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MIDLANDS STATE UNIVESITY
FACULTY OF COMMERCE
DEPARTMENT OF BUSINESS MANAGEMENT
PROJECT TOPICRISK AND RISK MANAGEMENT DISCLOSURES AS A CORPORATE GOVERNANCE
MEASURE
A CASE OF THE ZSE LISTED BANKING AND FINANCIAL INSTITUTIONS
DISSERTATION SUBMITTED BY
R101551P
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF THE
HONOURS DEGREE IN BUSINESS MANAGEMENT
GWERU, ZIMBABWE
NOVEMBER 2013
b
APPROVAL FORM
The undersigned certify that they have supervised the student
dissertation entitled Risk and risk management disclosures as a
corporate governance measure: A case of the ZSE listed Banking
and Financial Institutions submitted in partial fulfillment of
the requirements of the Bachelor of Commerce in Business
Management Honours Degree at Midlands State University.
…………………………………….
………………………………
SUPERVISOR
DATE
……………………………………..
……………………………..
CHAIRPERSON
DATE
i
…………………………………….
………………………………
EXTERNAL EXAMINER
DATE
RELEASE FORM
NAME OF AUTHOR R101551P
DISSERTATION TITLE INVESTGATION ON RISK AND RISK
MANAGEMENT DISCLOSURE AS A CORPORATE
GOVERNANCE MEASURE: A CASE OF THE ZSE
LISTED BANKING AND FINANCIAL
INSTITUTIONS
DEGREE TITLE BACHELOR OF COMMERCE HONOURS IN
BUSINESS MANAGEMENT
ii
YEAR GRANTED 2013
Permission is granted to the Midlands State University to produce
single copies of this dissertation and to lend or sell such
copies for private, scholarly or scientific research purpose
only. The author does reserve other publication rights and
neither the project nor extensive extracts from it may be printed
or otherwise be reproduced without the author’s written
permission.
SIGNED ………………………………………
PERMANENT ADDRESS 92 HARARE DRIVE GREYSTON PARK
HARARE, ZIMBABWE
DATE ……………………………………….
DEDICATION
I dedicate this research project to my family and friends for
their support and inspiration throughout my studies
iii
ACKNOWLEDGEMENTS
All glory and honor to the almighty God for guidance and
protection throughout my studies.
iv
I wish to acknowledge the guidance and support I received from my
supervisor who made it possible for this research study to be
complete. I am indebted to thank all my family and friends who
supported me through financially and spiritual during the course
of my study. Not forgetting to express my gratitude my friend
Bonelite Mavurawa for being a pillar of strength and support in
my studies and made this piece of work possible.
v
ABSTRACT
This study aims at examine the risk and risk management
disclosures as corporate governance measures by listed Banking
and Financial institutions in Zimbabwe. The collapse of many
banking institutions that span form 1999 to 2005 in Zimbabwe has
triggered the need to conduct a research in this sector. In
response to the crisis the central bank introduced The Code1 on
corporate governance in 2004 and Minimum disclosures requirements
in 2007 so as to curb systematic collapse of the financial sector
and restore the banking public confidence. The objective of this
study was to investigate the level of compliance of listed
financial institutions with the Reserve Bank of Zimbabwe Minimum
risk management disclosures requirements of 2007, extent of Basel
2 implementation and measures in place to warrant compliance.
Previous research indicated greater disclosures are in favor of
financial risk than non-financial risk. Also the corporate
governance frameworks which mandate the disclosures of risk
management have been implemented to foster compliance in the USA,
Canada, Brazil, Germany, France, Portugal, Netherlands, Malaysia,
United Arab Emirates and South Africa respectively. Descriptive
and case study approach were employed in the study. Content
vi
analysis was conducted to measure the extent and level of risk
management disclosure in the annual reports of listed banking
financial institutions .A content analysis was performed to
examine the informative of the risk disclosures. Population of
the study comprised of regulatory officials from ZSE, SecZ, RBZ
and listed financial institutions. Research findings shows that
financial risks are being disclosed in greater detail as compared
to non-financial risks, however risk management disclosures are
not detailed enough to enable stakeholders in making an informed
decision. The study also found deficiency in monitoring and
enforcing of corporate governance practices from relevant
regulatory authorities. Therefore the study concluded that there
was limited compliance with the Reserve Bank of Zimbabwe minimum
risk disclosures requirements. The Basel 2 implementation is
lagging behind and there is no cooperation of regulatory
institutions in monitoring and enforcement of market discipline
frame works as well as a lack of good governance in listed
financial institutions. The study recommend the adoption of a
legislative approach in the implementation of governance codes,
Multi-lateral approach in ensuring market discipline and
introduction of penalties on institutions and managers in case of
non-compliance.
Table of Contents
APPROVAL FORM..................................................i
vii
RELEASE FORM..................................................iiDEDICATION...................................................iiiACKNOWLEDGEMENTS..............................................ivABSTRACT.......................................................vLIST OF TABLES................................................xiLIST OF APPENDICES...........................................xiiLIST OF ACRONYMS............................................xiiiDEFINITION OF KEY TERMS......................................xivCHAPTER 1......................................................1GENERAL INTRODUCTION...........................................11.0 Introduction..............................................11.1 Background of the study...................................11.2 Problem statement.........................................61.3 Research objectives.......................................61.4 Research questions........................................61.5 Significance of the study.................................71.6 Assumptions of the study..................................91.7 Scope of the study........................................91.8 Limitations of the study.................................101.9 Chapter summary..........................................10
CHAPTER 2.....................................................11LITERATURE REVIEW.............................................112.0 Introduction.............................................112.1 The concepts of risk.....................................112.1.1 Risk management........................................122.1.2 Risk management disclosure...........................12
viii
2.2 Previous research findings on risk and risk management disclosures..................................................122.3 Corporate Governance in Zimbabwe and risk management disclosure in comparison with other countries................142.3.1 Companies Act........................................142.3.2 Zimbabwe Stock Exchange Act Chapter 24:18............162.2.3 Securities Act Chapter 24:25.........................17
2.3 Corporate governance in banking and financial institutions of Zimbabwe..................................................192.3.1 The Banking Act 24:20................................202.3.2 The RBZ Code 1.......................................20
2.4 Development and implementation of corporate governance and challenges adopting codes....................................212.4.1 “Comply or explain” principle........................222.4.2 Legislation of corporate governance codes............242.4.3 The “Comply or else” approach........................262.4.4 “Box ticking” approach...............................26
2.5 Risk management disclosure and Corporate Governance......272.5.1 Transparency and accountability......................272.5.2 Openness.............................................292.5.3 Good board practices.................................292.5.4 Fairness.............................................302.5.5 Turnbull Guidance (Internal control: Revised Internal Control Guidance for Directors on the Combined Code 2005). .302.5.6 King 3 report (South Africa, 2009)...................302.5.7 Malaysia Code on Corporate Governance (2012).........31
2.6 Risk Management Disclosure Requirements, Regulations, Accounting standards and Conventions.........................31
ix
2.6.1 Basel 2 Convention...................................322.6.2 Portuguese Companies Code (Codigo das Sociedades Comercias).................................................332.6.3 Securities and Exchange Commission (USA).............332.6.4 Sarbanes Oxley act (USA).............................332.6.5 International Financial Reporting Standards (IFRS). . .33
2.7 Theories of risk management disclosure...................352.7.1 Agency theory........................................352.7.2 Signalling theory....................................362.7.3 Political cost theory................................362.7.4 Legitimacy theory....................................37
2.8 Merits of risk management disclosure.....................372.8.1 Encourage better risk management in banks............372.8.2 Focusing on future events (forward looking)..........382.8.3 Reduced cost of capital..............................382.8.4 Improves Accountability..............................39
2.9 Demerits of risk management disclosures..................392.9.1 Commercial sensitive information.....................392.9.2 Unreliability of forward-looking information.........40
2.10 Chapter summary.........................................41CHAPTER 3.....................................................42METHODOLOGY...................................................423.0 Introduction.............................................423.1 Research Design..........................................423.1.2 Qualitative and quantitative approaches..............433.1.3 Descriptive..........................................433.1.4 Case study...........................................44
x
3.2 Population...............................................453.2.1 Target Population....................................453.2.3 Sampling.............................................453.2.4 Sampling technique...................................463.2.5 Non-probability sampling.............................463.2.7 Sample size..........................................473.3.1 Secondary data.......................................483.3.2 Primary data.........................................493.3.2.3 Self-administered questionnaire....................503.3.2.4 Questioner design..................................503.3.2.5 Close questionnaires...............................50
3.4 Research Validity........................................513.4.1 Validity.............................................513.4.2 Reliability..........................................52
3.5 Data analysis and Data Presentation......................523.5.1 Qualitative data analysis............................523.5.2 Content Analysis.....................................523.5.3 Data presentation....................................53
3.6 Ethical considerations in research.......................533.7 Chapter summary..........................................54
Chapter 4.....................................................55Data presentation, interpretation and analysis................554.1 Introduction.............................................554.2 Questionnaire response rate..............................554.3 Demographic data.........................................564.4 The extent of financial and non-financial risks disclosures.............................................................57
xi
4.5 level of compliance with financial risks disclosure requirements.................................................594.6 The level of compliance with non –financial risks disclosures requirements.....................................604.7 The extent of implementation and compliance with the RBZ minimum disclosures requirements and Basel 2 recommendations. 624.9 Analysis and discussion of the risk and risk management disclosure and the extent of compliance with RBZ minimum disclosure requirements and Basel 2..........................654.10 How many times do the reserve bank of Zimbabwe visit banksin its supervisory duty to assess the level of compliance with the Minimum disclosure requirements?.........................674.11 How does the Zimbabwe Stock exchange determine whether listed banking institutions are complying with other regulations which are not in the Zimbabwe stock exchange Act such as the RBZ Minimum disclosure requirements..............684.12 What are the measures being implemented by Securities Commission of Zimbabwe to ensure compliance with the RBZ minimum disclosure requirements and Basel 2 recommendation.. .694.13 Chapter summary.........................................70
CHAPTER 5.....................................................71Summary of findings, conclusions, recommendations and areas of further study.................................................715.0 Introduction.............................................715.1.1 Summary findings.....................................725.1.2 The extent of disclosures on financial and non-financial risks............................................725.1.3 Level of compliance with RBZ minimum risk disclosures requirement................................................72
xii
