Wangari Maathai Institute for Peace and Environmental Studies, University of Nairobi
Abstract
Effective risk management is accepted as a major cornerstone of bank management byacademicians, practitioners and well as regulators. Acknowledging this reality and the need for acomprehensive approach to deal with bank risk management, the Basel Committee on BankingSupervision adopted the Base I Accords, followed by the Basel II Accords and more recently, theBasel III accords, to attempt to deal with the critical matter in the banking industry. This studyaims to undertake a critical theoretical literature review on risk management, firm characteristics,corporate governance and performance of commercial banks. The paper starts from thetheoretical and empirical proposition that the risk management, firm characteristics as well ascorporate governance effectively leads to improved bank performance. The paper argues that riskmanagement coupled with theexternal demands for efficiency in banks (external corporategovernance) translates to internal, organizational arrangements for performance management andincentive system design (internal governance), leads into better performance of banks. Further itproposes that firm characteristics such as ownership structure, size and financial architecture caninfluence the nature of the relationship among risk management, corporate governance and bankperformance.The most common firm characteristics being included as variables in corporategovernance or risk management researches arefirm size,leverage and industry type. Theinfluence of these firm characteristics on the relationship between risk management and firmperformance however is not well documented.The study presents a conceptual framework guidedby the following theories: enterprise risk management framework, agency theory, thestewardship theory, the stakeholder theory. The study concludes by identifying and discussingthe knowledge gaps and documenting four possible areas for researches including: the effect ofrisk management on bank performance; the mediating effect of corporate governance on therelationship betweenrisk management;the moderating effect of firm characteristics on therelationship between risk management and corporate governance as well as the moderating effectof firm characteristics on the relationship between corporate governance and firm performance;further, many studies have assumed that the efficient performance of banks’ relies on either riskmanagement, corporate governance and firm characteristics in isolation or in combinations,however future research could focus on the effect of macroeconomic variables such as, financialcrisis, exchange rate, inflation rates, money supply and Gross domestic product as well microeconomic variables such as corporate strategy and management quality on the relationshipbetween risk management, corporate governance and bank .performance. Finally, future researchcould focus on the effect ofrisk management and corporate governance on shareholder return forlisted firms.Key Words: Risk Management, Corporate Governance, Firm Characteristi
