MARKET RISK DISCLOSURE AND CORPORATE GOVERNANCE STRUCTURE: By Nishi Kothari

Market risk disclosure and corporate governance structure – Increasing capital market activities?This article proposes to integrate corporate governance structures with risk compliance conceptualities to showcase market proponents affecting compliance practices. The aim is to analyse empirical nuances imposed by corporate governance structures, implicating demographic traits of management teams and their voluntary risk disclosure practices in financial institutions and banks. Various research findings showcase - high encompassments of profitability, auditing, and regularity within large banks have higher levels of risk disclosure practices. A strategic overview of implications for banks stockholder, regularity bodies and other groups affected by corporate governance implications shall be augmented to enunciate risk reporting in the financial and banking sector.[[1]]

Corporate Governance and Banking Sector.

Market disclosures circumscribed under banking contextualises require a decent amount of corporate governance and regulations for moniterrance. Various organisations specifically bank and financial institutions are playing major roles in the financial system of the country, hence they require good corporate governance structures to risks, enhance transparency and extrapolate public confidence. This ensures greater decision making and rational investment correlation.[[2]]

Framework Correlations

Corporate governance tries to extrapolate a system of checks and balances with due considerations to internal and external encompassment’s educed by companies. The same facilitates the discharge of financial accountability by stakeholders and financial institutions to act in accordance to the policies of Corporate Social Responsibility, aligning with the corporate governance structure. Another aspect impeding the aforementioned framework is the conceptualisation of corporate governance to be a system and process by which organisations are regulated to enhance shareholder value and performance. The same affecting the management structure, the sufficiency and reliability of corporate effectiveness and risk disclosure systems.[[3]]

Theories to explain corporate governance and market risk disclosures.

Agency theories showcase discrepancies between directors and shareholders when interest circumference the organisation differ. A way to tackle the aforementioned conceptuality is by using established investigations to review monitoring mechanisms such as audit committees, external and internal auditing encompassments and financial data syndicators to provide answers for mitigating agency problems – to provide top management with accurate resources for reporting. There is an important emphasis on the board of directors to regulate and monitor management decisions.

Information Asymmetry, another theorywhich extrapolates control systems prevalent between internal directors and external investors. Managers need to reduce information asymmetries by using management objectivity to benefit various investors and market users. When internal operators decide to showcase risk information to decrease conflicts, a system of accountability and control is enunciated within the respective realm. The management may decide to disclose information to enunciate their competence and compatibility to increase transparency and accountability. [[4]]            

Demographic traits – Mediums of Theories and Enforcing Agents.

Various research extrapolations showcase the demographic traits affecting voluntary risk disclosure practices. Banks of large size, greater ownership, higher profitability ratings, regularities of audit committee meets and inculcation of mixed gender managers have a higher impact on the levels of risk disclosure practices. Board sizements have direct implications on variables affecting disclosure practices in banks.

These theories extrapolate an important concept and are mediums for the imposition of the same. These implications are aligned to the fact that by information sent towards these banks, financial institutions and other interested groups lead to the augmentation of voluntary risks reported in the corporate realm. It poses to increase transparency via corporate structures regulating information adequacy and increased market efficiency. They extend towards propositioning governance, board demographics and risk disclosure literature by justifying and empirically investigating the implications of such factors and theories in regards to risk disclosure practices. The adjustment of the same is important as it tends to dematerialise the inclusiveness of the banking environment. [[5]]

Features of Corporate Governance Structures for voluntary risk disclosure.

1.     Linkages of board and executive authorities with agent related mechanisms, i.e. incentive compensations and ownership control variables, and risk management disclosure volume examine the implications on the degree of financial risk management.

2.     Importance of managerial and executive risk modulation shall affect incentive contracts on the degree of corporate risk management.

3.     Managers owning more shares of the stock of their firms manage more financial risks as opposed to those who hold more stock options – manage less financial risks, post controlling for other risk management variables such as leverage and degree of business diversification.

4.     Extent of Enterprise Risk Management – positively relates to certain key governance and organisation factors i.e. the presence of the Chief Risk Officer, Board Independence, Support from the CEO, CFO and auditors.

Formatively the following exponents can be deduced to ensure market risk disclosure by corporate governance structures.

·       Increase in the number of independent board members affects market risk disclosure positively.

·       Increase in minority controlling vote ownership negatively impacts degree of voluntary risk disclosure.

·       CEO incentive compensation affects voluntary risk management disclosure positively – other things being equal.

·       Interim reports, prospectuses, press releases and the internet highly affect the decision making process – sufficient data can be provided by these sources. [[6]]

 

Conclusion

Structurisations of regulative authorities impact the financial market in mainly two dimensions – the board of directors affected with governance mechanisms and recent regulations derived from research postulations within the banking sector. The theories help to showcase the effects, and try to decipher the costs involved for market risk disclosures, additionally the degree of them impacting the banking sector. Hence, using the propositions aforementioned, i.e. the features, with the theories, we can deduce the importance of ownership and control structures (key corporate governance variables) – impacting risk disclosures and the intensity with which they bring transparency in the future.

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[1]Guidance for Directors: Governance Processes for Control, (December). Canadian Institute of Chartered Accountants (CICA) (1995).

[2]ohen, J., Krishnamoorthy, G., and A. M. Wright, Corporate Governance and The Audit Process, Contemporary Accounting Research, 19 (4), 573-594, (2002).

[3]Cronqvist, H., and M. Nilsson, Agency Costs of Controlling Minority Shareholders, JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, 38 (4), 695-719, (2003).

[4]Hart, O, Incomplete Contracts and the Theory of the Firm, JOURNAL OF LAW, ECONOMICS AND ORGANIZATION, 4, 119-139, (1988).

[5]Laporta, R., Lopez-de-Silanes, F., Shleifer, F., and R. Vishny, Corporate Ownership around the World, JOURNAL OF FINANCE, 54, 471-517, (1999).

[6] Williamson, Oliver. E, The Mechanisms of Governance NEW YORK: THE FREE PRESS, (1996).