5.1.4 The extent of compliance with RBZ minimum disclosure requirements and Basel 2...................................725.1.5 Frequency of on-site examination by RBZ in its supervisory role...........................................735.1.6 Zimbabwe stocks exchange assessment on whether listed institutions are in compliance with regulations which are noton the Zimbabwe stock exchange Act such as the RBZ minimum disclosures requirements...................................73
5.2 Conclusions..............................................735.3 Recommendations..........................................755.4 Areas of further study...................................75
References:...................................................77APPENDICES....................................................86
xiii
LIST OF TABLES
Table
2.1 Basel 2 risk management disclosures
requirements
3.1 Sample of the study
4.1 Response for distributed
questionnaires
4.1.2 Respondents academic qualifications
4.4 Extent of disclosures of financial
and non-financial risks
4.5 Level of compliance with financial risks disclosures requirements
4.6 Level of compliance with non-
financial risks disclosures requirements
4.7 Implementation and compliance with
the RBZ minimum disclosures
requirements and Basel 2
recommendations
4.8 Risk management disclosure in annual
of financial institutions
xiv
4.10 Response on the frequency of
assessment of banks
LIST OF APPENDICES
Appendix 1 Cover letter
Appendix 2 Questionnaire
xv
LIST OF ACRONYMS
ACCA Association of Chartered Certified
Accountants
BSSL Bank Supervision, Surveillance and
Licensing
BIS Bank of International Settlement
xvi
CACG Commonwealth Association of Corporate
Governance
CIS Chartered Institute of Secretaries
COSO Commission of Sponsoring Organizations
ICAZ Institute of Chartered Accountancy of
Zimbabwe
ICAEW Institute of Chartered Accountancy of
England and Wales
IFRS7 International Financial Reporting
Standards 7
MPS Monetary Policy Statement
RBZ Reserve Bank of Zimbabwe
SEC Securities Exchange Commission
SOX Sarbanes-Oxley Act
UAE United Arab Emirates
UK United Kingdom
USA United States of America
SECZ Securities Commission of Zimbabwe
ZSE Zimbabwe Stock Exchange
xvii
xviii
DEFINITION OF KEY TERMS
Corporate governance- is the framework of rules, relationships,
systems and processes within and by which authority is exercised and
controlled in corporation. It encompasses the mechanisms by which
companies, and those in control are held to account, It influences how
the objectives of the company are set and achieved, how risk is
monitored and assessed, and how performance is optimized (Australian
Corporate Governance code 2006)
Risk- is defined as anything that can create hindrances in the
way of achievement of certain objectives
Financial risks – defined financial risks as risks that have an
immediate effect on assets and liabilities in monetary term
Non-financial risks- are risks that can affect an organizations
that arises from the operating environment or in the organization
Risk management- these are measures that a put in place to
mitigate, hedge or reduce the possible impact of unfavorable
events
xix
Risk management disclosure- this is the dissemination of
information on risk management systems that are in place in an
organization through the annual reports
xx
CHAPTER 1
GENERAL INTRODUCTION
1.0 Introduction The last few years has witnessed an exponential growth in demand
for corporate disclosures. The worldwide financial crisis is a
key driver for increased disclosure demands, particularly in risk
matters (Woods, Dowd and Humphrey, 2008). In order to satisfy the
raising demands for information and warrant corporate
transparency and accountability, there seems to be general
agreement that new reporting approaches are needed (Beatti,
McInnes and Fearnely,2004).Although there are several significant
developments in the area revolving around the reporting topic,
there exist a considerable information gap. Specifically
reporting on risk in general (Beretta and Bozzolan, 2004) and the
risks inherent in intangible resources appear to be
underdeveloped (Buhk, Neilsen, Gormsen and Mouritsen, 2004). Many
developing economies such as Africa and Zimbabwe in particular
recognises that a competitive banking sector is necessary for
sustainable economic growth and that corporate governance in the
form of corporate risk transparency fosters a stable and vibrant
banking sector(Carletti and Hertman, 2003). Richer information is
not necessarily linked to positive returns’ but economic theory
presents contradictory expectations regarding the advantages of
1
greater banking stability through enhanced disclosures. More
information is rather associated with both beneficial and
negative externalities .Hence richer corporate risk management
disclosures and transparency, can influence sensible bank risk-
taking through market discipline (Barth et. al. 2004).
1.1 Background of the study Banks are risk- taking enterprises operating in an increasingly
unpredictable and unstable business environment that are required
to provide a multitude of information about their activities. The
Asian financial crisis of 1997-1998(Jayaraman and Kothari, 2012)
and the recent credit crunch of 2007-2009 have led to increased
calls arguing for even more risk and its management disclosure
(Durst et.al, 2008). Information on risk is essential to
determine the risk profile of a company, the accuracy of
securities price forecast, the estimation of market value and the
probability of corporate failure (Lang and Lundholm 1996; Beretta
and Bozzolan, 2004).Despite the critical role attributed to
banks, it is surprising this sector is apparently under
researched with respect to (risk) disclosure (Woods, Dowd and
Humphrey, 2009)
Zimbabwe’s financial sector crisis can be traced back in the
late 90’s up to the new millennium era, under different economic
conditions, financial sector regulations, political and
government set up as well as different central bank governors.
The deregulation of the financial sector of early 1990s exposed2
the banking sector to structural vulnerability and risk
management cum corporate governance challenges (Muranda,
2006) .Since 1995 depositors and financial sector investors have
lost their funds either deposited or invested in the bank without
prior warning or publication of challenges being or likely to be
faced by the banks either through press release or annual
reports.
The need for depositor and investors’ interest protection and
notification through risk and risk management disclosure was
underscored by bank failures in the 1995-2001, mainly Universal
Merchant Bank, United Merchant Bank, Zimbabwe building society
and First National Building Society (The Herald 31 May 2013).
Three banks were liquidated and nine others were put under
curatorship (Monetary Policy Statement 2006). It was reported in
the 2013 Monetary Policy Statement under the heading troubled
banks that banks failure of 2004 was due to weak governance, poor
risk taking and deficiency risk management.
The following is a list of some of and a brief explanation events
of those troubled banks: Trust Bank was put under the custody of
a curator in 2004 and then liquidated the same year after it was
discovered that that the bank was facing serious liquidity
problems, emanating from non- performing loans, poor risk
management systems while this information was kept out of public
eye through risk and risk management non-disclosure. Intermarket
Bank in March 2004 was placed under curatorship by the Central
3
bank after facing serious liquidity challenges, high level of
non-performing loans amounting Z$174 billion which was unearthed
by the curator. Barbican Bank started to face liquidity problems
in 2003 but had since late 90’s engaged in over expansion
activities against low capital to support its expansion projects
including across – boarder investments in South Africa. In 2003
the bank was placed under the curator citing poor risk management
systems and weak corporate governance structures. Later on in
2004 it was decided to liquidate Barbican bank by the Central
Bank. Royal bank was put under curatorship in 2004 due to a
number of deficiencies including high level of non-performing
loans and chronic liquidity challenges. Time Bank, CFX Bank
Limited CFX Merchant Bank, Intermarket Building Society and
Intermarket discount House were all faced operational challenges.
Risk management deficiencies were frequently associated with
every bank that failed.
It is in light of these bank failures that the Government
through the Reserve Bank Of Zimbabwe drafted the statutory
legislature Minimum Disclosure Requirements in 2004 and was
published three years later in 2007 (BLSS 2007).In this
regulation it is stipulated that banking institutions must
disclose the following risk and mitigation systems in place
credit risk, foreign exchange risk, interest rate risk, liquidity
risk, strategic risk, reputational risk, operational risk,
institution and market risk, legal and compliance risk .The RBZ
Minimum Disclosure Requirements also mandated listed financial
4
institutions to disclose their compliance with the BLSS 2007 in
their annual reports. After the 2003-2004 financial crises the
nation lost investors and depositors’ confidence and the events
that follow was the effort by the Reserve Bank of Zimbabwe in
trying to address risk management systems and their disclosure so
as to win back public confidence. The Central bank move on to
redraft the Minimum Disclosure Requirement of 2004, through the
use of the Basel 2 Conversion publication of 2004 also known as
the Basel Committee on Banking Supervision which contained the
infamous Pillar 3 or Market Discipline .The Basel 2 Accord
clearly stated that a bank should publicly disclose quantitative
and qualitative information about its risk exposure, including
its strategies for managing risk (BIS 2003) .This action was
taken as measure to promote corporate risk transparency and
effective market discipline to ensure that both depositors and
investors will be aware of the level of risk that is faced by
their banks and the risk management system being
implemented(jayaraman, 2012).After the Minimum Disclosure
Regulation was gazetted and became operational in 2004, the same
year witnessed the biggest financial sector crisis .
In year 2007 the Central bank fully adopted the principles set up
in Basel 2 Accord which were based on the fact that market
discipline imposes strong incentives on banks to maintain a
strong capital base to cushion potential future losses arising
from its risk exposures. BLSS 2007 was published with the revised
Minimum Disclosures Requirements ,in this revised edition more
5
risk management and disclosures were provided by stipulating that
all banking institution were expected to provide sufficient,
timely and detailed information that allows stakeholders to make
meaningful assessment of the bank’s financial condition and
performance, business conditions, risk profile, risk management
practices, corporate governance and compliance practices(BLSS 9
Jan, 2007).The following were major addition; capital adequacy
compliance or minimum capital requirement for banks as a pre-
condition to be licensed and to the continuance of license ,
credit risk mitigation methods such Standardised Approach,
Foundation Internal Ratings –Based Approach (IRB) and Internal
Ratings Based approach; description of stress testing method
applied, disclosure of the organisational structure of the risk
management function, procedures, policies on limits including
types of limits and how they were established
However despite the previously mentioned developments trouble
continued to rock the Zimbabwean financial sector. On June 3,
2011 the RBZ Governor announced it had put ReNaissance Merchant
bank under curatorship after filing for bankruptcy as a result of
poor corporate governance practices and failure to meet the
minimum capital threshold (Financial Gazzette 9 June 2011). In
June 2012 Interfin Bank Limited was put under curatorship citing
liquidity crisis. Depositors failed to access their funds at the
announcement of its failure without prior publications of operating
problems and possible risk of collapse. When the news was published
all Interfin bank branches had no cash at their disposal. Genesis
6
Merchant bank voluntarily surrendered its banking license to the
Central bank and was closed on 11 June 2012 this was as result
of failure to satisfy the minimum capital threshold requirement.
Genesis bank was shut down without prior publication of its
challenges and possible failure in its previous financial
statements.27 July 2012 barely a month after the collapse of
Genesis bank and Interfin bank, Royal Bank surrendered its
banking license citing failure to meet the requisite of minimum
capital threshold in stipulated time frame, conduct of banking
business without sound administrative and risk management
procedures , poor accounting practices and, liquidity constraints
with a negative gap amounting US$3.03 million in the critical 0-7
day time band resulting in the bank imposing a minimum withdrawal
limit of US$50 per day. High non-performing loans that spans to
15 months up to July 30 2012 since the commencement of Royal bank
operations were unearthed. The defaulted loans was as much as
99.92% of the total loan book of US$ 1.52 million to 31 May
2012.In the same press statement it was mentioned that the bank
was fully aware of the level of the non-performing loans, but it
was misrepresenting information and data presented to the RBZ
(Royal bank press statement July 2012).
