The Role of Risk Management in Corporate Governance

38 Pages Posted: 10 Nov 2015

See all articles by Andrew Ellul

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

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Date Written: September 1, 2015

Abstract

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

Keywords: banking, risk management, risk taking, corporate governance, ownership structure, board expertise, executive compensation

JEL Classification: G20, G21, G24, G28, G32, G34

Suggested Citation

Ellul, Andrew, The Role of Risk Management in Corporate Governance (September 1, 2015). Kelley School of Business Research Paper No. 15-81, Available at SSRN: https://ssrn.com/abstract=2688106 or http://dx.doi.org/10.2139/ssrn.2688106

Andrew Ellul (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

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Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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