Research Questions:.......................................................................................8 . Primary Literature Review:.....................................................................10 1.7. Research Approach:...........................................................................12

Ethical Consideration:.................................................................................12 2.1. Introduction of Chapter Two:........................................................13

Tan Booth & Jenny Tan: Corporate Governance & Risk Management Services, access 05/08/2012 Available at 1. http://www.rsmethos.com/Services-Corporate-Governance-and-Risk-ManagementServices.htm........................................................................................................................................14 Factors of Corporate Governance June 1990 http://www.ehow.com/about_7535199_factorscorporate-governance.html.................................................................................................................15 Management study Guide, Corporate Governance - Definition, Scope and Benefits,2008. Available at : http://www.managementstudyguide.com/corporate-governance.htm .......................22 What is an Integrated Report? Integrated reporting . Its the way of the future by Saica 2011 access 08/08/2012 available at http://www.sustainabilitysa.org/About.aspx....................................23 Sandy Mavrommati; Corporate Governance Challenges Affecting Financial Stability..................28

Corporate

Governance

Challenges

Affecting

Financial

Stability

2006,http://www.chasecambria.com/site/journal/article.php?id=186 access 28July 2012...............33

Robert Adamson, Corporate Governance & Risk Management Blog, July 6, 2009. Access 08/08/2012 available at http://business.sfu.ca/corporate-governance-blog/2009/07/corporategovernance-in-asia/.......................................................................................49 .................................................................................................................50 3.1. Introduction...............................................................................50

Research background:.................................................................................50 4.1. Introduction:......................................................................................59

Acknowledgement I would like to express my sincere thanks to Carlo Petrucci & Dr personal boundaries through your mentoring.
Jingchen Zhao.

Your support

during this work was helping me to focus and to finish this project. I think I was able to overcome

I am glad to say that I learned so much and was able to develop myself. I would like to express my thanks to my wife who helped me and supported me with this work, my friends and my family, who always stood behind me.

ABSTRACT

World has become a global village with the communication so quick and easy and technology has revolutionized everything including trade methods, rule and laws associated with it. Corporate has been affected by these highly advanced and rapid changing trends in ways business are conducted. After reviewing the literature on the corporate governance and Risk management, we have viewed in detail the role of risk management in corporate governance in organizations and how it helps to mitigate risk which business face in their routine activities. Study has achieved number of objectives such as to explore the literature about risk and risk management strategies, to find out the changes adopted by the Corporate Governance, to find out the different strategies adopted by different countries, to find out the risk management practices in U.S.A and U.K, its positive role in corporate governance, to judge the improvements in risk management in management and to develop the detailed recommendations for improvements. This study has been conducted through analyzing the data. Secondary data has been used to conduct this research. Study has concluded that risk management is an important element of

Corporate Governance and the most important is the use of one most suitable risk management strategy that can reduce the risk factors in the Organizations.

THE ROLE OF RISK MANAGEMENT IN THE LIGHT OF THE THEORY OF THE CORPORATE GOVERNANCE. Chapter One: Introduction Introduction:
In the recent years people have seen so many corporate scandals and heard about the credit crunch. These scandals are credit crunches have shaken the worlds economy, people are forced to close their business and millions got redundant from their jobs. All that happened in the last decade has made us think about the role of Risk Management in the theory of Corporate Governance. The first chapter consists of content which gives the introduction of the whole study. It presents the purpose and underlying principles of the study. It gives a stakeholder view with the help of previous literature available on the topic and the importance of the study is discussed in it. The moral values of research and the structure, design of research is also present in this chapter.

1.2. Background:
In the corporate sector the term Corporate Governance is as old as the corporate sector itself and it has been defined by the several authors as the rules, regulations by which companies can be restricted and regulated. Corporate Governance can also be defined as lawful and executive outline, and with the help of these laws and regulations Corporations are operated and controlled 1. This is a new term for a relatively old concept and it helps to improve the working standards of the companies ensuring that its being carried out according to the given standards and criterias. The
1

Principles of Contemporary Corporate Governance: Jean Jacques du, Hargovan and Bagaric ( Cambridge University Press,2006)222

whole phenomena of Corporate Governance does not operate in a vacuum but makes sure that all the basic rules and regulation necessary to be used in the human interactions must be met and along with the needs of the Corporate Industry and stakeholders. As in the Corporate Sector the conditions, needs and demands change with the passing time so do the rules and regulations need to be changed and it keeps on updating the whole process and in result of all this Corporate Governance is a set of rules and regulations and a frame work which targets to improve the working of the Corporate Sector.2As in the evolving era of Corporate Sector it has become necessary to forecast risks and plan for them in advance and make strategies accordingly. Risk Management is a vital part of business planning; it includes predicting, foreseeing the risks of future and planning for them in advance to have a more secure position of the company. Risk management has become an important aspect of Corporate Governance because Managers have to take decisions which are less risky making organizations and businesses less vulnerable from risks and making businesses more safe and profitable. In the corporate Sector as the competition is increasing the factor of risk is also increasing for that purpose it has become important to have decision which might help to reduce risks and to keep a company at a profitable place to help it grow. Risk management and Corporate Governance have a strong relationship and it has vital impact on the strategies made to follow and accomplish business standings. 3In this study the main focus is to study the role of Risk Management and Corporate Governance and to see the impact of it on the Corporate Sector.

1.3. Aims & Objectives:

1.3.1. Research Aim:


The aim of the study is to examine the role of risk management in the light of theory of corporate governance. As in corporate sector it has been observed that 70% of the organizational decisions

Manual of Corporate Governance 2002 http://www.secp.gov.pk/IACCD/pub_iaccd/manualCG.pdf access 19/07/12 3 Risk Management homepage at: file:///F:/risk%20management/What%20is%20Risk %20Management.htm

are late4, unclear and ineffective so it has become important risk management must be inculcated in the Corporate Governance to have reduce their failure rate and have competitive advantage. This research aims the role of Risk management in Corporate Governance by looking at the aspects in depths which are mostly overlooked by the people while making frame work of Corporate Governance.

Research Objectives:
To gain the objectives of the study certain important points related to the study are highlighted. These vital points will help to focus on the areas of study which needs most attention and the questions which need to be answered through it. To explore the literature about risk management strategies and its use in corporate governance. To find out the techniques and strategies adopted by the risk management. To find out the risk management practice difference between organization practicing and those who are not practicing it.

To judge the improvements in Corporate Governance framework due to Risk management. To formulate the suggestions for the problems identified.

Research Questions:
The purpose of the research is to explore for the answers of the areas undefined and need to have more focus and this is done by formulating research, the research questions of this study are explained below:
4

What are the consequences of these scandals on the banks? What is Risk Management and how does it work? What is good governance?

Late decisions are decisions which are not made in a proper time span and one loses the opportunity and chance which might have been very beneficial for the business or organization. In this era of competition and global business activities it has become important for managers and businesses to predict the risks before hand and think and act swiftly when faced by one.

Why the risk management is essential part of the good governance? Will the good Risk Manage helps to generate the finance for the businesses? Does Risk management help to make better decisions in corporate governance? Is there any significant change in terms of quality of Corporate Governance with inculcation of Risk Management? How risk management practices helps to protect the image of the Organizations? How EU & USA utilizing risk management? How Risk Management works in third world countries?

1.4

. Research Significance

The main aim of this study is to find out how risk management practices are becoming an integral part of Corporate Governance, how it helps to reduce risks in business and has a positive effect on the returns in business. It gives a overview of all the changes that occurred in the corporate sector in the past. This study will prove useful for all the shareholders and people who move around in the business market:

Researcher is the one who will gain a lot and will be enriched with the knowledge of corporate governance, and the effectiveness of Risk Management in corporate sector. It will give him insight about the use of different approaches of risk management used in organization. It will help to create understanding about the topic and will prove beneficial in terms of inculcating business skills into him.

The next advantage of this research will be enjoyed by the managers as they would be able to better judge their business risks through the strategies of risk management explained in the study. They will formulate their business strategies according to the suggestions and recommendations given in this study.

Academic circle will be the next main stakeholder of this study as the results and research material will add in the existing information on both the topics and will give way to have further research on the related topics.

. Primary Literature Review:

Risk can be defined as a possibility of hazard or other unfavorable and unpleasant result, or it can be also something causing a risk. In every step of life we came across some risk.5Risks can be beneficial because without taking a risk you cannot move forward. But there must be limit in taking a risk that is called Risk Management. The element of the risk cannot be removed but you have to learn how to use it effectively. Risk Management can be described as way of life, course, framework which guides towards looking at the chances ahead and availing them by dealing consequences related to them effectively. The real important part of Risk Management is to make decisions today while predicting and evaluating future risks. There are multiple advantages of Risk management such as good decisions, less blow, more effective planning and better relationship with the stakeholders6. In Corporate sector there is no one single definition of corporate governance it can be conceived as set of rules of regulation terms among stakeholders, management and all the factors involved in business setting. These terms change with the course of time and differ from situation to situation and are the ones by which companies organization are
5

Arora, advantages of Risk Management, available at http://www.scribd.com/doc/54431522/32/Risk-Management-Advantages-and-Disadvantages 6 Risk Management, John 2011acess http://www.dnv.com/focus/risk_management 20/7/12

controlled and regulated. It has been observed that an organization works in its own sphere and limits of its stakeholders and Corporate Governance and Risk management together aims at better performance by keeping in mind the interests of all stakeholders and working within the legal limits allowed as well. As Corporate Governance aims at making an equilibrium between the aims of a person and of community. The structure of corporate governance helps to protect the rights of the individual and society as well7.With the help of Risk management we can make the working of corporate governance much better and improved.

1.6. Research Onion: Figure no1

Sec UNDP Corporate Governance http://www.secp.gov.pk/IACCD/pub_iaccd/ProjectReport.pdf

July

2003

access

Source: Research onion by Saunders et al. (2007)8

1.7.

Research Approach:

Saunders et al. (2007) says that there are basically two ways of doing a research about any topic; this method can be inductive or deductive. Deductive method is that of research which goes from top to down and where analysis is done through study of theory and existing data available whereas the inductive method is down to top way of doing a research. In this case observations are collected through various methods and then theories are formulated in light of them. 9 The objective of the following study is to analyze the existing data available on the role of risk management in Corporate Governance and the approach used here is Deductive approach. Different models and approaches are observed to comprehend the observed fact.

