Risk Oversight Research Articles

Corporate Governance as Risk Regulation in China: A Comparative View of Risk Oversight, Risk Management, and Accountability

Risk management and oversight have long been recognized as core corporate governance issues and have gained renewed attention in the wake of the financial crisis. Recent corporate governance reforms in China follow these global trends. This article is the first to examine the intersections between corporate governance and risk regulation in China from a comparative perspective. It surveys corporate governance tools that have been adopted by Chinese regulators and firms to motivate effective risk oversight and risk management across the corporate enterprise, focusing on China's regulation of internal controls and risk management systems. These internal mechanisms are particularly important given the widely recognized limits of external monitoring and enforcement mechanisms in China.This article observes that recent guidelines on enterprise risk management (ERM) and internal controls reflect international corporate governance standards and that China adopts a broad perspective on risk oversight that extends to both financial and non-financial risks. China's adoption of international models offers a new opportunity to reexamine longstanding debates on the potential for global corporate governance convergence. This article argues that China has adopted a regulatory approach to internal risk oversight and management that is consistent with its historical law reform trajectory, the reality of China's state-dominated equity markets, and the continued influence of the state on firm management. Its conclusions support the literature on the path dependency of corporate governance systems and prior comparative studies of corporate governance in China that find convergence of form but divergence of function.

Crisis at the Bottom of the Pyramid: A Case Study of Micro-Finance in India

The micro-finance industry in India is in the midst of the most severe crisis in its 25 years history. The genesis of the problem was the clash between the original micro-finance goals of poverty alleviation with the profit maximization goals of the micro-finance institutions. In the state of Andhra Pradesh, micro-finance institutions have been accused of lending practices that adversely affected the lives of the poor borrower, to the extent that they were driven to commit suicide. This led to government intervention with an ordinance that effectively stopped collection of micro-debt and prohibited new micro-loans in the state. The Andhra Pradesh government action led to a 600 fold decrease in financing to the very poorest of India’s citizens. The more systemic outcome from this was the lending freeze by the banks to the micro-finance sector, not just in the state but all across India. The crisis that erupted initially in the state of Andhra Pradesh in the early October 2010 had its contagion spread across the whole country and globally. This current stalemate brings to fore the importance and urgency of getting the right policy for the micro-finance sector. This paper provides background and insight to the crisis which raises important questions about the evolution of micro-finance market. This paper also delineates the three distinct aspects where the government needs to play a pivotal role for sustainable development of micro-finance in India. The first role is to protect the rights of the micro-borrower, the consumer of the micro-financial services. The second role is that of prudential oversight of risk taking by firms operating in micro-finance. The third role is a developmental role where the key issues are diversification of access to funds, innovations in distribution and product structure and the use of new technologies. Each of these roles needs to be placed in an existing or a new regulatory agency.

Introducing the Systemic Risk Council

Facing the challenge of restoring a sense of urgency about proper oversight of systemic risk

Risk Oversight: Is it “Broken”? What are the New Expectations?

Following the global financial crisis of 2008 commissions were convened around the world to study what went wrong. One of the common themes that emerged is that many of the companies at the root of the financial crisis had some combination of weak risk management and deficient board oversight of risk. Unfortunately, few of the commission, including the ones convened in the U.S., even took the time to probe or consider the role internal audit played in the periods leading up to the crisis. The widely held assumption by commission members was that the approaches used by the majority of internal audit departments are incapable of preventing the type of massive governance lapse at the root of the 2008 global crisis. This article analyzes the traditional role played by boards, senior management and internal audit function and proposes significant changes in the approach used by boards, senior executives and auditors to prevent yet another wave of trust debilitating corporate governance breakdowns.

ICGN corporate risk oversight guidelines: The role of the board and institutional shareholders

Oversight of risk has become a significant issue in the corporate governance debate following the failure of traditional institutions. In the aftermath of the crisis, the International Corporate Governance Network (ICGN) developed the ‘ICGN Corporate Risk Oversight Guidelines’ to help institutional investors assess how effectively the boards of their portfolio companies carry out their oversight function regarding financial and non-financial risk. The ICGN Guidelines reflect a consensus achieved during a year of discussions between technical committee members, the sounding board and contributors of comment letters, who represented various institutions and jurisdictions across the world. These debates have culminated in a document that discusses not only the board and company process of risk management and risk oversight and disclosures concerning financial and non-financial risks, but also the investors' responsibilities in oversight and their communication with the companies. The purpose of this paper is to present the ICGN Guidelines with a commentary linking it to the current debate and developments in the corporate world.

