Critical Perspectives on the Evolution of American and British Banking
Edited by Matthew Hollow, Folarin Akinbami and Ranald Michie
Chapter 9: Effective risk management and improved corporate governance
Risk plays a critical role in entrepreneurship and finance. In entrepreneurship, there is a direct relationship between risk and reward, whereby it is necessary to incur some risk in order to reap the rewards of entrepreneurship. This is particularly the case in financial markets, where the calculation and pricing of risk is often an integral part of the activities carried out in such markets. The corporate form has developed as a medium for entrepreneurship and risk-taking in business. In order to counter the propensity of entrepreneurs to take on too much risk and, in so doing, endanger the corporation’s shareholders and other stakeholders, it has become necessary to make effective risk management an important part of the governance of corporations. This chapter explores the links between risk management and effective corporate governance. It examines some significant risk management failures in a number of European banks that faced difficulties during the global financial crisis of 2007–09. In response to these risk management failures, the chapter examines some of the ways that law can be used to improve risk management in corporations. It also analyses some of the corporate governance reforms proposed, to tackle excessive risk-taking, in the aftermath of the global financial crisis. The chapter therefore highlights the closeness of the link between effective risk management and effective corporate governance.
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