Ethical Consideration:
Research study will be carried out following the guideline given by the university and will stick to the ethical values throughout the process so to maintain the consistency of the study. References will be given in footnotes and plagiarism will be avoided. The secondary data will be analyzed with the help of literature already available and figures
1.8.

Dissertation Structure:

Dissertation consists of four chapters. In first introduction of the study is provided and it gives an overview of the whole research. Aims and objectives of the research will be in discussion with the

Research Methods for Business Students Saunders.M, Lewis.P, Thornhill,A et al. ( ,4th ed. , Pearson Education Limited, Harlow,2007)132
9

Research Methods for Business Students Saunders.M, Lewis.P, Thornhill,A et al. ( ,4th ed. , Pearson Education Limited, Harlow,2007)132

reference to significance of the study paired with its methodology. Recommendations will be given in the fourth chapter.

Chapter No 2 Literature Review

2.1.

Introduction of Chapter Two:

The study is about the role of risk management in light of corporate governance and this chapter gives an overview of the previous researches done by different scholars on the topic. This chapter discusses Corporate Governance, and different types of Governance. There is discussion regarding factors and types of Corporate Governance. There is also information given on the nature of risks in Corporate Governance and importance of risk management for Corporate Governance. There is also discussion related to how Risk Management can play an effective role in Corporate Governance its role in third world countries and how EU and USA is utilizing it usefully.

2.2. What Is Corporate Governance?


Corporate Governance is about the procedures structures through which the operations of the Company and business are regulated. It is related to all the Organization who believe tin enhancement of their shareholder values. Good Corporate Governance consists of ventures

performance and their transparency as well10. Corporate Governance is the structure of system through transparency, honesty and answerability is managed by the directors of the board. 11 Corporate Governance is a bond that ensures answerable business actions, which makes it possible to have good working environment, corporate responsibility and good relations in business environment, high financial gains etc. This has become more obvious in todays world of global business community and comes up with positive results and rise in economic gains.12 If we describe the word Corporate Governance separately the word governs means to manage the action and behaviors of people. In organization this term is widely used it helps to control the activities of the people, their projects and other day to day scheduled activities. In short we can say that these are set of rules, policies and instructions which help to keep a track and examine the performance of the activities.13 The word Corporate Governance is a phenomenon which deals with the matters which arise when we separate ownership and control. In order to solve Agency problems between shareholders, stakeholders, supervisory boards the role of institutional investors is emphasized. We have seen that recently that code of Corporate Governance have been published by Companies, Organizations, Interests groups, Agencies. All these activities must be properly joined together with the interests of owners and managers.14

2.3.

Factors of Corparate Goveranace

10

Tan Booth & Jenny Tan: Corporate Governance & Risk Management Services, access 05/08/2012 Available at 1. http://www.rsmethos.com/Services-Corporate-Governance-and-Risk-ManagementServices.htm

11

Business dictionary access 08/10/2012 available at http://www.businessdictionary.com/definition/corporate-governance.html#ixzz23CRVJtFZ

12

Corporate Governance The Foundation for Corporate Citizenship and Sustainable Businesses

http://www.unglobalcompact.org/docs/issues_doc/Corporate_Governance/Corporate_Governance_IFC_UNGC.pdf009 access 25/07/12 13

John Fisher: Corporate Governance and management of risk ,2010 p.no3 , available at http://www.best-managementpractice.com/gempdf/Corporate_Governance_and_Management_of_Risk.pdf 14 Alexander N. Kostyuk , Udo C. Braendle, Rodolfo Apreda, Corporate Governance, Virtus Interpress Kirova Str. 146/1, 20 Sumy, 40021, Ukraine, (2007).

The factors of Corporate Governance are its board of directors, shareholders, management etc and how these elements work for the betterment of the Organization. The formation is for the purpose of the overall betterment of the company, satisfaction of shareholders and keeping a track on the cash flows. The whole motive behind this is to have good reputation of company as investors always go for the company with a good reputation and sound financial standing and for this purpose it is important to have all the factors of Corporate Governance working well.15

2.4.

Types of Corporate Governance

All over the world there are varieties of models of Corporate Governance. This depends on the funding a company receives and secondly on the legislations provided by the environment. Corporate Governance helps the different companies to operate in same manner. Worldwide different approaches have been established by the Governments to protect the companies and Organizational assets their repute and financial stability. If we analyze it is seen that organization have come up with many approaches worldwide to save their assets, building their capacity and the name of their organization.16

The main types of Governance are:

2.4.1. ANGLO-AMERICAN: In this type of Corporate Governance rules are set by


the owners of the company, as stakeholders are the owners of the company or organization so all the accountability, aims and objectives are set according to their

15

Factors of Corporate Governance June 1990 http://www.ehow.com/about_7535199_factors-corporate-governance.html access 28/07/2012 16 John Fisher: Corporate Governance and management of risk ,2010 p.no3 , available at http://www.best-managementpractice.com/gempdf/Corporate_Governance_and_Management_of_Risk.pdf

agendas. There are many players involve in the Anglo-American Model such as Directors, Managers, shareholders etc. 17

Figure No 2. ANGLO-AMREICAN Model

Source: EWMI/PFS Program / Lectures on Corporate Governance - Three Models of Corporate Governance December2005.doc 1418

2.4.2. JAPANESE: Japanese Model has a feature of increased level of possession with
the linked banks and corporations. Banking system present in it is like having strong relationships with corporation for a longer period of time with a policy (legal, social, industrial) designed to support keirtsu.19 This industrial composition is constituted
17

Three Models of Corporate Governance from Developed Capital Markets: EWMI/PFS Program / Lectures on Corporate Governance - Three Models of Corporate Governance December2005.doc 1 at http://www.emergingmarketsesg.net/esg/wpcontent/uploads/2011/01/Three-Models-of-Corporate-Governance-January-2009.pdf access 28/07/2012 18 A model showing the Corporate Governance Cycle which forms in the Anglo American Model explaining the relationship, interests ,interactions of management ,shareholders and board of Directors. Anglo-American Model is used to govern corporation in US, U.K ,Australia, Canada, New Zealand and several other countries. 19 This is a term used to define a situation which especially exists in Japanese financial and industrial corporations ; with them having cross share holdings and in this every firm has its won independence but maintain very close industrial relationships with one another available at :http://www.businessdictionary.com/definition/keiretsu.html#ixzz22PttZuO2

on the buyers and suppliers companies. Organizations have strong relations with their financing banks and firms.

Figure No 3. JAPANESE Model

20

Source: EWMI/PFS Program / Lectures on Corporate Governance - Three Models of Corporate Governance December2005.doc 14

2.4.3. GERMAN: The German corporate Governance Model is radically different from
the Anglo-American and Japanese Model, but some of its features are like Japanese Model. Banks have long term interests in the corporations in Germany just like in Japan.21 There are three main features of this model which differentiate it from other two models. Firstly in the boards there are two types of boards Management Board and Supervisory Board ; Management board consist of executives of the Corporation and
20

The figure above shows the connection and interests of four key elements. And the outside shareholders and independent directors are presented with the open lines because they have a insignificant role. 21 Cf. Rafael La Porta/Florencio Lopez-de-Silanes/Andrei Shleifer, Corporate ownership around the world, October 1998, Table II and III; Henry Hansmann/Reinier Kraakmann, The End of History for Corporate Law, Harvard Law School, John M. Olin Center for Law, Economics, and Business, Discussion Paper No. 280, January 2000, at III.D.

Supervisory Board which consist of representatives from labors and shareholders .Second element is that supervisory board size is determined by law and cannot be altered by the shareholders. Third element is of voting restriction and there is a percentage of total share capital.22

2.5. Approaches to Corporate Governance:


There are certain approaches of Corporate Governance which gives a broad view of Corporate Governance and helps to define it in better way:

2.5.1.

Agency theory

Agency theory like Corporate Governance believes that there is a two way control of managers and owners of the company.23 Agency theory says that a firm can be seen as connection of many contracts between many suppliers. An agency relationship is one in which the owner hires somebody to do a particular job and is also able to make decisions. The main relationships which we can see in businesses are among stockholders and managers and stockholders and debt holders. It is mainly focusing on the conflicts of the managers and agents.24In Agency Theory the question which it focuses on is that how shareholders take care of the fact that Managers are taking care of their interests along with their own objectives.25

22

Three Models of Corporate Governance from Developed Capital Markets: EWMI/PFS Program / Lectures on Corporate Governance - Three Models of Corporate Governance December2005.doc 1 at http://www.emergingmarketsesg.net/esg/wpcontent/uploads/2011/01/Three-Models-of-Corporate-Governance-January-2009.pdf access 28/07/2012
23

Agency theory in Corporate Governance June 1990 http://www.ehow.com/about_6729036_agencytheory-corporate-governance.html access 28/07/2012 24 Agency Theory 2012 http://www.enotes.com/agency-theory-reference/agency-theory accessed 27/07/12 25 Xavier Vives, Corporate Governance; Theoretical and Empirical Perspectives, Institute d Analisa Economica , CSIC Barcelona (2000): 23

2.5.2.

Transaction cost theory

Transaction cost theory elaborates the concept of governance. It states that organization is a total of many transactions which are put in an efficient manner to have a stabilized structure for achieving business objectives and successful contractual relationship in business scenario.26

2.5.3.

Stakeholder theory

Stakeholder theory originated in 1970 and with the passage of time was developed by Freeman (1984) who inculcated the factor of corporate accountability to stakeholders. In fact we can say that is not a proper official theory and like a research way, philosophical view, moral values, laws, financial concepts, and organizational ideas.27 Moreover it can be defined as any group of people or person who might be influenced or can influence the aims and objectives of the Organization. It is opposite to the Agency theory in which managers is considered to be serving the stakeholders; in these managers are considered to be serving to suppliers, employees and business partners. 28 Organizations have their own population and their voters and the success of the Organization is dependent upon these groups and their formulation. If we talk about the Stakeholders several question arise on it like who are these Stakeholders? What are their rights? How they should be managed and whether there should be some law related to these Stakeholders, Answer to all these questions become more complex when we look at the matter with the perspective of organization like what does organization owe to the stakeholders? Here where stakeholder theory is concerned and being referred to. IT explains and suggest several measures and suggestions how to strengthen the professional and ethical relationship.29

26

Daniel BDULESCU, Alina BDULESCU: Theoretical background of Corporate Governance [where is it taken?]

