FINANCE

The Global Financial and the Inadequacies of Corporate Governance

The Global Financial and the Inadequacies of Corporate Governance

In the wake of the recent financial crisis, the importance of risk management in organizations, of every size, is obvious. Conflicts of interest and insider loyalties have deprived the company management centres chargeable for risk management of adequate power and independence in addressing risk. Recent changes in company governance mirror an awareness of this drawback. Firms keep getting larger; the globe keeps expanding for the businesses. Going forward, it is important for risk professionals to think about the impact of: incentives, ethical hazard, and new product or services that they do not perceive furthermore as they may (Sun et.al, 2011, pp. 210-222). Risk management in monetary establishments is essentially linked to company governance that conditioned past failures and will fortify defences against future crises. Within the UK, the Prime Minister commissioned David Walker, a former head of Morgan Stanley International, to conduct an inquiry of company governance "in the light of the expertise of crucial loss and failure throughout the banking system" within the 2008 monetary crisis.

There is one element of a company's risk management framework that touches the very fabric of the business and that is operational risk management. Not credit risk management, not market risk management, but operational risk management. Operational risk is capable of destroying a company, either as a result of a monetary loss, loss of operating capability or loss of reputation - yet the financial services sector is still littered with examples of where operational risk management is not treated with the gravitas that is required or it deserves (Kolb, 2010, pp. 193-201 ).

Operational risk exists in every business in every sector, and every sector has its own history of operational risk events. The major difference, it would seem, is that other sectors take operational risk management very seriously and learn lessons from events, regardless of how trivial they may seem. Take the airlines, the oil and gas sector, the military, the motor industry and other similar industries - if things go wrong for companies in these sectors, there is the potential for people to lose their lives. Frequently, the damage that this can do to a company's reputation can be critical.

The culture of an organization is critical to its success in managing operational risk. Much is made of the "tone at the top" and the need for senior management to set a good example, but it has become clear as we work our way through the subprime lending crisis and the credit crunch that these two issues have been sadly lacking. In recent times we have seen evidence of poor banking practices and strategies driven largely by a search for yield and in response to increasing demands from shareholders (Yong, 2009, pp. 125-141 ). Such evidence is revealed in poor valuation practices, poor due diligence, lending multiples that bordered on the ludicrous, self-certification of income and an overreliance on funding from wholesale ...