Corporate Governance

From Open Risk Manual

Definition

Corporate Governance denotes the set of processes and controls (whether explicit and defined or implicit) through which a firm, institution (corporate entity) is operating. Corporate governance has implications for the entire spectrum of the firm's footprint, both internal and external. In the context of Risk Management) corporate governance affects the ability of the firm the identify, measure and manage the various risks it is facing.

Corporate governance is effectively (the internal to the firm) pattern of information exchange and management control that connects the various stakeholders:

Stakeholder List

  • Board of Directors
  • Managers (at various hiearchical levels and with different mandates. This category includes internal risk management and internal audit functions)
  • Shareholders (different forms of equity ownership imply different amount of control)
  • Creditors (both professional, e.g Banks and individuals, e.g. Depositors, Peer-to-peer lenders etc)
  • External Auditors
  • Regulators
  • Employees
  • Clients
  • Other participants in the environemnt in which the firm operates


Poor Governance Indicators

The general indicator of poor governance is when the relationships between stakeholders are not managed in an informed and transparent manner. There are several specific forms:

  • Diverging interests between management and shareholders
  • Diverging interests between shareholders and creditors
  • Capture of external regulators / auditors
  • Diverging interests berween shareholders and wider society

Risk Management Implications

Given that a large fraction of modern life is organized along corporate lines, the risk management implications of poor governance are very significant. Poor corporate governance is a Risk Factor that creates a range of potential risks for the firm itself:


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