27 28

Dr. George Matyjewicz Dr. Sarah Blackburn The need for Corporate governance Haslinda Abdullah & Benedict Valentine: Fundamental and Ethics Theories of Corporate Governance Euro Journals Publishing, Inc. 2009 http://www.eurojournals.com/MEFE.htm 29 Robert Philips , Stakeholder Theory and Organizational Ethics p.6. access 05/08/2012 available at http://www.bkconnection.com/static/Stakeholder_Theory_and_Organizational_Ethics_EXCERPT. pdf

Figure No 4: The Stakeholder Model

Source: Stakeholder Model by Donaldson and Preston, 1995 30

2.5.4. Stewardship Model:


In this managers perform their functions as caretaker, look after all the operation of the Corporation. Owners have their objectives but also provide friendly environment for the managers to work in. in this model managers have their internally developed sense of care and dedications towards the interests of the company.31

2.6.

Need for Corporate Governance

With the increasing globalization there have a lot of changes in how businesses work and how they are operated, processes have become more complex and need more control and more controlled approach to have a close eye on them. It has become vital that all the activities are being performed in a proper manner with all the ethical values and aspect of integrity kept in mind. The process need to be defined in a proper manner as there is a lot of complexities existing which need to be addressed and must be explained in a proper manner. As directors are the decision making bodies
30

The model describes the relationship of firm with other factors and how they are interrelated and interconnected with each other. 31 William Frey, Jose A. Cruz-Cruz ; Different Approaches to Corporate Governance

so their training is most important and they must be trained properly because the future risks can only be avoided like this. 32 The term Corporate Governance has been introduced and widely used since mid to late 1970s due to many scandals after discovering the fact that many corporations were involved in corruption As we have seen in current scenario in advanced countries economies have inculcated the concept of corporate governance in their business setup and have enjoyed the benefit as well. With the passage of time it also gained recognition in Europe.33Corporate governance is an idea which tells about the rules procedures that how Companies are managed through the effective system of rules and regulations and are governed by the system specified by the Managers34. As Board members are accountable to the shareholders of the company and are answerable to them for all the decisions they take about the company. All these methods and ways through Organizations are handled have a direct impact on their performance and their financial standing as they are accountable to their stakeholders of each and every action of them. Good corporate governance is responsible of a good financial repute of the company and investors are mostly attracted to the companies with a good financial standing whereas comparatively companies ineffective corporate Governance suffer from inefficiencies their resources and potentials are wasted not properly utilized and in more bad scenes they suffer from financial crisis. 35Companies and organization which are in a better condition usually enjoy competitive advantage and are more attractive for investors. Corporate Governance mostly focus on the public companies and help them to flourish in their businesses , its aim is to help them operate according to the boundaries specified by the government and on the other hand help government to modify and enhance their laws and rules and regulations related to the corporate sector. Guidelines, suggestions are provided to the units such as stock exchange, investors, corporations, and other units which are involved in the activities

32

The importance of Corporate Governance 2009 http://www.applied-corporategovernance.com/importance-of-corporate-governance.html access 27/7/12

33

E. Norman Veasey, The Emergence of Corporate Governance as a New Legal Discipline, The Business Lawyer 48, 1276 (1993). 34 Holly J. Gregory; Globalization of Corporate Governance 35 The importance of Corporate Governance 2009 http://www.applied-corporategovernance.com/importance-of-corporate-governance.html access 27/7/12

with the formation of Good corporate governance.

36

Performances and different surveys have

shown that no one structure of corporate governance is suitable for all the business markets as every situation varies from one another so the one set of rules and regulations given is not needed to be necessarily adopted by all market or is mandatory, Indeed it is expected to adopt the selected things which suits your given condition and can be modified further according to the need of time. The rules and regulation of corporate governance are meant to be made and adopted for the purpose to control the company or organization internally. The need and the benefits of the Corporate Governance can be short listed in points such as: 1. It makes sure the success of the business and financial and economic growth. 2. When there is strong Corporate Governance it means investors trust the company and automatically they will invest more which will raise the capital of the company. 3. It helps to reduce the capital cost. 4. It has positive impact on the share price.
5. It motivates the owner and managers to work well for the objectives of the company. 6. It makes sure that organization is organized in a manner aligned with the interests of the

Company.37

2.6.1. Reports and standards


The term Corporate reporting refers to the ways reporting could be done. As there are several methods of doing so. Following are the methods.

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Integrated reporting Financial reporting Corporate governance Executive remuneration Corporate responsibility

Ronald J. Gilson; Leo Strines Third Way: Responding to Agency Capitalism

37

Management study Guide, Corporate Governance - Definition, Scope and Benefits,2008. Available at : http://www.managementstudyguide.com/corporate-governance.htm

Narrative reporting

Integrated reporting Integrated Reporting as the name specifies is about making a decision about your company by keeping in my mind all the information you have about its current standing, past performances and mistakes, its formulated strategy to be carried out in the coming period and all the risks that might be faced by it, as it is impossible and must be realized by all the stakeholders, managers and directors that company , firm ,organization cannot perform in isolation and all these factors are interrelated in the web of the operations of company and these are two things which cannot be separated .38 Integrated reporting is in more elaborative form and is clearer and more comprehensive which is helpful for the directors to convey their point to their stakeholders. 39Initially there was a sustainable reporting style but now it has been transformed into integrated reporting style which mainly aim towards providing an overall view to the shareholders of the company and to its stakeholders about its performance, approaches adopted by them and risks which company might face. As financial reporting tells about the organization, integrated reporting gives a picture of organization working with the reference to its environment and social issues. Integrate reporting helps to assess companys present financial condition along with its future standing in the market. It allows looking deeply into the opportunities and threats. It is that kind of report which has all the information needed and other reports such as annual financial report and sustainability measuring report can be derived.40

38

Financial reporting
at

Integrated reporting 06/13/2012 access 04/08/2012 available http://www.kpmg.com/global/en/issuesandinsights/articlespublications/pages/road-tointegrated-reporting.aspx 39 Integrated reporting http://www.theiirc.org/about/ access 12/08/12
40

What is an Integrated Report? Integrated reporting . Its the way of the future by Saica 2011 access 08/08/2012 available at http://www.sustainabilitysa.org/About.aspx

Financial reporting is the reporting method used for reporting the financial data it is based upon all the financial details and information related to accounts and is generally more about accounting methods and principles used.41

Executive remuneration: This type of reporting is about the rewards and remuneration given to the executives in return of their duties performed for the company in fulfilling in their objective. All the details are given in it regarding short-term and long-term rewards.42

Corporate

responsibility

Corporate responsibility is that how companies are seen by their customers and general public their image on the whole, how they handle it and maintain it effectively to give their best to their customers and increase their profitability and avoid risks. All the business when starts operating have an agenda set in their minds and it varies from the nature of the business. Many of them have only purpose of making money but as we live in a world where our actions have an impact of people living near us and we owe them such actions which might not affect their lives in any negative or negative externalities should be avoided. There is a responsibility towards society called corporate responsibility. Basically these are ethics of a business and one needs to obey them for the sake of the goodness of the people around which they are operating. As business is not operated in vacuum many people are involved in it and are affected by it. In the past these are regulated by the governments, and laws were prescribed to the companies under which they had to operate. Now as the customer is well informed and knows about his rights and different choices available so is with the case in society. Apart from it there are many non government
41

What is financial reporting and who uses financial reporting 02/05/2010 available at http://www.charleshooper.net/blog/what-is-financial-reporting-and-who-uses-financial-reports/ 42 Executive renumeration, access 05/08/2012 available at http://www.ecgi.org/remuneration/index.php

organizations which monitor the operation of company very closely and limit its activities to certain boundaries that go in favor of labor and environmental issues. 43Corporations are now answerable for their activities to not only government but to public as well. Big corporations and companies have knowledge that they are being watched and their operations are not hidden anymore. Now days companies themselves are aware of these things. 44 There are a lot of other factors as well which are to be accounted for like care of labor laws, environmental friendly activities and products and not employing labor on the lower costs from the third world countries. These issues are now being addressed only because there are groups closely watching the activities of the corporations. Corporations are now forced to go for the adoption of corporate social responsibility because they know it is not possible to survive in this global village if they are conducting activities which may damage the environment they are living in. Corporations lose a lot in terms of money and Image as a punishment in case of misconduct and violation of laws related to the environment and ethics. Corporate responsibility is a term which defines the responsibility towards society as the business activities are not carried out in isolation it affects everybody. As for example if company does not meet the standards of safety and rules regulations for the operation of the business it not only affects the labor of third world countries but also the air we are breathing in.45 Narrative reporting

43

David Waldman, Ron S. Kenett & Tami Zilberg; Corporate Social Responsibility: What it really is, Why its so important, and How it should be managed access 08/10/2012 available at http://www.ecrc.org.eg/Uploads/documents/Articles_Corporate%20Social %20Responsibility.pdf
44

What is Corporate Responsibility?; Wise Geek clear answers for questions (2003) access 05/08/2012 available at http://www.wisegeek.com/what-is-corporate-responsibility.htm 45 What is Corporate Responsibility?; Wise Geek clear answers for questions (2003) access 05/08/2012 available at http://www.wisegeek.com/what-is-corporate-responsibility.htm

Narrative reporting is information not provided in detail and is given along with the financial report. The main objective behind this type of reporting is to give an overall view of corporations status in the market, its financial position, achievements.46

2.6.2

Position Limits and Rules

Position limits are set standards or the minimum quality required for the product or services. This limit is the standard set for the product that up to which it is acceptable and below that standard it is unacceptable. 47 There are some other criteria as well, such as; it must cover the risk associated with it; credit line must be kept in mind and factor of exposure of prices and exposure to parties competing with you in the business. These limits help to finish and reduce risk and also used as risk mitigation as these Limits helps to reduce risks in an investment are mostly used in Portfolio Management. With passing time in a business a short summary is prepared in order to analyze the position of limits. These are helpful in limit and also reduce the losses associated with the investments. 48

2.6.3

Strategies for investments and guidelines

Many types of guidelines and strategies are available for the investments which are used in the businesses and in organizations. In the organization mostly the risks associated with the investments and every organization has some set limits and boundaries for these investments which must be followed by the managers.49 These set rules and controls are part of the Risk Management and are used to eliminate the risks related with investments. In Many cases small investments are joined together by the port folio manager and then one big risk mitigation plan is developed instead of planning it individually for each investment. As there could be more chances
46

PWC, What is Corporate Working ; An article on Corporate working and types of reporting 2011, http://www.pwc.com /gx/en/corporate-reporting/frequently-askedquestions/publications/what-is-corporate-reporting.jhtml access 27/07/2012
47

Dunnett, R.S., Levy, C.B. and Simoes, A.P. (2005), Managing operational risk in banking,McKinsey Quarterly, No. 1.