The new model of governance and risk management for financial institutions

The paper proposes a new model of governance and risk management consisting of four components: (i) board risk oversight responsibilities, (ii) a board level risk committee, (iii) an executive risk committee and (iv) an individual with responsibility for overall risk management. Some companies are subject to the Dodd–Frank Act and are forming a stand-alone risk committee; other companies still have the option of adopting these best practices. The paper contends that the new model promotes greater risk disclosure, the audit committee should complement the risk management committee, the board level risk committee should have an independent member with extensive risk management experience, the board should develop a clear risk position, management should form an executive risk committee, have a chief risk officer, create an internal risk intelligence function and, if these are done, institutions will enjoy higher stock prices.

Fuel Risk Management at American Electric Power

AbstractThe senior management team and board of directors at American Electric Power (AEP) have emphasized the importance of an Enterprise Risk Management approach for dealing with the wide array of risk exposures that the firm faces. Senior management has put in place a risk governance structure that facilitates the identification of major risk exposures, assesses their impact on the firm's overall risk profile, and interacts the risk management process with the strategic planning process. Central to this structure is the firm's Risk Executive Committee, which includes the senior leadership of the firm and the Enterprise Risk Oversight staff. Members of the AEP Enterprise Risk Oversight group have just returned from a meeting of the Risk Executive Committee. The discussion at the meeting focused on an event that recently came to the firm's attention—an unexpected disruption in the firm's coal supply over the coming year due to necessary repairs in railroad facilities near the coal source. By the end of the week, the Enterprise Risk Oversight group needs to communicate with the relevant teams within the organization as part of its effort to identify the potential repercussions of the event for the enterprise. In addition, the Risk Executive Committee would like the groups to identify other possible adverse events that could occur and steps that should be taken now in preparation.

ICGN Corporate Risk Oversight Guidelines: The Role of the Board and Institutional Shareholders

Oversight of risk has become a significant issue in the corporate governance debate following the failure of traditional institutions. In the aftermath of the crisis, the International Corporate Governance Network developed the ICGN Corporate Risk Oversight Guidelines to help institutional investors assess how effectively the boards of their portfolio companies carry out their oversight function regarding financial and non-financial risk. The Guidelines reflect a consensus achieved during a year of discussions between technical committee members, the sounding board and contributors of comment letters, who represented various institutions and jurisdictions across the world. These debates have culminated in a document which discusses not only the board and company process of risk management and risk oversight, disclosures concerning financial and non-financial risks but also the investors' responsibilities in oversight and their communication with the companies. The purpose of this article is to present the Guidelines with a commentary linking it to the current debate and developments in the corporate world.

Preventing the next wave of unreliable financial reporting: Why US Congress should amend Section 404 of the Sarbanes–Oxley Act

Sarbanes–Oxley Section 404 calls for opinions from CEOs, CFOs and external auditors of US listed companies on control effectiveness over financial reporting. Section 404 has almost certainly proven to be the most costly regulatory intervention in the history of securities regulation, costing billions of dollars each year. Unfortunately, since Section 404 was implemented in 2004, thousands of materially wrong financial statements supported by SOX Section 404 control effectiveness assurances have been issued from CEOs and CFOs, including those at financial institutions at the center of the 2008 global financial crisis, as well as their external auditors. In light of SOX 404's poor track record and massive costs, the authors recommend that US Congress enact an amendment to Section 404 to require CEO, CFO and external auditor opinions on the ‘effectiveness of risk management processes’ – not ‘control effectiveness’. A true risk-based approach would allocate resources to the most statistically probable root causes that account for the majority of materially wrong financial statements. The authors believe that this legislative change will result in significantly more reliable financial statements, reduce long-term Section 404 compliance costs, better align with the new global regulatory focus on risk management and risk oversight and, most importantly, restore global confidence in US corporate governance and capital markets.

