The Role of Risk Management in Corporate Governance

Posted: 11 Dec 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: December 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 nonfinancial 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.

Suggested Citation

Ellul, Andrew, The Role of Risk Management in Corporate Governance (December 2015). Annual Review of Financial Economics, Vol. 7, pp. 279-299, 2015, Available at SSRN: https://ssrn.com/abstract=2702335 or http://dx.doi.org/10.1146/annurev-financial-111414-125820

Andrew Ellul (Contact Author)

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

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Centre for Economic Policy Research (CEPR) ( email )

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

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