48

Dunnett, R.S., Levy, C.B. and Simoes, A.P. (2005), Managing operational risk in banking

,McKinsey Quarterly, No.1


49

ibid.

of failure when dealing with single investments so portfolio management is planned in order to overcome the failure and loss.

2.6.4.

Incentive Schemes

A well made and carefully described and monitored system is needed to look after the incentives contracts. These type of contracts are favourable and are useful for the person who bear all the risks and share his interest with the line managers, these include setting off, allocation of the cost, analysis of risk . This trick also helps to have a joint interest of managers objectives along with the stakeholder objectives. The technique of Incentives is a best practice in Risk Mangemnet as it encourages Stakehlder to stay for the longer period with the Organization because of the additional benfit they will be getting by doing so.50 Everything in the Risk Management has a transparency and controls and in case of exceeding the limits there will be breach of a contract. These controls are made to control and reduce risks in a business. Proper tracking and appropritae planning helps the orgainzation to overcome all the flaws and risks whether Financial or non financial risks .51

2.7.

Governance, Risk and Financial stability

It has been viewed that in recent past a lot of financial crisis has been observed and it has happened due to inefficient corporate governance inability to predict risk before hand and people not realizing the importance of risk management in their business setup.52 Governance plays an important role to define the boundaries to operate in and draw certain lines to operate in likewise it
50

Dowd, K. . Measuring Market Risk. ( 2nd ed. Published by John Wiley 2005).

51

Horcher, K. A., Essentials of Financial Risk Management. Hoboken:( John Wiley & Sons, Incorporated 2005)

52

The importance of Corporate Governance 2009 http://www.applied-corporate-governance.com/importance-of-corporategovernance.html access 27/7/12

is always known that in business setup element of risk cannot be avoided and it must be dealt wisely and proper measures must be taken to avoid it. All these factors if taken into consideration and are successfully handled by the managers or directors of the organization, company results in having financial stability. On the other hand if any company or firm is lacking in any of these, suffers from the financial strains and decline in their performance. 53

2.8.

Consequences of Scandals of Banks:

Banks are the most crucial part of the countrys economy and play a very eminent role in the financial system so it is required that activities and operations of the bank must be effectively carried out to have sound economy and financial stability. That is the reason financial institutions tend to perform in an effective, cautious and absolute way to reduce risk factors. 54As the nature of financial institutions is different from the other institutions, so they have to operate in a much different manner. They have a complex operation and their transactions are different; a lot of care is needed as there are more of chances of fraudulent activities. Following attributes and elements makes the standing of the financial companies different from the other corporate units. As there are additional financial risks associated with them.55 In the past there have been a lot of financial crisis world has suffered; particularly from 1980 to 1990. As we have seen many examples in UK and USA in recent past such as ENRON in USA and BCCI in UK.56 BCCI in UK was a bank having many layers of units interrelated in form of range of public companies, affiliations, sub banks dealers and shareholders relationships. As the structure

53

Sandy Mavrommati; Corporate Governance Challenges Affecting Financial Stability

54

The importance of Corporate Governance 2009 http://www.applied-corporategovernance.com/importance-of-corporate-governance.html access 27/7/12


55

PWC, What is Corporate Working ; An article on Corporate working and types of reporting 2011, http://www.pwc.com /gx/en/corporate-reporting/frequently-askedquestions/publications/what-is-corporate-reporting.jhtml access 27/07/2012 56 Richard Anderson & Associates : Risk Management and Corporate Governance

of the Bank and its operation was very complex and there was no government control in it and it was voiding many laws itself by having complex structural and operational activities; it was very easy to have unlawful activities. Similarly we have an example of Barrens it was the bank which financed wars of Napoleon and Erie Canal. It was the bank of queen. The fact which attracted attention towards it was the fraudulent activity performed by the businessman who was in Singapore. He lent money from the fund of pensions and tried to keep alive the empire. In the end it led to the failure resulting in pensioners losing their pensions. In result of all this, a committee was set up on corporate governance in 1991 and person namely Sir Adrian Cadbury headed that committee and presented a report known a s Cadbury Report . The focus of the report was on the need of the efficient, effective, organized audit committees with defined duties and responsibilities of executives. His main recommendations were that there must be define rules and assigned duties to avoid over empowerment of executives so that they might not use their powers in bad manner. In 1999 another report was presented in this regard, which had a focus on the internal control. It stated that how companies should manage their risks. The main recommendations given in this report were that there should be a lawful statement which shall state the duties of the directors. There should be a new agenda which should be the promotion of the company objectives and directors should be proactive and provide the auditors all the necessary information they need to carry out the procedure.57

2.9.

Risk Management

In this era of rapid change where we face changes after every second and there is lot of competition faced by the business, it has become very important to keep an eye on changing needs and demands and the requirements of the customers, profits and upcoming risks.58 We can say that Risk Management is way of pondering about the matters analytically, risks associated with it, troubles and Catastrophes in advance before they actually harm you and then making plans to stay away from them, to reduce their effect, and to handle the situation. The art of
57

Dr. George Matyjewicz , Dr. Sarah Blackburn;The need for corporate governance, access 06/08/2012 available at http://www.gapent.com/media/inthenews/ArticleNeed_for_Corporate_Governance_updated-Japan.pdf 58 Crouhy M., Galai D. and Mark R. Risk Management, McGraw-Hill, (New York 2001)

analyzing the situation in which business is operating and then formulating a strategy is Risk Management. Risk Management starts with three questions such as:

What cannot be suitable for your business in future? What you can do to avoid it and how to keep an eye on it? What will be your move if that happens?59

A business cannot be successful if its strategies are not proactive and the element of risk mitigation is not included in it. Thats why nowadays every organization has a department of risk management in it whose whole purpose is to keep an eye on the risks and formulating strategies to overcome them continuously60. In simple words we can say that Risk management is all about controlling, keeping a track, and realizing the risks. In risk management following things are considered. 61

There must be adequate capital while taking a risk. Risk related decisions must be very clear and self explanatory. Payoff and the cost associated with the risk must be calculated in-advance. Risk related decision must support the objectives and strategies of the business. There must be a calculated risk allowed by the limits. There must be pre hand knowledge available about the decisions and risk associated with it.

Risks can be defined as a possibility of hazard or other unfavorable result, or it can be also something causing a risk. In every step of life we came across some risk.62Risks can be beneficial
59

The Our Community team An introduction to Risk Management< www.ourcommunity.com.au > 60 Crouhy M., Galai D. and Mark R. Risk Management, McGraw-Hill( New York 2001) 61 Crouhy, M., Galai, D. and Mark, R. A comparative analysis of current credit risk models, Journal of Banking and Finance(2000) 24(1-2): 59-117.
62

Arora, advantages of Risk Management, available at http://www.scribd.com/doc/54431522/32/Risk-Management-Advantages-and-Disadvantages

because without taking a risk you cannot move forward. But there must be a limit in taking a risk that is called Risk Management. The element of the risk cannot be removed but you have to learn how to use it effectively. Risk Management can be described as way of life, course and framework which guides towards looking at the chances ahead and availing them by dealing consequences related to them effectively. The real important part of Risk Management is to make decisions today while predicting and evaluating future risks. There are multiple advantages of Risk management such as good decisions, less blow, more effective planning and better relationship with the stakeholders63. In Corporate sector there is no one single definition of corporate governance it can be conceived as set of rules of regulation terms among stakeholders, management and all the factors involved in business setting. These terms change with the course of time and differ from situation to situation and are the ones by which companies organization are controlled and regulated. It has been observed that an organization works in its own sphere and limits of its stakeholders and Corporate Governance and Risk management together aims at better performance by keeping in mind the interests of all stakeholders and working within the legal limits allowed as well. As Corporate Governance aims on having an equilibrium of the aims of a person and community. The structure of corporate governance helps to protect the rights of the individual and society as well64.With the help of Risk management we can make the working of corporate governance much better and improved. These vital elements are related to the Risk management. It is one of the basic functions of the Organization to manage their risk and implement strategies to handle the risks.65 Organizations usually make plans and schemes which help them to calculate their trade off accordingly. It is very essential to calculate and forecast risk in order to have sound financial standing and secure position in the market66. There are generally three kinds of strategies developed in order to cope with the risks. Firstly transfer of risks from business to client, secondly to adopt risk absorption strategy and
63

Risk Management, John 2011acess http://www.dnv.com/focus/risk_management 20/7/12 July 2003 access

64

Sec UNDP Corporate Governance http://www.secp.gov.pk/IACCD/pub_iaccd/ProjectReport.pdf


65

Doherty, N. Integrated Risk Management: Techniques and Strategies for Reducing Risk,

McGraw-Hill,( New York 2000)

lastly to develop strategies for the mitigation of risk. The issues related to risk are high in the big organizations but organization can make the situation workable and feasible by working on it before hand they can overcome their deficiencies and can have a control on them. Risk management is a continuous process and it goes on with the passage of time and continues to change with the demands and need. The fears of the stakeholders in risk management includes The realization of the duties and role of the stakeholder in an Organization. The level of control and say of stakeholders in organizational operations, Stakeholders investment and its influence on the organizational decisions.

Figure No 5: The Process of Risk Management.

Source:

Countrysideinsurance. Understanding Risk Management . 2011.