Transparency Regulation in Financial Markets – Moving into the Surveillance Age?

In the wake of the global financial crisis, the trajectory of legal reforms is likely to turn towards more transparency regulation. This article argues that transparency regulation will take on a new role of surveillance as intelligence and data mining expand in the wholesale financial sector, supporting the creation of designated systemic risk oversight regulators.The role of market discipline, which has been acknowledged to be weak leading up to the financial crisis, is likely to be eclipsed by a more technocratic governance in the financial sector. In this article, however, concerns are raised about the expansion of technocratic surveillance and whether financial sector participants would internalise the discipline of regulatory control. Certain endemic features of the financial sector will pose challenges for financial regulation even in the surveillance age.

Quality of board of directors and capital structure decisions in Malaysian companies

This study examines the relationship between board structure and board process on capital structure decisions of Malaysian public listed companies. The study combines a survey approach and secondary data from the year 2007 to 2009. Based on a sample of 175 companies, the findings reveal that directors’ risk appetite is positively correlated to company leverage while directors’ tenure has negative relationship with leverage. With regards to board process, four variables are identified to be negatively correlated to capital structure which is boards’ risk oversight, performance of independent directors, CEO’s performance evaluation and accessibility of information.

International pharmaceutical social risk regulation: An ethical perspective

Pharmaceutical production and distribution constitute big business. For the companies the rewards can be substantial. Rates of return on drug company investments tend to be higher than many other manufacturing enterprises. But reward is only one side of the story. There is also the issue of social risk, the focus of this article. Social risk for pharmaceutical production is especially pronounced. An ineffective or, worse, dangerous drug, can have dire consequences for the population at large. For this reason, there is elaborate government regulation and oversight of drug safety and risk. These systems, especially in the US and Europe, will be the main focus of this paper. The two systems will be described, and then compared and contrasted in terms of their framing of social risk and actions governments take to limit it. Systems elsewhere, especially in the developing world, are increasing in relative importance and these will be briefly discussed as well. Ethical issues that have arisen in these various systems will be surfaced and analysed. The paper will close with some conclusions and suggestions for further research.

The Evolving Contours of the Board's Risk Management Function in UK Corporate Governance

The well-documented banking company failures that occurred in the UK over 2007 and 2008 have enhanced the perceived importance and scope of the risk management function performed by boards. It is consequently a universal expectation of non-executive directors (NEDs) today that they provide a high-level challenge to a company's executive on core business risks. This article examines the recent corporate governance reforms introduced by Sir David Walker in 2009 and the Financial Reporting Council (FRC) in 2010 as they relate to NEDs' evolving risk oversight role. It also documents the regulatory development of the board's risk management function in the UK prior to 2007, explains the impact of the UK banking collapses of 2007–08 in reframing boards' risk function, and also critically assesses the key Walker and FRC recommendations in this regard. It will be demonstrated that over recent years the board's internal control remit has shifted from one of risk management—denoting the mitigation of the extraneous adverse effects of business activities (with limited questioning of the viability of those underlying practices themselves)—to one of risk moderation—whereby the inherent riskiness of a firm's core entrepreneurial activities is now placed at the very centre of the board's risk compass. The article then explores the relationship between NEDs' extended risk management function today and the independent board paradigm that has been increasingly dominant within UK corporate governance over recent decades, and concludes with a prediction as to the future development of British board structures in light of the recent reforms.

Risk Management: A Corporate Governance Manual

As we sift through the debris of the last economic crisis, we are reminded again that most business disasters can be traced back to bad risk taking. In particular, when managers over reach and expose their businesses to the wrong type of risks or too much risk, investors in these firms (stockholders and lenders) bear the immediate cost, but employees, customers and taxpayers all suffer collateral damage. Of all the tasks that make up corporate governance, none is more critical than oversight of risk: Are the decision makers in the firm taking the right risks and the right amount of these risks, hedging the appropriate risks and allowing the correct risks to pass through to investors? In this manual, we aim to lay out the scope of risk management, by first defining risk and looking at how human beings react to risk in the first three chapters. We then look at measuring and dealing with risk in the next few chapters, by examining how risk measures have evolved over time and the different tools that we use to incorporate risk into decision making. We close the manual by arguing for a much broader view of risk management and its impact on the value of a business and by developing a template for building a good risk taking organization. Each chapter begins by stating a theme for that chapter, followed by a brief examination of the key issues relating to that theme. At the end of each chapter is a set of tasks that can be used to convert the abstractions and propositions in that chapter to real world corporate governance tests/measures for any organization.

Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board

The global response to the financial crisis has included the establishment of new, or significantly revamped, institutions specifically dedicated to the task of overseeing systemic risk. Internationally, the Financial Stability Forum has morphed into the Financial Stability Board (FSB) and has been given a broader mandate. In Europe, a new body, the European Systemic Risk Board (ESRB), has been assigned the role of monitoring and assessing systemic risks. National systemic risk oversight bodies are being set up as well. Strengthening and reinforcing are words that feature prominently in many policy statements relating to these institutional developments but many of these bodies, including the FSB and the ESRB, are designed to operate without legally-binding powers. This raises questions about how powerful they will actually prove to be. In this article we suggest that lack of formal power need not prevent systemic risk oversight bodies from acting in a credible and authoritative manner. We draw on existing experience of soft laws and institutions in international financial regulation to support this assessment. However, we also acknowledge that softer approaches have been shown to have weaknesses, particularly with respect to surveillance and enforcement. We suggest that the financial crisis has highlighted the limits of what can be achieved through informal methods and the importance of exploring harder alternatives. We consider what the ESRB in particular can learn from the wealth of accumulated experience at the international level with respect to both strengths and weaknesses of an informal approach. At the same time, we emphasise that there is much about the ESRB’s structure that is special because of its place within the EU constitutional and legal framework and in respect of which lessons drawn from international level experience do not pertain. We explore the implications of the ESRB’s special situation. Close connections to bodies with formal power may enhance the ESRB’s effectiveness. On the other hand, this capacity to have hard effect could also inhibit the ESRB. The net result could be the loss of some of the advantages, such as flexibility and willingness to experiment, that are associated with a softer approach. An edited version of this article, entitled ‘Can Soft Law Bodies be Effective? The Special Case of the European Systemic Risk Board’, which focuses mainly on the ESRB and European law, is forthcoming in the European Law Review (December 2010).

Parenting Practices, Parents' Underestimation of Daughters' Risks, and Alcohol and Sexual Behaviors of Urban Girls

Purpose In urban economically distressed communities, high rates of early sexual initiation combined with alcohol use place adolescent girls at risk for myriad negative health consequences. This article reports on the extent to which parents of young teens underestimate both the risks their daughters are exposed to and the considerable influence that they have over their children's decisions and behaviors. Methods Surveys were conducted with more than 700 sixth-grade girls and their parents, recruited from seven New York City schools serving low-income families. Bivariate and multivariate analyses examined relationships among parents' practices and perceptions of daughters' risks, girls' reports of parenting, and outcomes of girls' alcohol use, media and peer conduct, and heterosexual romantic and social behaviors that typically precede sexual intercourse. Results Although only four parents thought that their daughters had used alcohol, 22% of the daughters reported drinking in the past year. Approximately 5% of parents thought that daughters had hugged and kissed a boy for a long time or had “hung out” with older boys, whereas 38% of girls reported these behaviors. Parents' underestimation of risk was correlated with lower reports of positive parenting practices by daughters. In multivariate analyses, girls' reports of parental oversight, rules, and disapproval of risk are associated with all three behavioral outcomes. Adult reports of parenting practices are associated with girls' conduct and heterosexual behaviors, but not with their alcohol use. Conclusion Creating greater awareness of the early onset of risk behaviors among urban adolescent girls is important for fostering positive parenting practices, which in turn may help parents to support their daughters' healthier choices.

The changing role of the CFO in a post‐Sarbanes‐Oxley world

Joining Freddie Mac in April 2003, Martin F. Baumann is the Executive Vice President Finance and Chief Financial Officer. Baumann is responsible for the corporation's accounting, financial reporting, tax reporting, budgeting, capital oversight, economic research and analysis, and operational risk oversight. Prior to joining Freddie Mac, Baumann was a Partner at PricewaterhouseCoopers (PwC). He joined PwC in 1969, becoming a Partner in 1980, and also serving as Deputy Chairman World Financial Services Practice and as Global Banking Leader. Whilst ar PwC, he also served as the lead global relationship partner responsible for PwC services to such major companies as J.P. Morgan Chase, The World Bank and Prudential Financial. Here he speaks about the changing role of the CFO.