In more recent developments in Zimbabwe’s financial sector
AFRASIA Kingdom Bank in particular, has continued to raise public
concern about the compliance of the banking sector with the
corporate governance practices in risk and risk management
disclosure and their risk management systems in place. On 10 May
7
2013 it was reported that AFRASIA Kingdom bank was in a serious
trouble arising from a huge US$ 21 million non-performing loan
which had weakened its financial position(News Day 10 May
2013).This also raises quires over the compliance of banking
institutions with the RBZ Minimum Capital Threshold and its
disclosure as the total capitalisation of Kingdom bank was
reported to be US$ 28.79 million (Monetary Policy statement Jan
2013) yet its non-performing loan was said to be a massive US$ 21
million leaving the bank with US$ 7,79 million as actual capital
in position, while such capital discrepancy only came to public
knowledge after a newspaper report instead of a financial
report or press statement. On the 30th of June 2013 came another
shocking news of the listed Pan-African bank BancABC Financial
holdings when it was reported that the bank had its property
worth US$10 million attached by the Harare Messenger of Court
over a US$ 11million “debt’’ owed to a Belgian diamond company
‘Mackie Diamonds’.It was later uncovered that this occurred after
a diamond deal that went sour between BancABC and one of its
client ,Mr Jamal Joseph Hamed who was said to have been given US$
20 million in 2010 to purchase rough diamonds from Marange.
However Mr Hamed failed to repay the amount leading to the bank
withholding some of the funds amounting US$ 11 million belonging
to Mr Hamed and Mackie Diamonds, who are said to have been part
of the deal. This resulted in the Belgian firm pursuing the
matter through the courts and won the case against Banc ABC.
However further investigations revealed that the US$ 20 Million
8
under-performing loan was never recorded in BancABC books and
also never disclosed in its annual reports since 2010 (Bulawayo
24 NEWS 13 June 2013).
Over the past 10 years there have been recurrent instances of
Zimbabwean Banks collapsing or, being weakened so that the
Reserve Bank of Zimbabwe has had to intervene, pursuit in its
supervisory role on financial institutions. Its interventions
have ranged from forced closure of some banks, placement under
curatorship of other banks to introduction of various regulation
including risk management and its disclosure. However, despite
such controls and measures, the stability of various banks and
security of both investors and depositors funds in those banks
has continued to be uncertain without the disclosure of the risk
managements systems in place.
1.2 Problem statementDespite a progressively intensified monitoring and control of
banking sector by RBZ, are banking and financial institutions
trading on the Zimbabwe stock exchange complying with the Reserve
Bank of Zimbabwe minimum risk and risk management disclosure
requirements.
1.3 Research objectivesThis research aims at providing empirical evidence to the risk
management disclosure as a corporate governance measure of listed
9
banking and finance institutions of Zimbabwe. Specifically, the
objectives of this research are to:
assess whether there is conformity between corporate risk
management disclosure practices in listed banking and
financial institutions and the RBZ Minimum Disclosure
Requirements in risk management disclosures.
Investigate the level of risk management disclosure of
financial instruments information among listed banking and
financial institution in Zimbabwe from 2009 to 2012.
examine whether listed banking institutions of Zimbabwe are
providing more information than statutorily required in
their annual financial reports
assess the extent of implementation of Basel 2 in Zimbabwe
listed banking institutions
are there consequences associated with failure to meet the
RBZ Minimum Disclosure Requirements faced by listed banking
institutions in Zimbabwe.
1.4 Research questions1. What is the extent of compliance of listed banking
institutions in Zimbabwe with the required disclosures of
the Reserve Bank of Zimbabwe minimum risk and risk
management disclosures?
10
2. Is there conformity between corporate risk management
disclosure by Zimbabwe’s listed banking institutions and
stipulated Minimum Disclosure Requirements
3. Do listed banking institutions in Zimbabwe disclose
discretionary risk management information than required?
4. What is the extent of Zimbabwean listed banking institutions
in implementing the Basel 2
5. What are the consequences of non-compliance with Reserve
Bank of Zimbabwe Minimum Risk Management Disclosure
requirements?
1.5 Significance of the studyCompulsory and voluntary disclosure of financial information in
corporate annual reports and their determinants have attracted
considerable research attention in the developed countries than
developing ones (Akhtaruddin, 2005 ).Alan Edkins (2009) studied
risk disclosure and re-establishing legitimacy in the event of a
crisis, this research was focused on a case of Northern rock
building society United Kingdom. Dennis Taylor (2011) carried out
a research on corporate risk disclosure and the influence of
institutional shareholders and audit committees. Allen. N.
Berger, Thomas Kick and Klans Schaeck studied the effect of
executive board composition (gender, educational qualifications,
age and their areas of specialisation with risk disclosures. Dirk
Horing and Helmut (2011) carried out an investigation on risk
disclosure practices in the European Insurance Industries. Dr11
Yainis Anagonostopolus and Rosemary Skordoluis (2009) researched
on the risk disclosure policies in Greek Banking industries
including both listed and non-listed banks. The research findings
in the developed countries especially in the European Union (EU)
have aided the government of these nations to revamp their risk
and risk management compliance mechanisms. They have also
assisted the government in issuing out directives that facilitate
the harmonization process and invariably bring all community
companies up to a reasonable level of disclosure. However these
studies and their findings may not be applicable in African
Countries and Zimbabwe in particular as they were carried out in
different economies, political set up, cultural, educational and
literature development. Only a handful of studies have been
carried out in developing countries (Africa) relating to issues
of disclosure practices in risk and corporate governance issues.
Jackie Young studied (2011) Corporate Governance and risk
management a South African perspective. The disclosure of
operational risk in Tunisian companies was conducted by Weal
Hemrit and Mournira Ben Arab (2011).
In Zimbabwe only a single study was conducted by Jacob Mavingi
who researched on Merchant banks and conformity to International
best practices in risk management. The research was conducted
through a survey method by administering questioners and
conducting interviews to targeted individuals working in those
merchant banks. In all these researches they have concerned with
corporate attributes and their effect to risk disclosures and
12
without any agreed concrete conclusion or result in those studies
as different researchers argued the results of others. Corporate
risk management disclosure has remained under researched
especially on listed financial institutions in Africa and
Zimbabwe. Therefore, the following have been identified as the
gaps that currently exist in knowledge.
There exist no comprehensive study on the compliance of
the listed Zimbabwe’s banking and financial
institutions with risk and risk management disclosures
in relations to corporate governance practices.
The analysis of previous researchers was mainly focused
on corporate attribute and risk taking and disclosure
while risk management has been left out in these
researches.
The rapid changes in risk and risk management
disclosure regulations, growing awareness on corporate
governance and stakeholder relations calls for a
constant update.
This study aims to fill the current gap observed by considering
the following:
Current annual reports for the year ended December 2012
Regulatory requirements in risks disclosures operational at
the time of the research both local and international
Risk and risk management disclosures in relationship to
corporate governance in banking and financial institutions
13
The role being played by regulatory institutions in ensuring
that firms are in compliance with risk disclosures
requirements and consequence for non-compliance
Opinions and views of regulatory officials and users
financial reports on the risk and risk management disclosure
practices of listed financial institutions in Zimbabwe
As Zimbabwe is a developing country and its risk management and
disclosure practices are still at an emerging stage. Academic
literature in risk reporting field is limited or currently
unavailable, therefore this research is expected to be one of the
fundamental study on current risk reporting and management
practices in the banking and financial sector of Zimbabwe.
Research on risk management disclosure in banking sector of
Zimbabwe will enable students and professionals already in the
industry to have a thorough understanding of the nature of
corporate risk management disclosure in developing countries and
enhance the quality of literature in the subject in matter.
The study will pave way for other researchers to further
investigate other topics related to risk management disclosures
and factors that influence the practices.
This research is also of significant to the government,
investors, business management, regulatory bodies, educators,
researchers, accountants, auditors and scholars particularly in
the field of banking, finance, accounting and risk management as
it will cast more light and add understanding on corporate risk
14
management disclosure in relation to corporate governance
practices.
1.6 Assumptions of the studyThe research on disclosure of risk management as a corporate
governance practices was conducted under the following
assumptions
If companies were to convey risk management information to
shareholders, the annual report would be only logical and
practicable choice of media.
This research effectively assumes that if any of the listed
financial institutions under review fails to report any
assessed risk or risk management disclosure requirement it
is simply non-compliant with the particular required
disclosure.
1.7 Scope of the study The concept of disclosures in this research will be limited to
risk and risk management disclosures
The study will be focused on listed financial institutions as
they are regulated by the Zimbabwe Stocks Exchange Act,
Securities Act, Banking Act and are the one which are mandated to
publish annual reports these banks ABC Holdings, CBZ Holdings, ZB
Holdings, FBC Holdings, Barclays Bank Zimbabwe and NMB bank
15
The study will focus on the information that have been published
in annual reports of the trading period from 2009 to 2012 as this
time was characterised by low inflation rates, stable political
environment and a multi-party government as well as the multi-
currency system
Secondly the research on the annual report will be confined to
the risk management disclosures section of the annual report of
firms chosen in the sample. Banking institutions not listed on
the Zimbabwe Stock exchange are not taken into consideration as
they are not of paramount interest to the investors and are
outside the scope of this work.
1.8 Limitations of the studySample size was small as the banks that were involved in the
study were the one that were listed on the Zimbabwe stock
exchange on the closing day of 30 June 2012.As a result the study
findings may not be generalised to other banks not listed on the
stock market.
Another limitation of the study arise from the use of content
analysis which tend to be inevitably subjective and results may
not be generalised (Linsley and shrives, 2006) there for the
study resort to triangulation using both primary and secondary
data to ensure validity
16
1.9 Chapter summaryThis chapter was an insight into the topic of the research in
terms of background of the study, in an attempt to pinpoint the
need to investigate the risk management disclosure. In this
chapter main elements that will guide the study were outlined
which are statement of the problem, research objectives,
significance of the study, research questions, the scope of the
study, assumptions as well as limitations of the study. The
following chapter (two) will review the literature that the
researcher used to gain knowledge in risk and risk management
disclosures as well as corporate governance in particular.
CHAPTER 2
LITERATURE REVIEW
2.0 IntroductionThis chapter aims to put the study into context by discussing a
wide range of literature the researcher devoured before and
during the research process. In the chapter an overview of the
following will be provided so as to enhance the readers
appreciation of the subject under study ;the legal frame work17
that govern companies in Zimbabwe in comparison with other
foreign mechanisms, those that govern listed firms and banking
institutions. These comprise the Companies Act, Banking Act,
Securities Act, RBZ regulations and requirement, IFRS, Basel 2
convention, with particular emphasis on the risk and risk
management disclosure regulatory framework. The chapter also
discusses risk management disclosure theories corporate
governance implementation practices and the motives behind
compliance and non-compliance with risk management disclosures.
2.1 The concepts of riskRisk in this study is conceptualised as a hazard, threat, harm or
expected loss that might affect the business or its operations
(Lupton, 1999).Risk is a potential that events expected or
unanticipated, may have an adverse effect on the banking
institution’s net worth (capital), earnings, set goals and
objectives (RBZ –Risk-Based supervision Policy 2006).Risks that
are faced by banks can be categorised as financial and non-
financial risks. Jorion (1997) defined financial risks as risks
that have an immediate effect on assets and liabilities in
monetary term. Types of financial risks comprise of credit risk,
market risk, foreign exchange risk, interest rate risk, liquidity
risk, and non-financial risks are strategic, reputational,
operational risk, legal compliance risk and operational risk
(BSBC 2001).