Following figure describes the flow chart of risk management in organization. The first is related to identifying the risks in the organization, which can be successfully performed by evaluating each step separately so you can easily identify the areas which are vulnerable to risks. So this step
66

Chenhall, R.H. Management control systems design within its org context, Accounting

Organizations and Society (2003, Vol. 28) pp. 127-68.

is about the identification of Risks.67 Second step is decision about the risk according to the circumstances whether to transfer the risk or hold it. When a risk is avoided there are two possibilities, firstly that organization will stop that particular function second is that it will continue to operate in a same way. The third strategy in risk management is to transfer a risk and in this case organization can go for two options; either involve another company by signing a contract with it for a business for overcoming the loss or get the risk insured by a good insurance company68.

2.10.

What is Risk Management?

Risk management is realizing the risks of the business which it might face in its activities and acting in such a way to avoid them. In Business activities risks come as part and parcel and can be harmful for the growth of the company so there must some measures taken before hand to avoid them and doing things which will hinder them from happening. One of the major risks includes Fraud which is basic threat in business activities.69

2.11. How Risk Management works?


Risk management is not only identifying the risks but also calculate the impact of it on the Company. It must identify the risks, develop a strategy to handle it effectively and then after wards implementing it in an effective manner.70 Risk Mangers have different plans for different scenarios because all the situation vary from each other and have different factors involved in it so different strategies and plan is formulated for it. After formulating it not only implements it but also keeps a track of the results as well. The plans are mostly proactive and have tendency in them to be changed according to the situation. The real essence of the Risk Management is to predict the
67

Doherty, N. Integrated Risk Management: Techniques and Strategies for Reducing Risk, McGraw-Hill( New York 2000) 68 How Risk Management works 1999 http://www.allbusiness.com/company-activitiesmanagement/management-risk-management/6180653-1.html#axzz227gS8V2K access 25/07/2012

69
70

Corporate Governance Challenges Affecting Financial Stability Andrew Keay; the duty to promote the success of the company: Is it fit for purpose?

future by looking at the present situation this is basically called a function of Risk Management.71 . Risk management is an approach which is adopted before hand in order to avoid risk and make Organization Invulnerable towards the financial crisis and upcoming risks. It gives us a number of challenges to consider which are faced by the people in the business scenario and which if not considered carefully can end up in the failure of the business. The results can be harmful and unexpected. All the lawful requirements , the needs and demands of the shareholders and all the stakeholders have modified the scene of Corporate Governance and now Organization are now in position to again review their strategies in order to cope up with the Challenges , and to restructure their legal requirements and rules and regulations. Organization mostly face a lot of challenges while maintaining a balance between their objective like maximizing profits , minimizing cost and on other hand acting on the codes and laws set by Corporate Governance.72 Figure No 6: Nucleus of Risk Management

Source: Corporate Governance & Risk Management Service Tan Boon & Jenny73
71

How Risk Management works 1999 http://www.allbusiness.com/company-activitiesmanagement/management-risk-management/6180653-1.html#axzz227gS8V2K access 25/07/2012


72

Tan Boon & Jenny Tan, Corporate Governance and Risk Management Services access 05/08/2012. Available at http://www.rsmethos.com/Services-Corporate-Governance-and-RiskManagement-Services.htm
73

ibid

2.12.

Risk at different hierarchy levels In Corporate Sector

As it has been discussed earlier there are different types of risks at the different levels of business in an Organization. To effectively handle the Risk management one must be equipped with the knowledge to mitigate the risk and handle the situation effectively. Management must be aware of the different levels of risk at each level. Risks in organizations are distributed among three levels below. Figure No 7: Levels of Risks and Its Drivers.

Source : A Risk Management Standard by AIRMIC, ALARM, IRM: 2002 74 2.12.1. Micro level

74

A Risk Management Standard by AIRMIC, ALARM, IRM: 2002 access 04/08/2012 available at http://www.theirm.org/publications/documents/Risk_Management_Standard_030820.pdf

These are small level of risks as the name identifies. These risks occur on the personal level and mostly organizations are not aware of the fact that their employees are taking risks on their own.75 It is not merely possible to make strategies to handle such risks because these types of risks are known when some crisis is already been done the only way to avoid such risk is to appoint responsible persons as employee and there must be strict rules and punishment in case of disobedience. These risks occur on operational level and strategies to handle them must be implemented in the operational level.76

2.12.2.

Macro Level

Macro level risks are concerned with the middle level of the management and the operations performed at the middle level. These are one step after the Micro level.77 In Organization these types of risks in different departments while performing their routine activities. The occurrence of this type of risk is comparatively less than micro risk but they have a great effect on the profit of the business. In this type of risk middle management is accountable and occurs mostly due to negligence of issues and mismanagement. 78

75

Baccarini, D. and Archer, R. The risk ranking of projects: a methodology International

Journal of Project Management(2001) 19 139-145


76

Apgar, D.

Risk intelligence: learning to manage what we don't know (Harvard Business

School Press,2006)
77

How Risk Management works 1999 http://www.allbusiness.com/company-activitiesmanagement/management-risk-management/6180653-1.html#axzz227gS8V2K access 25/07/2012


78

Beasley, M.S., Clune, R. and Hermanson, D.S. Enterprise risk management: an empirical

analysis of factors associated with the extent of implementation. (Journal of Accounting and Public Policy, 2005) 24(6), p.521-531.

2.12.3.

Strategic level

This is the most vital and sensitive type of risk in business in an organization. This has direct effect on the efficiency of the organization and its productivity. This type of risk is associated with the upper level of management and the directors.79 The risk here at this level are expected when a new competitor enters into a market, when you plan to expand your business or introduce a new business in your existing line of business or when you align your business objectives with the current activities. These types of risks are less but they have a great impact on the business as a whole. Immediate actions are taken to avoid and overcome these risks and higher strategic planning is needed for it.80 Risk at this level needs alternative plan in order to set right the cure and avoid the situation. As we can see there is global economic competition with a great speed and now every day we see new ideas floating around the market apart from the mainstream business which capture the consumer attention and with the introduction of new product and services business become vulnerable to the risks as well. In order to handle this and to overcome the risks as well organization must formulate a strategy to stay in the business, earn profit and avoid risks as well. This is a big challenge off course and needs a lot of continuous remedial strategies. As in current era world has seen a lot of economic crisis organization are more cautious in their functions, products and services they render and avid to take risks. 81(Casu, Giradone and Molyneux, 2006). Risks at this level are more critical than above two levels because banks have to evolve their strategies with the risks aligning with the need of the current market. Briefly we can say that Risk Management is very important for the existence of Organizations, companies in this current era.
79

Baccarini, D. and Archer, R. The risk ranking of projects: a methodology International

Journal of Project Management (2001)19 139-145


80

Broady-Preston, J, & Hayward, T. "Strategy, information processing and scorecard models in

the UK financial services sector" Information Research(2001) 7(1)


81

Casu, B., Girardone, C. and Molyneux, P. Introduction to Banking. Harlow: Pearson.(2006)

2.13. Risk Management an essential part of Corporate Governance


Risk management is considered to be an essential part of Corporate Governance as it is very important in this era of globalization to be very cautious about your each and every decision and business activity to be performed according to the rules and regulations stated by the company and of government as well.82 There is a lot of competition and multiple business operate in the market with complex structures so there are chances any illegal and unlawful activity to be carried out. And as we have seen in the past that in USA and UK many financial institutes have faced declining situations and have been bankrupt due to the absence of the inefficient and weak corporate governance and additionally missing Risk management. Corporate governance helps to stay on track, making directors to be accountable for all their transactions but it is a fact that it is impossible most of the time to avoid risk so it is important that Corporate Governance and Risk management must be aligned in order to have better results.83

2.14.

Positive Role of Risk Management in Corporate Governance

Risk management has a positive role in corporate governance as it helps to have sound financial position because it helps to mitigate risks beforehand a proper strategy is formulated to avoid the risks. Not only risks are focused but also the combination of both formulates such laws, policies, rules which strictly prohibits unlawful and illegal activities. 84

82

Abdullah & Valentine; Fundamental and Ethics Theories of Corporate Governance Middle Eastern Finance and Economics ;ISSN: 1450-2889 Issue 4 (2009) EuroJournals Publishing, Inc. 2009 available at http://www.eurojournals.com/MEFE.htm 83 Andrew Keay; the duty to promote the success of the company : Is it fit for purpose? August 20, 2010Universityof Leeds School of Law, Centre for Business Law and Practice Working Paper available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1662411
84

Peter Utting Corporate responsibility and the movement of business; Development in Practice, Volume 15, Number3&4, June 2005 access 03/08/2012 available at http://www.unrisd.org/unrisd/website/document.nsf/ MovBus.pdf

2.15.

Will Risk Management helps to generate funds?

Risk management helps to generates fund as we have seen in past that many companies have lost their businesses as they were not prepared for the disaster they faced and globalization has made it possible to have multiple structures with complex activities so when there is an extensive competition and a lot of risk involved in business activities it is important to have mechanism which should protect you against financial losses; which Risk management does successfully and it helps to predict the upcoming risk and companies evaluate themselves accordingly and formulate strategies to avoid the risks and save their losses and successfully operate and their financial situation improves.85 There are multiple benefits which we can get after applying strategies of effective Risk management in an organization.

It helps us to estimate the cost of projects and projects by evaluating the after effects of it. It gives an overview of the activities and helps to see the other options available.

Due to revision of the matters and looking in the matters in depth it helps to have multiple suggestions from different shareholders as well.

Decision makers are free to make decision with a clear perspective of things in mind. They are able to estimate all the factors which are associated with the decision because all the matters are deeply analyzed beforehand.

There is a scrutiny of information and the required information is gathered from various sources so decision maker is well informed.

Risk management is a standardized methodological way of making decisions. It helps and guides to how to solve a problem. It is a logical approach towards problem solving.

85

Tandelilin et al. Corporate Governance, Risk Management, and Bank Performance: Does Type of Ownership Matter?

There is a deep analysis on the alternates available. 86

There are multiple benefits which a company derives from the risk management. Some of them are: It helps to have a strong financial position. It protects from financial failure. It helps to have raise in profits. It works in such a way that produces profit directly and indirectly. There is a peace of mind for the investors and share holders because they know they are protected.

