Herick Ondigo


Effective risk management is accepted as a major cornerstone of bank management by
academicians, practitioners and well as regulators. Acknowledging this reality and the need for a
comprehensive approach to deal with bank risk management, the Basel Committee on Banking
Supervision adopted the Base I Accords, followed by the Basel II Accords and more recently, the
Basel III accords, to attempt to deal with the critical matter in the banking industry. This study
aims to undertake a critical theoretical literature review on risk management, firm characteristics,
corporate governance and performance of commercial banks. The paper starts from the
theoretical and empirical proposition that the risk management, firm characteristics as well as
corporate governance effectively leads to improved bank performance. The paper argues that risk
management coupled with theexternal demands for efficiency in banks (external corporate
governance) translates to internal, organizational arrangements for performance management and
incentive system design (internal governance), leads into better performance of banks. Further it
proposes that firm characteristics such as ownership structure, size and financial architecture can
influence the nature of the relationship among risk management, corporate governance and bank
performance.The most common firm characteristics being included as variables in corporate
governance or risk management researches arefirm size,leverage and industry type. The
influence of these firm characteristics on the relationship between risk management and firm
performance however is not well documented.The study presents a conceptual framework guided
by the following theories: enterprise risk management framework, agency theory, the
stewardship theory, the stakeholder theory. The study concludes by identifying and discussing
the knowledge gaps and documenting four possible areas for researches including: the effect of
risk management on bank performance; the mediating effect of corporate governance on the
relationship betweenrisk management;the moderating effect of firm characteristics on the
relationship between risk management and corporate governance as well as the moderating effect
of 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 risk
management, corporate governance and firm characteristics in isolation or in combinations,
however future research could focus on the effect of macroeconomic variables such as, financial
crisis, exchange rate, inflation rates, money supply and Gross domestic product as well micro
economic variables such as corporate strategy and management quality on the relationship
between risk management, corporate governance and bank .performance. Finally, future research
could focus on the effect ofrisk management and corporate governance on shareholder return for
listed firms.
Key Words: Risk Management, Corporate Governance, Firm Characteristic

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