18
2.1.1 Risk managementRisk management is the mitigation or measures that are put in
place by the directors or senior management to identify, measure,
monitor and control risk so as to reduce the negative impact of
or eliminate possible risks Identified (Bessis 1988; Fischer and
Veilmeyer, 2004). According to COSO (2004) "risk management is a
process, affected by an entity's board of directors, management
and other personnel, applied in strategy setting and across the
enterprise, designed to identify potential events that may affect
the entity, and manage risk to be within its risk appetite, to
provide reasonable assurance regarding the achievement of entity
objectives(COSO,2004). Mertens and Blij (2008) defined risk
management as all activities and measures which are aimed at
controlling risks. In this regard the focus of risk management is
on prevention of the adverse effects of threat in the event they
occur.
2.1.2 Risk management disclosureBaretta and Bozzolan (2004) defined risk disclosure as the
communication of information concerning firms' strategies,
characteristics, operations and other external factors that have
the potential to affect expected results. Risk and risk
management disclosure is therefore the dissemination of or
publication of risks that might negatively affect a particular
bank and risk management systems that are being implemented
19
through annual financial report. In particular, more information
regarding banks’ risk profile is highly demanded, as this would
help stakeholders to better evaluate the risk exposure of a
certain bank and measures implemented to tackle it (Linsley and
Shrives 2005; Tricker, 2009).
2.2 Previous research findings on risk and risk managementdisclosuresIn a study conducted by Angela Ma et al (2012), using a sample
all 300 listed companies on the Australian Stocks Exchange
identified the following (a) 90 per cent simply documented
phrases in their annual reports regarding regulatory changes to
express the management’s willingness to comply with all
regulatory and statutory requirements. In view of this extract it
highlights that only 10 per cent of listed firms in Australia
provided detailed information pertaining to legal and compliance
risk management with Australian Stocks Exchange Corporate
Governance Practices requirements.
In Italy, a research in the annual reports of 85 listed companies
on the Italian stock exchange by Beretta and Bozzolan (2004)
discovered that Italian institutions willingly disclosed their
future risk management strategies (35.9 %),however, expected
effectiveness of implementing those strategies were rarely
disclosed thus only (15.5%) communicated such information. In the
same study it was found that Italian annual reports lacked
information about decisions and actions taken to manage risks as
20
evidenced by only 16.2% of all firms to be disclosing such
information.
A study by Kongprajya (2010) in Thailand of 30 listed companies,
conclude that Thai companies financial risk disclosures were the
most popular among all types of risk disclosures. This was
further explained by the fact that "financial risk is complex to
understand as they are usually related to technical terms and
sometimes sophisticated calculations (Kongprajya, 2010).
Therefore financial risks are assumed to require more
clarification as compared to other types of risks which are also
referred to as non- financial risks.
Research findings by Carlon et al (2000) of an examination of
annual reports of 54 Australian companies in the mining industry
discovered variations in the level and detail of voluntary risks
disclosure. In another study which recorded similar results
reported by Lajili and Zaghal (2003) that examined annual reports
of 300 listed Canadian companies and discovered voluntary risks
disclosures in annual reports are presented in qualitative nature
lacking specificity and detail or depth. A study by Woods and
Reber (2003) who conducted an investigation on the risk
disclosures of six German institutions and six British companies
for the year 2000 and 2001 respectively conclude that there was
an increase in risk disclosures by German companies after GAS 5.
In another separate study by Mousa and Elmar using content
analysis of 48 companies listed on the Bahraini Capital Market
21
reported that interest rate disclosures were dominant in in both
financial risk sections while operational risk was common in non-
financial risk section.
These previous study triggered the need to enhance knowledge in
this area of study at a local level, by investigating the
disclosure practices in risk and risk management in Zimbabwe’s
banking and financial institutions listed on the stock market.
2.3 Corporate Governance in Zimbabwe and risk management disclosure in comparison with other countriesCorporate operations in Zimbabwe are governed by the Common Law
which has some elements of the Roman-Dutch Law (Tsumba, 2002).
Corporate Law is engraved in the Companies Act of 1951 of which
every organisation that operate in Zimbabwe is expected to
conduct its business in line the Companies Act chapter 23:04
regardless of their size, nature of industry or whether private
or public corporation. For companies that wish to or trade on the
Financial market they are further mandated to comply with the
listings requirements embedded in the Zimbabwe Stock Exchange Act
Chapter 24:18 and the Securities Act Chapter 24:25 of 2010 which
was issued by the Securities Commission of Zimbabwe .Apart from
the three mentioned Acts of law Financial institutions whether
incorporated in Zimbabwe or in another countries are subject to
the Banking act Chapter 24:20.
22
2.3.1 Companies Act The Companies act Chapter 23:04 is the one which vested fiduciary
duties of the directors’ to conduct their work in utmost most
good faith on behalf of shareholders. Company directors are held
accountable for any event arising in their exercise of duties
during their tenure of office. Thus the interest of the
shareholders comes first in their day to day execution of duties.
Zimbabwe's Companies Act requires company accounts to be prepared
in accordance with the adopted IFRS 7, there for even the annual
financial statements should also be prepared in line with the
same principles.
Zimbwa (2005) argued that the Companies Act stipulates only the
basic minimum requirements thus disclosure rules are supplemented
by pronouncements of the professional accountancy body the
Institute of Charted Accountancy of Zimbabwe (ICAZ). Implicitly,
the Companies Act requires published financial statements to be
factually correct and presented in all material respects in
accordance with the generally acceptable accounting practice
Stephen (Owusu-Ansah, 2000).In the same study of Owusu-Ansah
(2000) argued that the Companies Act of Zimbabwe does not
mandate the disclosure of risk management.
The lack of a clear section of law that deal with requirements
of risk management disclosures pose problematic in information
reporting, thus polarise the practices of risk reporting in
general and good governance in particular. Risk management
disclosures recommended in Accounting standard do not stipulate
23
their strict compliance and the dissemination of such information
are left at the discretion of managers. While this is a critical
governance issue absence of an act of law means good governance
will not flourish in the country. In comparison to South
Africa’s Companies Act which adopted the King 3 report and made
it mandatory that institutions must apply the codes in their
financial statements.
The success of the King report in more recent time is a result of
a significant decision which was made to incorporate the King
Report into the South African Companies Act. Under this regime
disclosures became mandatory and breach of which attracts penalty
for the contravention of a statutory regulation. In light of the
resurgence of financial institutions failures of 2001, 2004 and
recent scandals in financial sector of 2013 which are associated
with poor risk management. A stringent arm of Law can help in the
restoration of sanity in the Zimbabwean finance sector.
In Germany as a response to infamous corporate crisis and
failures, the German government passed the legislative law on
Corporate control and Transparency “KonTrag-Gestez zur Kontrolle und
Transparenz im Unternehmensbereichamendedss” (Durst, 2005).Germany
banks are required to disclose their risk exposure that are
regulated by the articles 289(1) and 315(1) in the HGB and the
German Accounting Standards GAS 5-10:representing a legislative
standard that is unique in the world so far (Homolle, 2009).GAS 5
require institutions to report information about their risk
24
management system, qualitative and quantitative data on relevant
risks. The German Accounting standards also requires disclosures
about risk forecast and relevant accompanied information which
are compulsory, referring to GAS 5.9-10,5.18,15.83-91
(Dobler,2008). This shows a sharp distinction from other
accounting standards which only recommend these disclosure and
not require them. Under GAS the reporting of risks facing an
institution must include non -financial risks and non-market
risk. Further it also requires the explanation of corporate risk
management and risk forecast.
It is such firm stance toward good governance that need to be
factored in the Companies Act of Zimbabwe that can help to
enforce the disclosures of risk management while spearheading
good governance in the business environment.
2.3.2 Zimbabwe Stock Exchange Act Chapter 24:18For companies wishing to trade their securities on the stock
market in Zimbabwe are further obliged to abide with listings
requirements of the Zimbabwe stock exchange Act. Listings rules
require that annual published accounts report certain information
in addition to that demanded by the Companies Act. For instance
institutions annual reports must disclose the aggregate of the
direct and indirect interests of directors in the share capital
of listed company, distinguishing between beneficial and non-
beneficial interest (s.8.52 (d)). Companies trading on the stock
25
market are mandated to disclose relevant material information
necessary to help present and potential investors to evaluate
their financial position and performance. Zimbwa (2005) argued
that corporate governance disclosures are largely voluntary on
the stock market; citing that there are no provisions in the
Zimbabwe stock Exchange Act regarding the disclosure of or
discussion of risk management in annual reports, though strongly
encouraged by the accounting profession.
In comparison the Emirates Securities and Commodity Market
Authority (ES&CMA) listing conditions encourage organisations to
disclose risk-related information with an appropriate level of
transparency "UAE Federal Act NO.4 OF 2000"(Hassan, 2012).The
ES&CMA also passed the UAE Code of Corporate Governance that
encourages as part of best practice, to have regular procedures
allowing for the determination, measurement and disclosure of
their risks (Khaleej Times, 2006) and (ES&CMA decision R/23,
2007).The participation of securities market in corporate
governance is required in Zimbabwe to encourage corporates in
adoption of good governance practices. The effort that arises
from stock market regulatory authorities is likely to yield quick
and successful results in restoration and maintenance of
corporate governance practices as well as market transparency.
Another mechanism of risk management disclosures regulation that
is lacking from the Zimbabwe’s stock market is that of Novo
Mercado of Brazil which is an independent body from Bovespa Stock
26
Exchange. This requires companies to comply with more rigorous
corporate governance standards relating to shareholders rights
and transparency. Under the Novo Mercado’s rules shareholders may
submit any disputes relating to the listing rules to binding
arbitration in Brazil. These provisions give shareholders of Novo
Mercado’s companies a forum entirely separate from the Brazil
judicial system to seek redress for violations of their rights as
shareholders” (Milstein et al, 2005). The Novo Mercado regulation
system exhibit how the stock exchange can be a strong tool to
enforce corporate governance codes or practices in emerging
markets like Zimbabwe, even when the judicial and legal systems
are inefficient. The calibration and reformation of stock
exchange rules is relatively simple than for Companies Acts.
Rather more essentially, the threat of delisting enable the stock
exchange with distinct ability to enforce compliance with the
regulations set by other institutions that seek to install and
maintain market discipline.
The stocks exchange is endowed with a unique self -enforcement
capabilities to impose sanctions. This ability of stock exchanges
to act as enforcers in their own right is demonstrated by the
London Stock Exchange adoption of Cadbury Report as part of the
listing rules which mandate institutions to comply with corporate
governance codes recommendations or publicly explain the reasons
behind their non-compliance (Millstein, et al, 2005). One of the
Listings Agreements of the India Stocks Exchange is that
Independent directors shall periodically review legal compliance
27
and as well as the boards disclosures on risk management.
Millstein, et al (2005) put forward that Stock exchange listings
requirements can adopt voluntary standards so as to ensure that
corporates do adhere to them as stocks exchange enjoys monopoly
therefore they have more enforcement powers.
Absence of risk management disclosures in the rules and listings
requirements on the Zimbabwe stock market plays down the effort
to attain good governance. Thus there is need to adopt from other
countries mechanisms that are being implemented to ensure fluent
implementation and success of the good governance.