Multiple targets are achieved by it It helps to alleviate the income of the company. It ensures continuous growth of the company. It helps to devise a responsibility towards company and society both in form of corporate social responsibility.87

Figure No 7 : The Value addition of the Risk Management for the company different areas.

86

Best practice in risk management; a function comes of age. A report from the Economist Intelligence Unit. Sponsored by ACE, IBM and KPMG. p no 13, 2007 access 10/08/2012 available at http://www.kpmg.com.au/Portals/0/eiu_Risk_Management.pdf
87

Best practice in risk management; a function comes of age. A report from the Economist Intelligence Unit. Sponsored by ACE, IBM and KPMG.2007 p no 13 access 10/08/2012 available at http://www.kpmg.com.au/Portals/0/eiu_Risk_Management.pdf

Source : Best practice in risk management; a function comes of age. A report of the Economist Intelligence Unit. Sponsored by ACE, IBM and KPMG88

2.16. How EU & USA utilizing risk management?


In the mid of 1980s, there were a lot of reasons due to which a great deal of attention was paid on Corporate Governance. The reasons were following

In USA and UK there was a lot of institutional investment. More regulations from government in USA. Regulation regarding investors required to vote at Annual General Meetings Dominant activity of mid to late 1980s, A sense of decline in competition with Germany and Japanese competitors.89

With the development of Governance in UK and with presentation of the Cadbury report 90which was emphasizing on the need of better reporting and better auditing techniques and organized committees the concept crept into the corporate activities. There have been codes set out and all the
88

Best practice in risk management; a function comes of age. A report from the Economist Intelligence Unit. Sponsored by ACE, IBM and KPMG 2007 access 10/08/2012 available at http://www.kpmg.com.au/Portals/0/eiu_Risk_Management.pdf 89 Three Models of Corporate Governance from Developed Capital Markets: EWMI/PFS Program / Lectures on Corporate Governance - Three Models of Corporate Governance December2005.doc 1 at http://www.emergingmarketsesg.net/esg/wpcontent/uploads/2011/01/Three-Models-of-Corporate-Governance-January-2009.pdf access 28/07/2012 90 The 1992 Cadbury Report includes a Code of Best Practice for companies, which is built around the principles of accountability, probity and transparency. These principles, along with the concept of equity, became the benchmark for good corporate governance. They were reinforced by the public sector equivalent; the first report on Standards in Public Life published by the 1995 Nolan Committee. Available at http://www.iia.org.uk/index.cfm

listed companies are required to act accordingly and have compiled the provisions. In June 2010 UK corporate governance code was published and placed a great importance on the need of the effective risk management.2006 UK Companies Act has provided a structure according listed companies should act and it includes the duties of directors but also the flexibility for the companies. 91 As in 1990 the development of governance began with the Cadbury report 1992, in which better reporting, non executives directors and committees were emphasized. In 1998 the Hampel Committee presented that report92 on director remuneration (Greenbury Report 199593 ) should be combine with the Cadbury Report which eventually become combine code. The code consisted of the principles set for the composing a board, its making, remuneration, transparency, and its public relations. All the listed companies have an obligation to check that whether they are following the codes or not and to give explanation if they have not done so. The Financial Reporting Council (FRC)94, an organization and a regulating body which has the responsibility of combined codes95 updates 2003 and 2008. In 2009, FRC again revised the codes
91

Leo Strines Third Way: Responding to Agency Capitalism Good corporate governance is not just a matter of prescribing particular corporate structu r e s a n d c o m p l y i n g w i t h a n u m b e r o f h a r d a n d f a s t r u l e s . T h e r e i s a n e e d f o r b r o a d principles. All concerned should then apply these exible and with common sense to the varying circumstances of individual companies. This is how the Cadbury and Greenbury committees intended their recommendations to be implemented. Companies experien c e o f t h e C a d b u r y a n d G r e e n b u r y c o d e s h a s b e e n r a t h e r d i f f e r e n t . T o o o f t e n t h e y believe that the codes have been treated as sets of prescriptive rules. The shareholders o r t h e i r advisers would be interested only in whether the letter of the rule had b e e n complied with y e s o r n o . A y e s w o u l d r e c e i v e a t i c k , h e n c e t h e e x p r e s s i o n box ticking for this approach.(The Hampel Report, 1998, p. 10, paras 1.111.12, emphasis added) available at http://www.scribd.com/doc/53729872/27/The-Greenbury-Report-1995
92
93

In January 1995 the Confederation of British Industry (CBI) established the Study Group on Directors' Remuneration under the chairmanship of Sir Richard Greenbury with a remit to identify good practice in determining directors' remuneration and to prepare a code of practice for UK PLCs. The final report of the group was published on 17 July 1995 and is usually referred to as the Greenbury report. Available at http://www.icaew.com/en/library/subject-gateways/corporate-governance/codes-andreports/greenbury-report 94 The Financial Reporting Council (FRC) is the UK's regulating body which has the responsibility for ensuring and maintaining Corporate Governance and reports for investment. 95 The combined codes are the Principles of good governance and code of best practice derived by the committee on corporate governance from the committees final report and from the Cadbury and greenbury reports.

after learning lessons from the financial crisis. After the modification the new code is known as UK Corporate Governance Code and it was published on 1 June 2010 and laid great stress on the effective use of Risk Management. FRC guides for audit committees have been updated with the passage of time according to the need of era. The guidance is referring to the Smith Report96 which was updated in 2008 and then again in 2010. In the e timeline of the Risk Management and Corporate Governance it is important to realize the importance of 2006 UK Companies Act which provided a structure of regulation according to which companies must operate and following Act was brought in four steps and the final changes were made in October 2009. It provisions were about duties and regulation but was lenient in terms of operations of the company.97

96

As an addition to the previous reports anther review was done by the UK government as a reaction to the ENRON scandal and along with the aim of assessing the role of the audit committee in UK Corporate Governance. T h i s R e p o r t w a s p u b l i s h e d i n J a n u a r y 2003.
97

Casu, B., Girardone, C. and Molyneux, P. Introduction to Banking. Harlow: Pearson(2006)

Figure No 8:

Timeline of UK Corporate Governance

Source: Chartered Institute of Internal Auditors UK98

98

Timeline of efforts of Risk Management and Corporate Governance in UK. Available at knowledge centre http://www.iia.org.uk/index.cfm

Table no 1.

Current status on Corporate Governance in US

Source: Corporate Governance in United States99

Parameters Ownership pattern Board size

USA Top Fifty Companies Largest shareholder holds less than 10%in all cases Largest board size 18. Smallest 10. 66% of the top 50 companies have more than 12 directors

Board Independence

All companies have a board majority of independent directors.

Executive directors Boards of 49 companies out of 50 have less than 25% executive in a Board directors.

Only 20% have separate Chairman and CEO. Chairman &CEO Lead Independent 20 companies have lead independent directors. Director Board Committee All companies have fully independent audit remuneration and nomination committees.

CORPORATE GOVERNANCE IN U.S.A

Corporate Governance rules and laws are not governed by some specific law in USA but are influenced by the ruling instruments , business law and the decisions made by the court about every corporation and when it comes to Public Companies it is guided by the US federal securities
99

Document on Corporate Governance in United States http://www.scribd.com/doc/75794598/Corporate-Governance-in-USA#download

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laws and the essentials needed by the securities market. The matters which are exclusively handled by the Government are voting rights of the shareholders, functions of the board and the members ability. There are different state corporation laws in the 50 states. U.S. Federal securities law has an influence on the practices of the Corporate Governance especially in the areas related to the financial reporting, voting and the submission of the proposals given by the shareholders at the meetings.100

2.17. How Risk Management works in third world countries? Risk management is a new concept in the developing countries as they have recently inculcated the concept in their corporate activities. 101The incident of Enron and percentage identified by different surveys has forced them to pay a heed on this topic as well. After UK and USA, Middle Eastern countries have developed a mechanism for the risk management and are making it a basic component in their corporate structure. It has been viewed that the corporate sector of Asia is gaining power in the global market and it has been predicted by the world economist that it will continue to lead the world economy if they keep on growing like this. All over the world investors have a deep interest in investing in Asian companies. Because of the favorable climatic conditions the outgoing business skills and the balance market situation are all the point which enhances the interest of the investors from all over the world. Though Asian economies have strong economic conditions and stable market place still there are some factors which are not favorable for it and act as hindrance in gaining a sustainable position in international market. The Way Corporation reacts to the challenges and the opportunity is also the fact which is important in this aspect. World has seen in the recent past the crisis of ENRON and after many things in corporate sector have changed globally.
100

Corporate Governance in USA p. 1 access 05/08/2012 Available at http://www.scribd.com/doc/43875312/CorporateGovernance-in-USA 101 Casu, B., Girardone, C. and Molyneux, P. Introduction to Banking. Harlow: Pearson(2006)

There are many factors which are very important in this regard and are question to be considered by the corporation in order to gain a profitable, reputable position in the world market such as How corporation are analyzing the changing behaviors and expectations of the customers globally? How do they respond to the needs and demands of the stakeholders and their participation in decision making? As the environmental factors vary from area to area so how this aspect is dealt with, as in Europe, America, Canada companies are bound to have corporate social responsibility and they are forced to obey the laws related to externalities. Are the companies and business in Asia are considering these issues while their operations? Are they restructuring their style of corporate governance? Do they have the same standards and make up to the level of following the laws and rules related business and environmental changes? Do they realize the importance of not following the prescribed conditions and the effect of it on their business and customers (present and potential)? Well it is not inappropriate to say that in order to have standing in an international market and global economy companies must need to work on these grounds, reform their corporate governance style. And it has also been seen that Asian market has responded to it positively but in a slow manner as it has been observed that for them to sustain in their business sit is essential to take these actions. They must include risk management practices in their daily operations. They must adopt the same business methodology as of those countries. For instance the companies who wish to trade with that international corporation have to be listed as a public company on US or European exchanges and for this it is obligatory to follow those rules and practices. There are more and more methods and regulations to follow for this and there is a criterion to be followed in order to be listed. There are many aspects which must be met and need consideration by the Asian market as what are the changing global trends of the market? What is that, that consumer seeks in a product? What must be inculcated in order to win the customer etc.

