The Role of Corporate Governance in the Events Leading Up to the Global Financial Crisis : Analysis of Aggressive Risk-Taking

This paper seeks to explain how failures in corporate governance contributed to the global financial crisis. More precisely, it studies how the current corporate governance systems failed to safeguard against aggressive risk taking and to provide the control that companies need in order to promote sound business practices. This paper concludes that aggressive risk taking, a corporate governance aspect, was a major cause of the 2007-2008 financial crisis. Inadequate risk management by executives and boards of directors is to be blamed for the credit market collapse and resulting financial crisis. This paper identifies three elements – improper incentive system, rationalization and opportunity – that encouraged managers in financial institutions to engage in aggressive risk taking. This paper contributes directly to understanding what went wrong in the corporate governance system based on a review of the literature. It introduces recommendations to deal with aggressive risk taking behavior in order to avoid future crisis. The outcomes of the study are directly relevant to the corporate decision-makers where the recommendations are tangible and presented in ways that decision-makers could implement