2.2.3 Securities Act Chapter 24:25The securities Act Chapter 24:25 of 2010 took a great stride
trying to foster corporate governance practices in Zimbabwe in
which risk management disclosures are recommended. The Securities
Act corporate governance guide lines for listed companies was
composed in line with the Cadbury and the Combined Codes of
United Kingdom, King 1, 2 and 3 of South Africa and Commonwealth
Association for Corporate Governance (CACG).The objectives of
this Act is to reinforce corporate governance practices by listed
institutions and foster the standards of self-regulation so as
their governance to be in line with the international standards.
In section 3:4 of the Securities Act on accountability and audit
stated that “the board should ensure that the financial
statements are presented in line with the international financial
28
reporting standards (IFRS) adopted in Zimbabwe”. Thus there
should be no divergence of reporting in annual financial
statements of listed institutions. Under section 3.4.1 the board
is required to maintain a sound system of internal controls to
safeguard the shareholders investments and assets. However the
Securities Act like other companies regulatory frameworks in
Zimbabwe remains silent on risk management disclosures in annual
reports.
In comparison with Canada the provincial securities commissions
have set out requirements for disclosure and discussion of risks
in annual reports. According to the guidelines, Canada's Ontario
securities Commission 2008 requested the disclosure of
information on the enterprises main risks as well as the
consequences of these for corporate activities and performance
and also the strategies implemented to manage them (Dia and
Zeghal, 2012).These measure are in recognition of the fact that
governance issues need to be enforced through the use of a
securities market mechanism that have direct contact with
institutions through listings requirements and listings
continuation.
Section 1.7 of the Securities Act stated that “every registered
institution must disclose in its annual reports and statements of
directors as to whether the corporate body is complying with
these guidelines on corporate governance, while section 1.8
stated that “where a registered institution is not in full
29
compliance with these guide lines the directors must indicate the
steps the company will take to adhere to full compliance”.
Governance issues are not mandatory as shown by the “Comply or
explain” approach which lack penal sanction. While in Malaysia,
the listing requirements of 2001 delineate the requirements for
financial reporting disclosures matters relating to corporate
governance and continuing listing obligations. Companies are
subject to fines and sanctions by Bursa Malaysia. Malaysian
Securities of Commission (SC) issued statutory legislations such
as The Bursa Malaysia Listing Requirements (Abdullah and Chen,
2010). Furthermore the Bursa Malaysia Listing Requirements
mandate all listed companies to disclose their compliance with
The Code on Corporate Governance of Malaysia in their annual
reports. Such an initiative is profoundly significant to
reinforce the effectiveness of internal governance in line with
corporate governance code (Abdullah and Chen, 2010).Thus the
recognition of the importance of compliance with governance
recommendations by Bursa Malaysia (Malaysia Stock Exchange)
strengthened compliance, improve market discipline and promote
transparency at institutional level.
In U.S.A companies are required by the Securities Exchange
Commission to disclose key information about their risk
management practices Item 305 of SEC Regulations S-K Quantitative
and Qualitative Disclosures about Market Risk (Lijili and Zeghal,
2005). This is another development from established markets were
30
the securities commission plays a pivotal role in warranting
success of good governance on the market.
Implementation of good governance codes can be successful in
Zimbabwe when there exist multi-lateral and mandatory regulations
which constantly monitor progress and educating senior management
to raise their awareness and knowledge on the need to disclose
risk management and how they can be disseminated in a clear way.
The discussion aimed to shed light on the regulations that govern
corporate activities as well as highlighting their weakness in
the good governance and risk management in particular. Other
foreign regulations that have been implemented in a bid to
enhance good governance and their possible effect they may render
if adopted in Zimbabwe were also reviewed.
2.3 Corporate governance in banking and financial institutions ofZimbabweIn Zimbabwe banks has gone through two different phases. Since
independence in 1980-1990 banks operated under quasi-command
economy in which the government had control of the financial
sector (Tsumba, 2002). Corporate governance though still
important was not given much attention it deserved. Monetary
policy and bank supervision were conducted in a passive manner as
the controls in place at that time ensured that risks were kept
at minimum levels. Such controls however limited the activities
of banking sector. While the Reserve bank undertook limited
31
supervision of banks during the 80s era, it is not surprising
that the country never experienced banks failure at all. Banks
profitability and viability were warranted as there was no
competition in the financial sector. Thus corporate governance
was not a cause to concern for banks as their customers were
guaranteed a return under the cost plus pricing that was in
place. In light of this there was no incentive to insist on sound
corporate governance principles on banks (Tsumba, 2002).
The financial sector reforms of 1991 lead to the removal of the
command system of economy and pave way for the entrance of many
institutions in the financial sector. Deregulation of the
financial sector heralded the advent of new players such as
commercial banks, discount houses and later by asset management
companies. During the period from 1991 to 2000 there exist few
regulatory frame works meant to govern financial sector in
particular. Onsite examination was introduced in 1996 by the
central bank with the primary focus on the commercial and
merchant banks (Tsumba, 2000). In 2000 the government of Zimbabwe
enacted the Banking Act Chapter 24:20 to regulate the financial
sector.
2.3.1 The Banking Act 24:20In section 45 (1) Banking Act provided the Reserve Bank of
Zimbabwe with strong, legal basis for supervising financial
institutions to ensure that they comply with the Act. Section 45
32
(2) empowered the Central bank with functions of monitoring and
supervising banking institutions through analysis of documents
and information supplied to it and obtaining of information at
the premises of the banking institution concerned.
2.3.2 The RBZ Code 1After a series of financial sector crisis in Zimbabwe, the
Central bank using its mandate from the Banking Act issued
Guideline/Code 1-2004 of corporate governance. The major
highlight of the code1 principles were (1.51) Risk management,
(1.5.3) High quality financial disclosures, (2.1) authority and
duties of shareholders, leadership of the banking institution,
role and functions of the board and duties and responsibilities
of the board. Zimbwa (2005) argued that code1 was marred by
presence of vague statements which were not worth abiding with as
they were not likely to change corporate governance in practice.
Further the author pointed out that lack of enforcement of the
code to succeed as well as being published, while leaving its
adoption to the discretion of those institutions which had come
across with the code.
An analysis in other Codes originating from Central banks of
other countries in monitoring corporate governance frameworks in
Malaysia for example; the Code on Corporate Governance was
approved by the Ministry of Finance (Norman et al, 2005) and it
was released by the Securities Commission and enforce by The
Stock Exchange Requirement (Abdullah and Chen, 2010). Such a
combined force of regulatory institutions in support of Corporate
33
Governance code is essential in any country that is eager to
implement a Code that will face a relatively weak resistance and
eventual success. However absence of such a will power from
Zimbabwean Government and the Market Regulatory body can be a
stumbling block toward attainment of market transparency goal and
efficient banking sector. Tsumba (2002) argued that the
Zimbabwe stock exchange does not support institutions that seek
to promote market discipline citing the Johannesburg stock
exchange adoption and support of the King report in 1994 which
was initiated as a private business initiative by Institute of
directors of South Africa and it was made part of listings and
listing continuation requirements .While implementation of Good
Corporate Governance is voluntary in Zimbabwe
Also in comparison with United Arab Emirate (UAE) regulatory
framework which impose mandatory requirements that exert pressure
on listed institutions to publish risk information in their
annual reports. The UAE securities market listing conditions
require the disclosure of risk-related information (Hassan,
2012).The UAE Central Bank regulations compel UAE financial
institutions to incorporate risk information in their annual
reports (Central Bank of UAE,2006 and Al-Taminmi ,2008).However,
the scope or extent of that disclosure is at the management
discretion (Obay,2009) In the UAE, the Emirates Security and
Commodity Market Authority(ES&CMA) and UAE Central Bank issues
regulations or guidelines that affect risk disclosures.
Furthermore the UAE Institute of internal Audit (IIA-UAE chapter)
34
share information to enhance knowledge about risk reporting among
different institutions. Thus the partnership between different
regulatory institutions in advocating for risk management
disclosure is essential to promote the desire to adopt practices
which are considered as worth of implementing.
2.4 Development and implementation of corporate governance and challenges adopting codesTo date Zimbabwe has not yet produced its own code of corporate
governance; codes that are currently in use were adopted from
other states. Though the business leaders in Zimbabwe has
undertaken effort to come up with locally produced codes, the
document under construction is more of a blue print of the King 2
and Cadbury report in particular. The Zimbabwean situation calls
for the exercise of caution against code "transplanting" from
established to developing economies or from one state to another
ignoring factors such as ownership, control structures and the
economic environment that influence institutions and behaviour.
Wong (2008) mentioned that many codes sit on the shelves of their
drafters because no local institutions have assumed any
leadership role in promoting their implementation. Lack of
support from the government and regulatory authorities has
contributed in hampering the successful development,
implementation and enforcement of corporate governance in
Zimbabwe.
35
Clearly demarcated lines between legislation and provisions must
be drawn to facilitate prohibition of pernicious behaviour by
management and board members by law. The problem associated with
lack of compliance with the corporate governance principles lead
to development of measure in various countries in a bid to ensure
compliance. A number of approaches to ensure success of corporate
governance were designed and implemented which consist of the
“comply and explain” approach of the UK and legislation of the
Sarbanes Oxley Act of the USA.
2.4.1 “Comply or explain” principleThe “comply or explain” also known as “if not why not” was
pronounced in United Kingdom in 1992 upon introduction of the
Cadbury report as to how it will work. The essence behind the
principle is that compliance with the code is not mandatory, but
that disclosure relating to compliance is (Macneil and Li, 2006).
Securities Commission of Zimbabwe adopted the same principle as
to apply to Securities Act Chapter 24:25 of 2010.In the act it
was stated that every listed institution has to disclose in
annual reports if they did not comply with the codes. Thus in its
nature the code’s principles are not mandatory to abide with but
only disclosure of non-compliance is mandatory.
The "comply or explain" code allows for companies not to comply
with the recommendation if they can prove that good governance
can still be attained. Thus success of the whole document is then
36
left in the hands of directors as to whether they wish to
implement the codes or they will choose to ignore then explain as
to why they did not comply with the principle. “Governance codes
have proved popular because they are seen as flexible instruments
that rely on market mechanism for their development,
implementation, enforcement and subsequent evolution; in contrast
to the more rigid and prescriptive nature of mandatory
legislation and regulation, corporate governance codes not only
accommodate-but in fact expect-some degree of non-compliance with
their provision” (Wong, 2008). Companies are not expected to
follow all provisions on a one size fit all basis, rather where
individual rules are not appropriate for a particular
organisational settings, companies are expected even actively
encourage to, deviate (D.seidl et al, 2012).The Combined Codes
for instance explicitly stated that: “Whilst shareholders have
every right to challenge companies' explanations if they are not
convincing ,they should not be automatically be treated as
breaches (Financial Reporting Council, 2006)
This further weakens the position of adopting a “comply or
explain” approach when dealing with corporate governance as it is
non-legislative. If the principles laid down in the codes are to
succeed as a result of public sympathy there is no point for them
to be accepted and implemented as they are a mere recommendation
instead of a mandate. Another point is the “box ticking”
reporting manifest under “comply or explain” regime.