Investors from international are also one good reason why Asian corporation need to act smartly and well informed. To gain their money and to have their trust worthiness it is essential to make smart moves and satisfy them in dealings. In response to all these pressures Asian business community has adopted the principles of UNEP principles for responsible investment102 and adopting techniques as mentioned in Basel II (New Accord)103. So it can be said that in order to have a market share in the international market Asian market must consider the changes adopted by business communities worldwide. 104

Chapter three: Discussion

102

In early 2005 the UN Secretary-General invited a group of the world's largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI). Individuals representing 20 institutional investors from 12 countries agreed to participate in the Investor Group. The Group accepted ownership of the Principles, and had the freedom to develop them as they saw fit. The Group was supported by a 70-person multi-stakeholder group of experts from the investment industry, intergovernmental and governmental organizations, civil society and academia. The process, conducted between April 2005 and January 2006 involved a total of five days of face-to-face deliberations by the investors and four days by the experts, with hundreds of hours of follow-up activity. The Principles for Responsible Investment emerged as a result of these meetings.

103

Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II believed that such an international standard could help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.
104

Robert Adamson, Corporate Governance & Risk Management Blog, July 6, 2009. Access 08/08/2012 available at http://business.sfu.ca/corporate-governanceblog/2009/07/corporate-governance-in-asia/

3.1.

Introduction

This chapter provides insight about the discussion and analysis. In this chapter all the data related to the Corporate Governance and Risk Management is analyzed in order to see its importance and role in modern corporate world

Research background:
Basic theme behind this study is to review the role of risk management in corporate governance. This study will help to see the role of risk management in corporate governance. Here are some questions which are discussed in the research.
3.2.

Discussion:

We have discussed a lot questions related to this research topic but the important question are discussed below.

What are the consequences of these scandals on the banks?


The scandals of the banks have serious impact as we have seen in literature available. It indicates weak corporate governance and banks are now more careful in choosing their corporate strategies. System has changed and government has also interfered by introducing more strict laws and codes. Every now and then according to the needs more and more changes are done to get along with the objectives of the organizations and the needs of shareholders. The big losses which banks suffered like (Barings and Daiwa) in 1990 and the huge low implosion of Enron and WorldCom have made the world realized the dire need for the effective Risk management; it is a well known fact that Risk Management and Corporate Governance are two things which work together. It made many things obvious, which were previously were not taken into the consideration. It damaged the relationship between the banker and the customer. The trust level on the banks was badly damaged. People no more trusted the banks and had doubts on their creditability. Banks had

to restructure their corporate governance and the emphasis was laid on the Risk Management. U.K. was the country which set an example for other countries and redefined its structure of Corporate Governance by inculcating the element of Risk Management in it.

What is Risk Management and how does it work?

Risk management is a process by which risks are identified and accordingly strategies are defined to overcome them. Its a continuous process and is very important to deal the risks successfully. Organizations are now inculcating it in the system to deal with the financial risks associated with their decisions. Risk management determines the factors which are highly vulnerable to the risk and then adopt measures to overcome and mitigate them. The beginning point from where risk management starts its work is that it deeply analyzes the environment of the organization and its elements. It consists of all the aspects such as the financial, social, technological, legal etc. Risk management has a principle that it must engage all the shareholders in it working. This helps to have a consensus with the shareholders, have an agreement over decisions and clear ideas about the objectives of the company. Risk management has a clear idea about the objectives of the organization as the purpose of it is to carefully see the objectives of the company, analyze it deeply see the risks attached to it and then suggest game plan accordingly and this all could only be done if the objectives are clearly understood and analyzed. Here one thing that is very important is that organization must clearly define their objectives, plans, aims; which could easily be reflected in their policies, rules, strategies so the work of risk management would be much easier. There are certain principles on which Risk management works and these principles help to make the element of risk reduced and eliminated from the business activities.
1. It understands the environment of the Organization and all the aspects in which it deals

with. 2. It also ensures the participation of the main shareholders in the matters which are consideration to have their consensus and suggestions in it. This helps to eliminate the problem of later conflicts in the ideas.

3. Risk management clearly go through the ideas, aims, plans of the organization because

unless and until objectives are not clear, risks associated with the activities cannot be defined properly so it is essential to do that. 4. Risk management ensures that all the rules are followed in the organization, processes of the organization are according to the rules prescribed, reports are timely made and presented to the upper management, the requirements made compulsory by the board of directors are being acted upon and the guidelines given by the regulating bodies are properly followed.
5. Risk management acts on the red zone and the warnings given by the organization about

the potential areas of the business where risk is expected.


6. As in the organization there are continuous changes in the business environment as there

various reason like a new competitor can enter into market, there could be downfall in the demand of your product , countrys economic condition can also affect your standing in the market so the function of the Risk management is to keep an eye on all the matters of the company continuously and give updates about all the changes, needs and the risks associated with these changes so company might be prepared for it.
7. It is not guaranteed that with effective strategies given by the risk management will

produce fruitful result. It is also important that it must be checked that whether activities are being carried out effectively or not and are properly executed or not.

Figure No10: Process of Risk Management

Source: A Risk Management Standard by AIRMIC, ALARM, IRM: 2002 105

In the figure the whole process of the Risk management has to be shown. It starts with the analyzing company objective first and then aims. These are vital because all the activities are based on it and strategies are formulated according to it. Next step consist of five different things which include risk assessment, then analysis of it and after wards describing it and evaluating it to extent to have solutions for it. After these steps the next step which is done is reporting the risk and the threats and opportunities which are attached to it. These threats and opportunities help to better judge the situation and give you better solutions for the problem. After all these step where you judge the situation carefully you have to now come up with the solutions for it ;sometime you have multiple solutions available but here your critical thinking matters and how you respond to the problems this all is done in this step as you have see where you have to land up safely and accomplish your goals. And in the next you evaluate your solution by keeping a track on what you have done previously making notes about it and looking forward for the feedback.

Why the risk management is essential part of the corporate governance?


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Risk management is a vital part and component of risk management as it helps to incorporate both law and element of profitability and risk avoidance. It is becoming very important for the companies to restructure their corporate governance and inculcate the element of risk management in it. In an organization there must be internal control in many matters like about expenses, taking decisions, implementation of policies etc. So if we say that corporate governance is one aspect of internal control, another aspect is Risk management; both are interrelated concept and connect with each other. The environment of the business in which an organization operates keeps on changing and have evolved a lot since earlier times as we have witnessed, every new activity and introduction of new techniques and methods have an element of risk associated with it as profits are always associated with risks and comes in part and parcel with it. It is not possible to have Risk free decisions in business. And the purpose of internal control is making sure the safety of organization assets and to help it increase its profit safely. This could only be done if risks are examined carefully and in a routine and continuously, their level of seriousness and to the extent organization is open to all these risks. This all helps the management to predict the upcoming risks and then formulates the planning according to it. This means it is essential to have an effective risk management in an organization.

Will the good Risk Manage helps to generate the finance for the businesses?
One of the functions of the Risk Management is to plan for the prospective risks and it is a process which is always finding inclination towards raising the business funds. With The follow approach and planning is carried out with an aim of keeping the business profitable and organizing the funds of the business in a way that caters the weak areas of the business. The weak areas of the business could be weak investments in business or going for the ventures which is not paying off properly or is not effective in terms of cost. It is a well known fact that risks cannot be avoided in business but with proper planning and effective implantation it can be avoided to a greater extent. The function of risk management is not limited up to planning for the potential risks but it also includes looking out for the good opportunities which could be fruitful for the business. It helps to locate the opportunity on the right time and then take a decision and act on it. Because in business

it is very essential to take a decision on the right time and then have maximum benefit derived from the opportunity. This also helps the company to stay ahead from other companies in the organization and lead the financial market along with the generation of fund. Competition in the market is also another element which is truly important and vital in business development. Risk management predicts that how trends in market are, how it react towards new competitors, that helps the management to make a plan and devise it, to handle the risks accordingly. A business which has a preplanned strategy formulated to how to move in the market, dealing efficiently with the competitors enjoys a better sound position with less financial assets at stake. In short we can say that Risk Management after analyzing the entire situation suggests a plan for business which in the end produces good results for the business. The use of risk management gives a hope and a logical reason to go for the ventures that have risks attached to them because in the present world it is not possible to have risk free investment as they say more risk more profit. Risk management in this case helps a lot as it provides a cushion against all the risks. This also emphasizes on the avoiding the things which may lead towards the decline in earning indirect benefits. It is not advisable to see that whether risk management helps to reduce the damages to the business in absence of it. It works towards multiple purpose not only provide a safe method of investing and moving a corporate scenario but also helps to have a secure and attractive image of the organizations. Investors are more attracted to a company which has a sound financial standing in a market. Risk management helps to improve the relations with the clients and investors and makes the position of your company secure in the market. And when you have a better relationship with your client you naturally have strong bonds with the regulatory body and the agencies dealing with you. As all these areas improve naturally your word out of the company improves and it derives strong financial benefits for you, your clients trust, your worthiness increases and your future clients make their way to you for investment. The factor of competitive advantage is enhanced by it and company gains a unique position in the market. The market share of the organization increases. Competitive advantage is not only the benefit but when in market you are well equipped with the knowledge about the ups and downs you are in a better position to detect the opportunities which you might have not realized when you had limited access to the information. An opportunity availed at a proper gives multiple benefits and its all about making right decision at right time. And right decision is again then related to effective risk management. An organization which equips itself in advance for a crisis is a one who enjoys most secure

position in the market. And in absence of planning of risks resources will be wasted and time of the company as well. So we can say that Risk management is important in gaining competitive advantage. Risk management adds value to the repute of the company, better strategic decision making is made, a better level of communication is present among different business units, there is a greater level of profitability , it increase the shareholder significance etc.

Does Risk management help to make better decisions in corporate governance?


An incorporated step towards the Risk management is very important for the organization to measure risks and keep an eye on all the business corners and closely look for the Risks. Measurement of risks is not what is needed all to deal with the next step should the use of these strategies and their successful implementation and proper execution of these. Following all these step will lead to successful management of risks and better decisions will be taken for the business. Decisions not timely taken or based on wrong or incomplete information leads towards bad decision making and can cause loss and decline of business. All this could lead to the use of inappropriate use of opportunities, taking of not required risks and misallocation of resources.

