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Introduction

Businesses are faced with different forms of risks originating from internal and external sources. For example, employees may be involved in fraudulent activities, hence affecting the organisation’s financial stability. Secondly, firms’ financial stability may be affected by economic changes such as the occurrence of financial crises (Anand 2007). Such issues may limit an organisation’s ability to achieve its profit and wealth maximisation objectives. In an effort to protect their interest, shareholders delegate the daily operation of their businesses to managers, hence leading to the creation of an agency-relationship between shareholders and managers.

In the course of executing their duties, managers have an obligation to ensure that they act in the best interest of the shareholders (Adeyemi & Olowu 2013). In a bid to attain this goal, managers have to take into account different issues that might affect their role in day-to-day running of an organisation. One of these issues includes the prevailing risks. Cohen and Sayag (2006) argue that managers have an obligation to ensure that such risks are avoided or eliminated where possible. Adopting an effective corporate governance system is one of the strategies that businesses can integrate in order to minimise and eliminate risks (Rand & Chambers 2011).

Adeyemi (2006, p. 52) defines corporate governance as ‘the structures, mechanisms and modalities through which firms goals and objectives are set with regard to the shareholders’ interests’. Subsequently, corporate governance aims at enhancing the shareholders’ value by promoting an organisation’s financial stability. The need to implement corporate governance arises from the existence of separation between managers and shareholders.

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