37
Successful development and implementation of corporate governance
in UK through a “comply or explain” approach on addressing
governance issues in place of regulations was attributed to many
factors that characterised the UK market. These factors consist
of the long history of self-regulatory of the United Kingdom’s
institutions such that the Cadbury report was accepted by many
institutions, “ with a tradition of self-regulation stretching
back hundreds of years the UK provides a highly conducive
environment for voluntary codes” (Wong, 2008).Differences in
culture and tradition in various countries means the success of
corporate governance codes based on culture of voluntary self-
regulatory cannot be guaranteed outside United Kingdom
specifically in Zimbabwe where the topic of corporate governance
is still at infancy stage. Secondly Wong (2008) stated that the
UK media plays a pivotal role in information dissemination on
matters to do with compliance, soon after information on code
compliance is published through annual financial statements, the
British media plays an important role in analysing it and
informing investors of significant codes breaches (Wong,
2008) .Fear of such media onslaught means institutions in the
United Kingdom are compelled to comply with corporate governance
codes to avoid media attention. Such kind of mechanism does not
prevail in all countries as each nation got particular topic that
get more attention. Therefore if the role of media is essential
for success of a code it will remain effective in UK until such a
time when all countries experience the same development in media
38
fraternity. Furthermore Wong (2008) added that the high number of
institutional-medium to long term investors plays a pivotal role
in ensuring that listed institutions are in compliance with code.
Institutional and long term investors are the one who are more
concerned with how corporate governance is adhered to as they
invest large amounts of funds and for long period so they want to
be satisfied that proper governance is in place to guarantee a
return on their investment and the safety of their funds. Based
on such mentioned factors “comply or explain” principle cannot
guarantee a successful development and implementation of
corporate governance in other countries such as Zimbabwe in
particular, given absence of conducive environment which enable
the success of self-regulatory regulations.
2.4.2 Legislation of corporate governance codes “Governance codes have proved popular because they are seen as
flexible instruments that rely on market mechanism for their
development, implementation, enforcement and subsequent
evolution; in contrast to the more rigid and prescriptive nature
of mandatory legislation and regulation, corporate governance
codes not only accommodate-but in fact expect-some degree of non-
compliance with their provision” (Wong, 2008).This approach to
corporate governance failed to install discipline on the market
and the governance of institutions in particular. Gary Becker
(1968) suggested that maximising punishment would ensure optimal
compliance in corporate governance recommendations and codes.
39
Corporate governance mechanism and enforcement may succeed under
frameworks such as Public enforcement in which governance codes
manifest into corporate and securities law
2.4.2.1 Sarbanes Oxley Act (USA)The US government saw it necessary to recalibrate the approach to
governance issues from voluntary implementation to a regulatory
requirement. Sarbanes-Oxley Act in the USA was signed into law
in July 2002.The Act brought changes in the regulatory framework
governing the market for securities. Sarbanes Oxley Act contained
major legislative changes to the accounting practice and
corporate governance regulation. The Act availed stringent new
regulations with the clear objective of “protecting investors by
improving the accuracy and reliability of corporate disclosures
made pursuant to the securities law". Some of the new rules in
the act was its application to companies of USA origin operating
in other countries and require the auditors of such companies to
comply with rules prescribed in the Sarbanes Oxley Act. Sarbanes
Oxley provided the Securities Exchange Commission of USA with
powers in respect to civil penalties, disgorgement, officers and
directors bars as well as equitable remedies. In addition, it
provided powerful substantive criminal provisions and sanctions
to the Department of Justice. Cooper, Leung and Wong (2006) in
their study concluded that SOX Act has improved internal
financial reporting assurance. This further strengthened the fact
that effective corporate governance warrant credible accounting
40
and quality financial reporting, which lead to transparency of
information. The problem associated with a prescriptive mechanism
of governance is that the ignorance of diversity among
organisations make it too complex to comply with.
2.4.2.2 Financial securities law (France)The financial security law (2003) in France was enacted as a
measure to formalise the recommendations set by Autorite' des
Marché’s Financiers (AMF) best practices into regulations
enforceable at law. The development provided an incentive leading
to French companies to comply with recommendations of the
corporate governance codes. Institutions issuing securities on
the French stock exchange are obliged to disclose the terms of
preparation and organisation of the board of directors or the
supervisory board as well as the internal control systems(risk
management systems) set up by the institution. Such an Act
strengthened the corporate governance practices from voluntary to
mandatory compliance. Non-compliance is treated as a breach of
law which calls for a judiciary court action and a punishable
offence instead of public justification derived from the "comply
or explain" approach. However the comply or explain is supported
by others based on the fact that it is flexible, adaptable as it
reject the one size fits all approach
41
2.4.2.1 Financial Reporting Council of Nigeria ActThe president of Nigeria signed into law the Financial Reporting
Council of Nigeria Act in 2011; this ground-breaking law
established the Financial Reporting Council of Nigeria and vested
it with powers of regulating institutions operating in Nigeria. A
significant development of this Act was a clear statutory
provision giving it responsibility in respect of corporate
governance on a regulatory body. The Act empowered the Financial
Reporting Council of Nigeria to require institutions to practice
sound reporting and accountability in annual financial
statements, establish effective systems of internal control (risk
management systems) to safe guard shareholders’ investment and
assets.
Functional deterrence needs a strong, credible threat. Such a
"threat" creates a robust incentive to avoid getting caught on
the wrong side of the law and foster a cultural, procedural and
process alteration necessary to bring about integrity and protect
investors.
2.4.3 The “Comply or else” approachThe “comply or else” approach to good governance was brought by
the Dutch Code when it was introduced. In 2004 the Dutch Code of
Corporate Governance) was enacted in articles 2:391 part 4 of the
Duct civil law (Meijer, 2011). Therefore institutions have to
42
comply with code or face court sanctions. In this view such codes
will be respected and adopted as a legislative law.
2.4.4 “Box ticking” approachIt is relatively easy to develop corporate governance codes, but
the challenge lies in guarantee of their successful
implementation and enforcement. Evidenced by the events witnesses
in many countries that governance codes have not witnessed
improvements in corporate practices due to inadequate compliance
by institutions a phenomena referred to as the "box ticking"
approach. Box ticking or boilerplate reporting is when companies
merely restate accounting standards' requirements or providing
general descriptions of risk and risk management. The major
challenge arise from "comply or explain" approach to corporate
governance ensuring that adequate information is disclosed and
the existence of quality in evaluation of the disclosed
information. “Box ticking” can also arise when investors and
shareholders/stakeholders insist on rigid compliance with
corporate governance codes without taking into consideration of
legitimate differences of institutions. Box ticking reporting is
likely to manifest when governance codes are enacted into a
legislative framework for which it becomes mandatory for
institutions to comply with. Consequently directors seek to avoid
prosecution by embarking on a piecemeal compliance, providing
large amount of information which lacks quality and do not assist
43
shareholders and investors in evaluating the performance of the
board in question.
Mak Yuen Teen (2008) put forward that "box ticking" arise from,
inadequate understanding/apathy, legalistic approach, or the
"comply or explain" approach to corporate governance. The author
also identified that, the standard "boiler plate" corporate
governance report, drafting of corporate governance report is
outsourced to law, corporate governance report is not reviewed by
the board or a board committee and absence of formal process
used by board to assess application of Codes as symptoms of "box
ticking".
To ensure successful development, implementation and enforcement
of codes there is need to strike a balance between factors that
need to be addressed through voluntary compliance and those that
require a strict regime of a legislature. The government must
devote effort in promoting good governance through stakeholder
consultancy in developing codes, media in popularising code’s
principles and constant monitoring and evaluation of compliance
while assisting those institutions that are failing to meet full
compliance.
2.5 Risk management disclosure and Corporate GovernanceAccountability as a key corporate governance measure must
manifest in the directors presenting of a balanced and
understandable evaluation of the institution's performance,
44
position and future events. The accountability concept must be
demonstrated in the disclosures essentially in risk and risk
management strategies, Key corporate governance issue is that the
board must ensure institutions maintains an effective system of
internal controls to safeguard depositors and investors funds.
Apart from such a measure they have to disclose to the
stakeholders the risk management policies and systems established
by the management together with a report on their effectiveness.
2.5.1 Transparency and accountabilityTransparency is maintained through responsible corporate
disclosure and effective corporate governance (Zimbwa, 2005).
High level of corporate transparency is argued to enhance the
economy through effective allocation of resources, improve
efficiency and sustainability of the economy. Risk management
disclosure is viewed from a technical perspective of accounting
practices as an elevated way to communicate how the quantitative
figures have been generated and how they match with the
effectiveness of the management in place to meet stakeholders’
needs. Rutherford (2004) put forward that stake holders require
information on board and management processes, strategies and
monitoring and evaluation of risks. In this regard good
governance through risk management disclosure can achieve the
goal of corporate transparency and accountability. King 3 Report
on corporate Governance in South Africa (2009) defined
transparency as the ease with which an outsider is able to make
45
meaning full analysis of a company's actions, its economic
fundamentals and the non-financial aspects pertinent to that
business. Further it states that transparency is a measure of how
good management is at making information available in a candid,
accurate and timely manner. From this view corporate risk
management disclosure thus becomes the principle means by which
institutions achieve transparency. Greater risk management
disclosure has long been identified as the essence of corporate
accountability.
Accountability and Transparency is found on the list of corporate
governance pillars. Exercise of power by company directors in
their duty of maximising shareholders wealth must also spread to
the information they disseminate to the public in annual
financial statements. Corporate risk management disclosure must
act as tangible evidence that the banking institution is
operating efficiently without jeopardising shareholders and
depositors funds. This is so as to enhance their commitment to
transparency which is essential in the banking sector whose
success lies in strong adoption and practices of good corporate
governance. Transparency fosters a stable and vibrant banking
sector (Jayaramana and Khotari, 2012) and echoed by Carletti
Hartmann (2003)
Good practices in Corporate Governance disclosure cannot be
mentioned without risk management disclosures. The United Nations
conference on trade and development (2006) guide to good corporate
46
governance section (G) on Material foreseeable risk factors,
stated that the board should give appropriate disclosures and
assurance regarding its risk management objectives, systems and
activities. It goes on further claiming that’’ the board should
disclose existing provisions for identifying and managing the
effects of risk bearing activities and report on the internal
control systems designed to mitigate risk including risk
identification mechanisms. In this publication it is clears that
risk management disclosure cannot be separated from good
practices of corporate governance. Support of the afore
mentioned disclosures can also be found in other internationally
recognised Guidelines on Corporate Governance Practices such as
the OECD Principles, the CACG Guidelines, King 3 Report and the
UK’s Combined Code.
2.5.2 OpennessSolomon et al (2000) argued that increased reporting may help to
decrease information asymmetry and agency problems given between
investors and other external stakeholders of the firm.