How risk management practices helps to protect the image of the Organizations?
With the changing time and growing competition it has become necessary for the organization to make sure that their resources are usefully utilized and properly allocated so that wastage could be avoided, and better decisions must be made at the right time and after having complete information. In this busy world with hectic schedules with the help of complete, related and analytical information can lead to better decision making. When information are in great deal and there are tools available for evaluating risk are not beneficial if they do not lead to making better decisions when you are facing risk. In organization when a risk is predicted and in return decisions are not taken to treat these risk ends up in having troubles. Risk management when not designed to address the risks immediately and formulating solutions to the problems end up having trouble and face the consequences. All the

process of risk management is effective in a condition when the decisions are taken in response to it otherwise the whole purpose of it fails and ends up having no fruitful result. If only risk is analyzed and decision is not taken in response to it then the organization has no advantage having a risk management and risk assessment process. Following things must be kept in mind after taking a decision after assessing the risk. When risk is identified and decisions are taken by different people in upper management it has to be ensured that everyone in the management knows about it so that there might be no conflict in the end every one must understand the reasons why that particular decision was taken. The risks must be prioritized by the risk management and the decision makers that which is the most crucial or needs to be addressed immediately. It can prove to be beneficial if focus must be on catering the short and most important risk at the moment rather going for a long term solution of the problem. Small analysis must be done to have quick solution of the problem faced.

How EU & USA utilizing risk management?


After the financial crisis all over the world there have been eminent changes in the structure of corporate governance of many the countries. Many countries have developed new laws and rules regulation to improve the situation. In U.K. financial reporting council has modified the code of corporate governance by adding certain things to it. And the aim of this is to assist the boards to work more effectively and be transparent towards their shareholders. And the real purpose of the change was to reassure the standard of the board. One of the following changes were

Explanation of the business model and the obligation of the board to analyze the level of the risk taken by the management and its consequences. Performance should be evaluated and incentives should be given on the level of performance. This must be done for the interests of company. In order to encourage discussion in board meetings. New laws on the leadership of the CEO have been introduced. For the promotion of boards to be unbiased and to keep away the issue of group influences new laws on the formulation of the board. The selection basis should be merit with no gender discrimination.

There must be board performance reviews after every three to have regular performance reviews and to have complete knowledge about the strengths and weaknesses of the company.

The codes were made compulsory for the listed companies and essential to follow, and to have transparency in terms of their performance and they way they are regulating according to the rules prescribed by the Good Governance.

How Risk Management works in third world countries?


Risk management has become very important part of business and it cannot be ignored. Corporation all over the world are inculcating it in their business in order to be successful and free of risks. With its emergence from USA, U.K. and EU its spreading now in all over world. Corporation all over the world are realizing its importance and reforming their setup and corporate style and laws have been passed according to strategies of risk management. As there are many countries in the world which are not economically nit very much string but have perspective of becoming string leaders in world trade setup so it is advisable for them to have a business and corporate setup enriched with the aspects of risk management.

Chapter Four: Recommendations & Conclusion

4.1.

Introduction:

Chapter Three has given us a deep analysis of the literature available, in order to examine the risk management strategies and its importance in Corporate Governance. This is the last chapter of the research and recommendations and suggestion are given in it after the analysis of the secondary data available. And in this chapter we have concluded the study.

4.2. Recommendations:
As the world has become global village and there is a lot of competition around the world. Growing needs and demands and fast pace of the technology has made the world a real easy place to live but this has also some drawbacks such as risks at every step and failures and frauds. In order to cope up with the complex environment and the risks at every step has made it compulsory for the organization to maintain their own risk management to have internal control. It has become integral part of the system in Corporate Governance. The importance of the risk management must be realized because it is very important for the sustainability of the profit and for the survival of the businesses. In Corporate Governance it plays an integral role because the essence of corporate governance is to see that whether companies are running according to the rules and regulation given to them. And in following these codes, the element of risk must be kept in mind. In the recent past world has seen a lot a financial crisis and failures of the big companies. So it has been realized that risk management is a very important element of the corporate governance and it must be inculcated in the structure of the organization Risk monitoring and risk handling is considered as a vital part of risk management and it has been given a lot of importance. These two elements must be inculcated in the structure of the organization to have a strong mechanism and for the roles of the individuals to be properly defined. According to this the structure of the organization must be strict and have internal control for the vulnerabilities towards risk as corporate governance is about rules, disciplines and procedure that how a company should be running with their involvement of the risk management strategies it can work efficiently and can raise the profits of the company as well. There must be a proper department for the risk management with its sole purpose to carry out analysis for the avoidance of risks and to the see the existing system. It must have insight to predict the risk that might e faced by the company and develop strategies to overcome them efficiently. The proposed

strategies must align with the laws, rules and codes given and with the business objective and profits as well. The control of risk cannot be successfully implemented if not measured properly. The true evaluation and measurement of risks under the light of corporate governance will help to decides company future market standing and it will also help to develop strategies accordingly. The procedure of risk management should be able to identify the risks on short run as well long run so strategies should be developed accordingly. As due to human factor involved and the element of change in global trend so quantitative risk cannot be measured so qualitative measure must be defined to evaluate the risks. The effective measurement of risk management also depend on capabilities and skills of the staff of risk management their ability to forecast risk and then adopting immediate measures accordingly should be their strategy and their efficiency and effective working will give benefits to the company . Corporate governance rules vary in different countries according to their own condition as it is not possible to apply new universal code to all the global companies this is because the risk faced by different are of different nature as of their different economic conditions and consumer behavior. So risk management strategies should also be made according to the conditions of the country and market conditions. The effective Risk management and development of efficient system will help to avoid risks on large scale there are different techniques and models adopted by the organization to avoid the risks. But the situation differs so as the type of the risk differs so strategy must be adopted according to the level of the risk. Organizations give the risk management responsibilities to certain teams or committees and they are responsible to review the whole organizational structure and systems on continuous basis. This referred to the vital internal control. every country has its own regulatory body which is manage its financial affairs according to the codes available .many of them have their own central bank as in the system of Japan which gives the credit and is one of its important stakeholders. As the financial market have faced a lot of failure and important incidents in the beginning of the 21st century that have dramatically changed the principles of the corporate governance. Some these events include the tech bubble in early 2000 and then large scale corporate scandals such as Enron and likewise many. In the reaction of all these scandals the corporate governance rules have been changed addressing all these issues. According to this organization must have a basic and fundamental change in their corporate governance structure as the risk management and corporate governance are inter related. Organization implement strategies to achieve their goals and all these goals have risks associated with them. The risks must be

addressed in such a way that objectives might also be achieved and risk must be avoided as well. For that purpose the role of stakeholders, share holders, board members and directors must be clearly defined. The board should drive the company towards its objectives in such manner that ensures long term growth and sustainability for the shareholders and company as well. The policies for the short term profit increment must be eliminated and which have a lot of risk involved in it. Such compensation should be adopted which have long term value creation goal and incentive risks must be considered. Appropriate risk management system must be ensured to avoid the high scale risk taking. Board must consist of independent different members which is vital for the risk profile of the organization. And when it comes to managers role its also very important for making an environment in which there is honesty and prosperity of the organization both involved. A manager should be on high alert in case of the risks. He should have a strong internal control and must monitor the processes and methods for risk management, he must make sure that all the procedures and methods are carried out by the competent staff. Effective compensation plans must be implemented which should appreciate and enhance transparent risk taking. Lastly the role of shareholder is also eminent in an organization. His role as a voter is extremely important for the corporate governance and it has impact on it. Shareholder must expect from management and board to inculcate corporate governance with organizational strategies taking into consideration the risk related to it. He should demand the management to be very clear and elaborative about the risks. He must use information about risk in a positive sense as he has to make voting and investment decisions. Explanation of the business model must be elaborative and regular and it should be the obligation of the board to analyze the level of the risk taken by the management and its consequences. Performance should be evaluated and incentives should be given on the level of performance. This must be done for the interests of company. In order to encourage discussion in board meetings there must be modification in the leadership so people can easily express their ideas and can feel free to have discussion on board. For the promotion of boards to be unbiased and to keep away the issue of group influences new laws on the formulation of the board. The selection basis should be merit with no gender discrimination. As in many corporation people are not selected due to certain biasness which could be a great human resource and asset for a company in the long run. There must be board performance reviews after every three to have regular performance reviews and to have complete

knowledge about the strengths and weaknesses of the company. These reviews helps to give an eagle eye view of the company and the faults in governance can easily be identified. The codes should be made compulsory for the listed companies and essential to follow, and to have transparency in terms of their performance so they must have their transparency and stakeholders have a safe journey with the corporation 4.3. Conclusion: This study was conducted with aim to analyze the role of risk management in corporate governance Study has revealed that these business organization have a very complex structure and a lot of risks are associated with it. Global scene has changed with the passage of time with the technology and growing needs of the customers. People all over the world are now more informed about the changes across the globe and their taste and needs change quickly. To cope up with all this it has become essential for the business community to come up with innovations to meet the customers demands. The new idea, products, improved services in the market not only brings comfort and luxuries but also risks with it. Because it is a well known fact that whenever you try something new and initiate a new venture element of risk is always there. As we have seen corporations have suffered a lot of crisis, which were not well prepared for the risks. Weak corporate governance also leads to the failure in business. It has become essential to adopt new policies, laws, regulations and to improve risk management strategies of your company in order to survive in global market. Effective management of risk incorporated with corporate governance helps to alleviate the profits of the business and sustainable market position can also be acquired through it. The laws of corporate governance have been changed globally to meet up the requirements of modern business world. Globally business communities and nations have realized that without the effective planning of risks it is not possible to survive. The environment of the business in which an organization operates keeps on changing and have evolved a lot since earlier times as we have witnessed, every new activity and introduction of new techniques and methods have an element of risk associated with it as profits are always associated with risks and comes in part and parcel with it. It is not possible to have Risk free decisions in business. And the purpose of internal control is making sure the safety of organization assets and to help it increase its profit safely. This could only be done if risks are examined carefully and in a routine and continuously,

their level of seriousness and to the extent organization is open to all these risks. This all helps the management to predict the upcoming risks and then formulates the planning according to it. This means it is essential to have an effective risk management in an organization.

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