Audit Committees Oversight Of Information Technology Risk

This exploratory study examines the role of the audit committee in overseeing information technology (IT) risk. We address the degree of audit committee oversight of specific IT risks, as well as factors associated with variations in audit committee IT oversight. Based on responses from 39 audit committee members, we found (1) little audit committee emphasis on oversight of IT risks, (2) audit committees involved with IT oversight focus on more traditional risks (e.g., monitoring), while very little attention is devoted to IT acquisition and implementation, and (3) the amount of IT oversight is positively associated with the responding members auditing experience and prior familiarity with the COBIT model for assessing IT risks. Audit committee independence, diligence, and expertise, company size, and industry were not significantly associated with IT oversight.

2.3.3 Risk and Opportunity Management and the Project Cycle

AbstractSystem engineering, as a function, is responsible for oversight of risk and opportunity management of a project. Design engineering is likewise responsible for risk and opportunity management at the Configuration Item level and below. Any complete process model, designed to illustrate engineering responsibilities, must emphasize the risk and opportunity aspects of system engineering management, and must illustrate these important activities in the context of the overall system engineering process. The model presented in this paper meets these objectives.The evolving baseline for the technical aspects of the project cycle can be illustrated during decomposition and definition process in a set of descending steps, and during the integration and verification process in a set of ascending steps. This representation creates a “Vee,” with the evolving baseline represented by the legs, or core, of the “Vee.” Risk and opportunity management activities, which are essential to the process, are shown as supporting activities off the core of the “Vee.”Use of a “Vee” model was introduced in our paper presented at the first NCOSE symposium in Chattanooga in October 1991. The “Vee” model illustrates the end‐to‐end involvement of system engineering in the development process, emphasizes the use of risk reduction and opportunity enhancement techniques, and encourages the implementation of concurrent engineering (including integrated product teams).During the past three years we have gained valuable experience in using this model as the heart of our System Engineering and Project Management training and consulting with major government and commercial clients. As a result of this highly illustrative model we have experienced considerable success in conveying the intricacies of the system engineering process to system engineers, project and program managers, and executives.As noted in our 1991 paper, others have considered a “Vee” project model in the past, but they only considered the core of the “Vee.” The enthusiastic acceptance of our model by many professionals is based on the power of the model in providing visualization of the complete development process. Key features of the model are: 1) Only the activities on the core of the “Vee” are part of the evolving baseline managed under configuration control, 2) project risk and opportunity management activities are off‐core activities external to the current baseline, and 3) time and baseline maturity move to the right, which helps illustrate the impact to the approved baseline caused by users with changing requirements.Enhanced graphics and lessons‐learned examples have been included to provide full understanding of how these concepts are used to drive toward optimum solutions based on value, risk, and opportunity.

Risk Management Practices: A Critical Diagnosis of Some Selected Commercial Banks in Bangladesh

The paper is about risk management practices of commercial banks in Bangladesh based on five commercial banks operating in Bangladesh. The number of respondents was 25, five from each bank. While collecting the requisite data, five points Likert Scale has been used. The objective of the study was to critically examine risk management practices of Bangladeshi banks i.e., types of risk facing a bank, procedure and techniques used to minimize the risk etc. The study also examines how far the banks follow the guidelines of Bangladesh Bank regarding risk management. The study reveals that credit risk, market risk and operational risk are the major risks to the bankers which are managed through three layers of management system. The Board of Directors performs the responsibility of the main risk oversight, the Executive Committee monitors risk and the Audit Committee oversees all the activities of banking operations. In the context of opinions regarding use of risk management techniques, it is found that internal rating system and risk adjusted rate of return on capital are relatively more important techniques used by banks. Key Words: Risk; Risk Management; Risk Management Techniques; Banking.DOI: http://dx.doi.org/10.3329/jbt.v6i1.9992 Journal of Technology (Dhaka) Vol. 6(1), January-June, 2011 15-35