final project of brm & f

FINAL PROJECT OF BRM & F.MBy:Rabbia QamarZeeshan RafiqUzma Naseem

Topic Impact of corporate governance and risk

management in financial banks of Pakistan

Introduction:

The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance.

Introduction:

Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.

Introduction:

Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularlycredit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.

Introduction:

Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs.

Principles of corporate governance:

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principles around which businesses are expected to operate to assure proper governance.


The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.


Rights and equitable treatment of shareholders: Organizations should respect the rights of

shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.


Interests of other stakeholders: Organizations should recognize that they have

legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.


Role and responsibilities of the board: The board needs sufficient relevant skills and

understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.


Integrity and ethical behavior: Integrity should be a fundamental requirement in

choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.


Disclosure and transparency: Organizations should clarify and make publicly

known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting.

Scope of topic:

Corporate governance and risk management are very broad topics around the globe. With the globalization and increasing investing trend of consumers the risk also increase. So for the better management of risk for consumer satisfaction it is very important to manage the risk in an effective manner.

Research Objective: The aim of this research is to find out the

relationship between the corporate governance, risk management and performance. As we know that Pakistan is under developed country, so we want to know that what are the factors that affect the performance of a firm. By doing this research, we try to dig out that factors that can affect the performance of firms, banks, and all other instutions

Theoretical framework:

Agency Theory: A supposition that explains the relationship between principals and

agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (for example, company executives). The two problems that agency theory addresses are: 1.) the problems that arise when the desires or goals of the principal and agent are in conflict, and the principal is unable to verify (because it difficult and/or expensive to do so) what the agent is actually doing; and 2.) the problems that arise when the principal and agent have different attitudes towards risk. Because of different risk tolerances, the principal and agent may each be inclined to take different actions.

Sarbanes-Oxley Act:

An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards.

Variables:

In this research, we used the following variables. Firm performance Proxies: Return on equity (ROE),Return on assets

assets (ROA)

Variables:

Corporate governance & risk management Proxies: CRO is the member of executive board.It will be determined

with the help of Dummy variables. Board Size Board independence Existence of board risk committee Board members back ground Return on assets Non-performing loans

Firm Performance:

Return on equity: The amount of net income returned as a

percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Return on Equity = Net Income/Shareholder's Equity

Return on assets:

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

Board Size:

Number of board directors in company’s owner ship structure. A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization.

Board independence:

An independent board is a corporate board that has a majority of outside directors who are not affiliated with the top executives of the firm and have minimal or no business dealings with the company to avoid potential conflicts of interests. An independent board is expected to provide vigilant oversight over firm executives to mitigate managerial opportunism and promote shareholder value.

Existence of board risk committee:

The existence of risk comitee is also a measure of risk management. It will be described in terms of dummy variables.

Board members back ground:

Here Background means the education level of board members. Their awareness to GAAP and IFRS.

Non-performing loans:

A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms.

“A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full” (International Monetary Fund).

http://en.wikipedia.org/wiki/International_Monetary_Fund

Equation:

Bank performance= Risk management + Corporate governance

Y1 = a + bX1 + bX2 + bX3 Y2 = a + bX1 + bX2 + bX3

Literature Review: (Tandelilin, May 2007) This study finds that the

relationships between corporate governance and risk

bank ownership. However, ownership structure shows partial support as a key determinant of corporate governance. Foreign-owned banks have better implemented good corporate governance than have joint venture-owned banks, state-owned banks, and private domestic-owned banks.

Literature Review: (Vincent Aebia, 2011) Most importantly, our results

indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate enti-ties), exhibit significantly higher (i.e., less negative) stock returns, ROA, and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks‟ performance during the crisis.

Literature Review: (Andrea CREMONINO°°) we introduce risk control in

portfolio decision making where in order to assess risk we developed a VaR model that is able to take in multidimensional risks. Then we ran out a simulation according to Italian banking operational procedures: our evidence shows a better performance both as total return and as Sharpie ratio. We argue that Basle standard requirements are less heavier than ones granted by internal models, modified by prudential coefficients.

Literature Review: (Chuku, THE COPORATE GOVERNANCE OF BANKS IN

NIGERIA: HOW EFFECTIVE ARE THE BOARDS OF) we find that admitting new members into the board improves bank performance up to a certain point ‘efficient limit’ where continuous increase of the board size begins to destroy value. We observe an inverse relation between board meetings and bank performance which suggest to us that ban boards that meet more often are only reacting to bank’s poor performance.

final project of brm & f

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