Corporate Governance and Risk Management Failures and Scandals

Corporate Governance

Corporate governance relates to the manner in which the business is governed. It is defined by relationships between the management, shareholders, and other stakeholders. Corporate governance also sets corporate objectives, activities, and behaviors (Peterdy, 2022). On the other hand, corporate governance is not involved in routine daily tasks. Corporate governance covers several dimensions: enterprise risk management, strategic planning, accounting and disclosure, talent management, and succession planning.

Traditionally, corporate governance undertakes decisions aligned with investors’ needs and wants. This leads to the main conflict involved in corporate governance, shareholder interests vs. stakeholder interests. As already stated before, shareholder interests concern the return on their investment. On the other hand, stakeholder interests primarily involve the needs of employees, customers, supply chain partners, and members of the corporation’s community. Needless to say, these interests are usually contradictory; what is good for shareholders is not always good for stakeholders and vice versa. Good corporate governance considers both accounts when making corporate decisions.

Good Corporate Governance Principles

Good corporate governance helps to build an environment of trust, transparency, and accountability necessary for fostering long-term investment. Successful, independent governance practices are among the key requirements to achieving and maintaining public trust and, more broadly, corporate confidence. Poor governance increases the likelihood of corporate risks and failures. Such failures may impose a significant public cost and increase contagion risks (Greuning and Bratanovic, 2020). In this instance, the importance of proper corporate governance cannot be denied these days.

Moreover, national authorities have been paying increasing attention to corporate governance, as corporations are now engaged in international trade, financial flows, and the stability of global markets (Greuning and Bratanovic, 2020). This attention can be attributed to several factors, such as the growth of institutional investors, the shift from traditional corporate governance goals in favor of stakeholder interests, financial globalization, and deregulation. International organizations, such as OECD, IMF, and World Bank, have declared strong governance the main priority and have taken initiatives to define good governance benchmarks. These benchmarks include but are not limited to “oversight by the board of directors, oversight by individuals who are not involved in the day-to-day running of the various business areas, direct supervision line and an independent risk management, compliance and audit functions” (Greuning and Bratanovic, 2020). These benchmarks ensure that good corporate governance techniques are established within the organization. According to Alam et al. (2019), the main corporate governance frameworks are the following:

• It should recognize the rights of stakeholders recognized by law and encourage active cooperation between shareholders (investors) and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
• It should ensure the timely and accurate disclosure of all materials and documents regarding the corporation, including the company’s financial situation, performance, ownership, and governance.
• It should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.

Over the past decades, many academic researchers have investigated links between corporate governance and firm financial performance. Most of these academic researches point out that good corporate governance positively impacts a firm’s financial performance (Kyere and Ausloos, 2021). The argument is that before investors think of investing in a corporation, they take into consideration the firm corporate governance mechanisms (Kyere and Ausloos, 2021). One role of corporate governance is to manage these conflicts between the principals and the agents. Good corporate governance, therefore, should have strong internal mechanisms to manage various interest groups, whence to reduce high agency costs.

Risk Management and Internal Control

Risk management is the process of identifying and assessing potential legal, financial, and strategic risks to the corporation to avoid or minimize their impact. It is a part of corporate governance. There are five steps in the risk management process, identification, analysis, response planning, mitigation, and monitoring. When the risk is not managed effectively, corporate governance deteriorates, and financial institutions incur huge losses such as those that exacerbated the global financial crisis. A