Stakeholders are interested in possibly negative organisational
developments, as this information would allow them to make
informed decisions about further proceedings (Abrahamson and
Park, 1994). It is emphasised that apart from just naming the
risks the firm is facing there should also be a detailed
discussion about the policies and measures applied to manage
these risks (Curtis, 2010). Elliot and Elliot (2007) argued that
47
a firm's reporting should include the identification and
prioritisation of key risks, a description of management of these
risks and information about the measure in place. These authors
agreed on the need to report risk management as a way of creating
openness to the investors and stakeholders, by reporting what can
be termed classified information. Therefore all the activities of
the bank must be open to public scrutiny by avoiding withholding
information. Investors consider the board's attitude towards risk
management and internal control to be an important factor when
making investment decisions about the company (The Combined Code,
2003).
2.5.3 Good board practicesA company's system of internal control has a key role in the
management of risks that are significant to the fulfilment of its
business objectives. A sound system of internal control
contributes to safeguarding the shareholder's investment and the
company's assets (The Combined Code, 2003).In light of this the
disclosures of risk management should inform shareholders how
well the managers are executing their duties in the interest of
shareholders. Linsley and Shrive (2000) reiterated that
disclosure of risk management is of importance if directors are
to prove their risk management skills by allowing the public to
evaluate their performance through evaluation of internal control
systems they implemented and their effectiveness.
48
2.5.4 FairnessRisk management disclosures eliminate bias through elimination or
reduction of information asymmetry between managers and
stakeholders at the same time cementing equality in information
dissemination. Good governance should warrant that convenient and
accurate disclosure is made concerning all material issues
involving the institution including risk management (AXS
Corporate Governance Council, 2006). It is expected from each
organisation to issue clear, timely and reliable information as
well as equality in dissemination to all stakeholders. Therefore
adequate risk management disclosures promote equality and equity
which is an essential aspect of good governance.
2.5.5 Turnbull Guidance (Internal control: Revised Internal Control Guidance for Directors on the Combined Code 2005)The Turnbull Guidance, Paragraph 33, stated “the annual reports
and accounts should include such meaningful, high-level
information as the board considers necessary to assist
shareholders' understanding of the company's risk management
processes and system of internal control". This Code is now being
criticised for supporting inadequate risk reporting but its
effort towards promoting risk management disclosure cannot be
ignored. It can be combined with other codes in reinforcing the
preceding codes that realised transparency in risk management.
49
2.5.6 King 3 report (South Africa, 2009)In every business some risk must be taken in pursuing a rewarding
opportunity, thus institutions are responsible for guarding
against such possible losses through responsible risk taking and
clearly defined risk mitigation strategies. A significant
development in the King 3 report was recognition of risk aspects
and its reporting practice in governance of institutions. The
report described that the board is expected to exercise duties of
care, skill and diligence in identifying, assessing and
monitoring risk as presented by management (King 3.2009). The
management is accountable to the board for designing,
implementing and monitoring the process of risk management and
integrating it into day-to-day activities of the company. Thus
the management is also accountable to the board for providing
assurance that it has done so. "The purpose of this comprehensive
risk assessment is for the board to make a public statement on
risk management including the effectiveness of the system of
internal control”. The board has an obligation to demonstrate
that it has dealt comprehensively with the issues of risk
management and requires appropriate disclosure on matters such as
risk tolerance and the risk management process in the integrated
annual report.
2.5.7 Malaysia Code on Corporate Governance (2012)The principle number 6 of the Malaysia code on corporate
governance under the heading of recognise and manage risk stated
50
that '' the board should disclose in the annual report the main
features of the company's risk management framework and internal
control system". This is one of the most recent codes which have
recognised the essential of risk management disclosure as one of
the pillars of market discipline. Such a development further
strengthened the need for institutions to take risk management
and its report serious as it is now a bench mark for good
governance to disseminate detailed risk profile in annual
reports.
2.6 Risk Management Disclosure Requirements, Regulations, Accounting standards and Conventions There has been a concerted effort in the promotion of reporting
risk management through various published recommended accounting
standards, conventions and securities exchange Act and
legislations. These are meant to provide a framework which
financial institutions can use as a benchmark in disclosing risk
management in their annual reports
2.6.1 Basel 2 ConventionThe Bank of International Settlement issued Basel 2 in 2004 to
replace the Basel 1 of 1988 with the aim to improve and maintain
safety and sound banking systems. Basel 2 contained the pillar
3(Market discipline) with details of minimum levels of public
disclosure so as to enhance transparency and accountability from
51
financial institutions management. The Committee recommended that
banks should disclose risk management practices and risk
exposures. Basel Committee recommended that banks should include
in preparing information about the bank's exposure to all types
of risk, consisting market risk, credit risk, liquidity risk,
operational risk and legal risk.
Table.2.1 Disclosures of risk management strategies and practices
as recommended by the Basel 2 Committee on Banking Supervision
1 Overall management philosophy2 policies and methodologies3 How risks arises and how risks are managed and
controlled4 the use of derivatives to manage risk5 the measurement and monitoring of risk (including
models used)6 the validation of models and stress testing and
back testingSource: (Basel Committee on Banking Supervision, 1998, p.17)
The principle argument of Basel 2 is its application on the
emerging market economies. Basel Committee expressly stated that
its recommendations are for its G-10 member states and not for
developing nations. Barlin (2008) argued that the strong
responsibilities given to regulators and the great amount of
regulatory variability allowed to banks in their calculation of
loan book reserves may overwhelm the regulatory systems of many
52
emerging market economies. Further Barlin (2008) purported that,
the high technicality in Basel 2 and the inclusion of internal
mechanisms in the measurement of risk, regulators will be forced
to hire and hold highly skilled employees through the medium and
long term. Unfortunately, the educational institutions required
to train such personnel may be absent in a country and many
emerging market regulatory agencies do not have the budget to add
costly high-skilled workers to their ranks( Barlin,
2008).Moreover Barlin argued that central banks may become lax in
their regulation of private banks allowing them to control risk
internally without proper oversight. These flaws associated with
Basel 2 will impact on its successful implementation in emerging
markets like Zimbabwe.
2.6.2 Portuguese Companies Code (Codigo das Sociedades Comercias)The Portuguese companies code requires companies to disclose
their main risks and uncertainties in the management report
(article 66).Further more companies are required to give special
focus to financial risk management activities and (at list
implicitly) to environmental and operational risks. Listed
Institutions’ are also bound to comply with the Recommendation
3/2005 of the Portuguese Stock Exchange Committee (Commissao do
Mercadodos Valres Mobiliaros) requiring disclosures of corporate
governance practices related to internal control systems (risk
management systems) in place.
53
2.6.3 Securities and Exchange Commission (USA)The Securities Exchange Commission ACT of USA was amended in 2010
in response to the financial sector crisis of 2007-2008 by
demanding greater disclosures associated with risk management. It
stipulate that all SEC registrants must disclose their risk
management practices, specific information on assessment skills
and the board role in the oversight of the company's risk
management.
2.6.4 Sarbanes Oxley act (USA)Sarbanes Oxley Act of 2002 embodies a requirement in s404 for SEC
to prescribe regulations requiring publicly listed institutions
to include in their annual financial statements an assessment of
the effectiveness of their internal control systems and
procedures. The aim of such disclosures is to reinforce the
potential usefulness of annual reports in assessing the firm's
risk mitigation procedures.
2.6.5 International Financial Reporting Standards (IFRS)IFRS 7 Risk disclosures 31" stated entity shall disclose
information that enables users of its financial statements to
evaluate the nature and extent of risk arising from financial
instruments to which the entity is exposed to at the end of the
reporting period". Section 33 indicated the typical risks to
54
include but not limited to, credit risk, liquidity risk and
market risk. For each type of risk arising from financial
instruments, an entity shall disclose: the exposures of risk and
how they arise; its objectives, policies and processes for
managing the risk and the methods used to measure the risk. These
standards were adopted by the Institute of Chartered Accountants
in Zimbabwe (ICAZ) and Public Accountants and Auditors Board of
Zimbabwe (PAAB) that every institution must prepare its annual
report in accordance with the standards. Securities Commission of
Zimbabwe recommended that listed institutions comply with IFRS 7
in their statements in their Securities Act Chapter 24.25 of
2010.
The International Accounting Standard Board (IASB) came up with a
publication of a new International Financial Reporting Standard
(IFRS) known as IFRS 7 Financial Instrument: Disclosures. These
new regulations became mandatory in 2007 for listed companies in
the European Union (EU) and forced companies to report risk and
create more transparency in the annual report (Meijer, 2011).
While the risk reporting of these accounting standards are
pronounced through acts of law in Zimbabwe the Companies Act and
Securities Act recommended their adoption. From their continent
of origin it was seen necessary to enforce them at law which
indicate that without stringent regulatory requirements on their
adoption their success was doomed.
55
Butler, C (2009) argued that IFRS7 guidelines are very vague and
so it is possible, given the complexities of financial risks that
entities will comply with the rules of IFRS 7 without disclosing
too many useful detail. Further the author cited that in simple
terms it is often difficult to prove that an auditor or
accountant has failed to comply with IFRS 7 even if they hide the
risks because of its very loose guidelines. For instance
Paragraph35 of IFRS 7 requires quantitative data unless such data
is unrepresentative at which time a reporting entity shall
provide further information that is representative. Such a
disclosure requirement is ambiguos as it leaves the decision of
whether quantitative data is representative, and its disclosure
to the management discretion. Better and more requirements
specific and relate to the nature of the risk can be useful to
shareholders and investors than provisions of such discretionary
alternatives. Throughout 2007, there was evidence that many
financial institutions suffered huge losses in the credit markets
and therefore very risky, this was not highlighted adequately in
their annual reports (Burtler C, 2000).
2.7 Theories of risk management disclosureA number of theories have been developed over the years which
seek to establish the motive behind risk management disclosure by
company directors. Healy and palepu (2001) assessed manager's
motives toward reporting and disclosures in the stock market
settings. The authors argued that managers disclose information
for the following reasons; competing for corporate control,
56
competition to attract capital, litigation and management talent
signalling
2.7.1 Agency theory Agents theory was put forward by Jensen and Meckling (1976) the
theory purport that agency relationship arise when shareholders
(Principals) delegates decision making through authorising
managers (Agents) to act on their behalf in the day to day
operations of institution. The agency theory is a model that
establish a direct link between performance and board
composition, as a result information asymmetries and self-
interest; principals barely trust their agents and will seek to
address their concerns by establishing governance frameworks to
align the interest of agents with principals and to reduce the
gap of information asymmetries and opportunistic activities. In
an agency relationship, problems emanate from conflicting
interest between principals and agents in terms of goals and lead
to the agency cost. A study by Verrecchia (2001) prescribed
principles of Corporate Governance as a remedy to deal with
agency cost and in this study it translate to risk management
disclosure as a corporate governance measure. In particular
agency theory realise that shareholders monitors directors by
requiring them to be accountable, thus the agents will act to
avoid the principals from scrutinising their activities through
disclosing more information than strictly required. Thus the
agents theory advocate for the disclosure of risk management
information so as to reduce the monitoring cost that arise from
57
shareholders (principals) mistrust of their managers (agents).
Stakeholder as providers of funds to financial institutions has a
legitimate right to demand greater information transparency. As a
control mechanism of this flaw, they will monitor manager's
attitudes and curtail opportunistic behaviour by managers. In the
financial sector this monitoring function (market discipline)
generates market signals that convey information useful to
supervisors in reducing bank's risk exposure or in assessing
suspicions of excessive exposure to risk (Bliss and Flannery,
2002)
2.7.2 Signalling theory Directors who believe their institutions are competent and better
than other companies in terms of risk management would seek to
distinguish themselves by signalling their competence to the
market (Spencer, 1973).Thus directors in such institutions will
signal their technical skills and tools to convince the market
that they can properly manage risk. Risk management disclosure in
financial institutions from a signalling perspective is motivated
by the desire to retain existing shareholders and depositors by
providing them with the information on how their funds are
secured and channelled into safe investments. The other motive
for risk management disclosure is that of attracting new
investors and deposits as directors in such institutions believe
that suppliers of capital or funds will be attracted to invest in
institutions which provide them with information regarding the
58
effectiveness of their internal control systems. Barron et al
(1998) assume that analyst observe a public signal that is common
to all analysts and a private signal that is unique to each
individual analyst. These institutions are encouraged to disclose
information related to their capabilities with respect to risk
management so that they can convince the market that losses
affecting their funds are unlikely to occur.
2.7.3 Political cost theoryAccording to the theory of political cost put forward by Watts
and Zimmerman (1986), companies disclose risk management
information to ward off unwanted attention from media, public,
politicians and supervisors. In this view supervisors play a
pivotal role in focusing on firms commercial activities with the
objective to protect those institutions against an operating loss
that absorbs their potential capital culminating in loss of
investors and depositors funds. Through providing risk management
information, regulators and market supervisors are kept away from
monitoring such institutions as they assume them to be safe
custodians of investors’ funds. To maintain their privacy
financial institutions tend to disclose some information on risk
management to avoid prosecution or regulatory surveys and
investigations on the part of investors.
59
2.7.4 Legitimacy theoryFinancial institutions are seen as having a social contract with
the society such that it operates in accordance with certain
accepted norms (Shocker and Sethi, 1974). This image is thought
to be maintained and reinforced by constant availing risk
management information to the public. Therefore legitimacy theory
can be attributed as the motive behind the disclosures of risks,
as legitimacy is assumed to be attained and retained in order to
gain stakeholders confidence through risk disclosures.
2.8 Merits of risk management disclosureApart from enhancing market discipline, information dissemination
on corporate risk management, there are benefits that can be
attributed to good governance practices which institutions can
harness as a result of their compliance. However it has also been
discovered that such an exercise can also expose institution to
malicious consequences thus they are forced to non-compliance
2.8.1 Encourage better risk management in banksThere is no doubt that banks have to identify and control risk
if they are to remain competent and profitable ,so risk
management is therefore part and parcel of running a successful
financial institution. Disclosure of risk mitigation is of
importance if directors are to improve their risk management
60
skills by giving a chance to the public to evaluate their
performance by looking at internal control systems they
implemented and how effective they were to perceived risks
(Linsley and Shrives, 2000). The need to show case their risk
management capabilities to the investing public act as an
incentive for directors to constantly improve their skills all
year round so as to have a tangible result to report on the risk
management section of their annual report. This also work to
reduce possible losses as there will be a dedicated team that
work to identify, monitor and control risks.
2.8.2 Focusing on future events (forward looking)Information which is dominant in annual reports tends to look
backwards and focus on historical financial results. This has
proved to be beneficial to investors and other stakeholders as
they are informed about the past performance but they will also
need to be informed about the future performance of the
institution. Risk management disclosures provide a platform to
inform the public on the future performance of the institution
(Linsley and Shrives, 2000), as risk management information is
forward looking in nature. Investors and account holders will be
better able to evaluate the management of the financial
institutions if it is of sufficient standard to warrant a return
on investments or depositors funds if they are given both
backward and forward looking information. So firms which
undertake a rigorous and thorough monitoring, identifying and
61
controlling risk can possess such detailed information to share
with the public in particular. In a study and experiments carried
out by Dietrich et al (2001) came up with the evidence that
indicated forward-looking disclosures were beneficial and could
help towards improving market efficiency and further support the
relevance of risk management disclosures.
2.8.3 Reduced cost of capitalDirectors who demonstrate that they are actively managing risk
and disclose this fact should find that there is a direct effect
upon the cost of finance. Therefore it may become cheaper to
acquire funding as the lender of this finance has a greater
confidence in the institution through being informed about its
risk management practices (Linsley and Shrives, 2000).Thus by
eliminating some uncertainty from the lender, the lender can in
turn remove or reduce premium that had been added on as the cost
of capital or interest to cover that uncertainty. Lang and
Lundholm (1996) and Botosan (1997) suggested that there is a
significant relationship between increased risk management
disclosure and lower cost of capital; this is also in support of
the above argument. Economic theory suggest that by increasing
the level of corporate reporting firms not only increase their
stock market liquidity, but they also decrease the investors high
interest demand arising from uncertainty about future returns
and pay out distribution (Petrova, Georgakopoulos, Sotiropoulos
and Vasileiou, 2012). Botosan (2001) argued that if institutions
62
disclose more risk management information, they would also
attract more long-term capital. In return it will influence the
market price and the marketability of the institution's
securities, thus reducing the firm's cost of equity financing. In
another research by Sengupta (1998) indicated that institutions
with high disclosure quality ratings enjoy less effective
interest when seeking capital. Baumann and Neir (2004) found
higher levels of risk disclosure are associated with lower levels
of stock return volatility. The study conclude that higher level
of risk disclosures are important and useful to investors and may
benefit the financial institutions by reducing their cost of
capital at the same time raising their effectiveness of stock -
based compensation.
2.8.4 Improves AccountabilityOfficers and directors are strongly held accountable for their
decisions and performance. Therefore accountability is only
possible in the presence of transparency (Linsley and shrives,
2006).By disclosing risk management there will be bases to
evaluate the accountability of the board to the investors.
2.9 Demerits of risk management disclosuresThough the above mentioned appear to provide good reasons why
institutions should strive to produce quality risk management
reporting .There are disappointing challenges that may arise as a
63
result of such risk reporting and that are presented to justify
non-compliance. From possible benefits arising from risk
management disclosure there are potential concerns with this
practices that demotivate financial institutions from availing
such kind of information.
2.9.1 Commercial sensitive informationThis is information that may have been identified to have serious
negative consequences once divulged to the public. It may lead to
loss of share values, investors, customers or weaken the
institutions against its competitors. To avoid dissemination of
such information, financial institutions may resort to a
boilerplate “box ticking” statement containing general
information that will not aid decision making (Linsley and
Shrives, 2000).In light of this such financial institutions may
declare that disclosure of risks they face and mitigation
strategies in place are commercially sensitive that they do not
intend to include such information in their annual reports.
Archer (1988) argues that there should be an opt-out clause to
exclude reporting on risk regarding it as commercial sensitive or
prejudicial in terms of publishing the risks and how institutions
respond to them as it can give a potentially misleading view of
the company’s risk profile. The Turnbull committee further
reinforced this position by recommending institutions to only
disclose that they have a verified system `institutions risk
management system. Linsley and Shrives (2005) argued based on two
64
major barriers in disclosures of risk. First, managers are
unwilling to report on risk information that could be
commercially sensitive and second they are so reluctant to
disclose risk with safe harbour protection.
King 3 report (2009) reiterated the same sentiments by implying
that “companies are not expected to disclose risk management
information that is strategically sensitive or could compromise
their competitive advantage”. The argument is that institutions
compete on their skills to evaluate risks, but they also compete
on their ability to mitigate risks. Informative risk management
disclosures by a firm that is good at risk management are a free
gift to its competitors, an obvious solution is for firms to make
uninformative disclosures (ICAEW Risk Reporting Challenges,
2011). Company managers may be hesitant to be fully transparent
about some portion of this information for fear that it could be
used by the company's competitors. However the problem of
withholding the so-called commercially sensitive information is
that readers of annual reports cannot tell whether they are
seeing the actual organisational true risk exposure or whether
they are making decision based in correct information (Kaller,
2004).
2.9.2 Unreliability of forward-looking informationIt has been mentioned earlier that annual reports pay much
attention on historical financial results, whilst risk management
65
section provide forward-looking information. This raises
questions on the degree of accuracy of the forward looking
information, as this information cannot be checked and verified
by auditors to certify it as reliable as compared to financial
results (Linsley and Shrives, 2000). On the other hand it is
assumed that annual reports should be useful in decision making
about the future hence they should be relevant, but if the risk
management information cannot be verified for accuracy, it is
difficult to use such information when making decisions. Lack of
credibility in the forward looking information can provide an
escape route for institutional directors to omit risk management
in annual reports as they seek to avoid publicising information
that can change in future and taken as misleading the investor
community. Linsley, Shrives, & Crumpton (2006) state that this
forward looking information is ‘unreliable and could leave
directors open to potential claims from investors who have acted
upon this information. Reporting of future information can be
risky for managers of institutions as it has the potential to
raise stakeholders’ expectations when the result of the actual
outcome turns differently the directors will bear the blame.
However Drietrich et al (2001) argued that provision of forward
looking information in annual reports lead to improved market
efficiency. While Francis and Schipper (1999) also reiterated
that the more financial reports look forward, the greater their
value to investors they become.
66
Apart from the demerits associated with risk management
disclosures, financial institutions should strive to create
transparency through greater risk management disclosures in
annual reports.
2.10 Chapter summaryThe chapter described and analyse risk management disclosures
from regulatory frameworks in Zimbabwe and in comparison with
other countries. The analysis includes the Companies act,
Securities act, Zimbabwe stock exchange Act, Banking Act and the
Code1. Previous research work and their findings were also
discussed. It also focused on a different of approaches in the
development, implementation and enforcement of good governance
codes. The chapter further explored the interaction of risk
management disclosures and good governance including codes that
recognise the importance of risk management disclosures. In
addition risk management disclosure regulations, theoretical
framework and merits and demerits of risk management disclosures
were also discussed. The next chapter focuses on the research
design and methodology.
67
CHAPTER 3
METHODOLOGY
3.0 IntroductionThe two previous chapters provided an insight of the study,
through highlighting the background of the study, statement of
the problem, research questions and objectives, scope of the
study and the literature review. The above mentioned help to
craft the means which the researcher utilised to gather necessary
information required to answer the research questions and meet
objectives of the study. This chapter will discuss the research
methodology, research design that had been used in collecting
data, the approach or tradition that was employed in the study,
will also reveal concepts like the study population, sampling
techniques, data processing, data presentation and analysis,
reliability and validity as well as research ethics.
3.1 Research DesignResearch design is concerned with the plan of how data is
gathered and analysed. Different techniques can be employed to
obtain information, which will then be used to perform any
68
meaning full research work. Burns and Grove (1997) describe
research design as a blue print for conducting a study that
maximises control over factors that could interfere with the
study’s desired outcome. Mouton (1996) defined research design as
a set of guidelines and instructions to be followed in addressing
the research problem. This guide enables the researcher to
anticipate research decisions so as to maximise the validity of
the final results. The study uses questionnaires to obtain views
and opinions of bank officials and regulatory officials on their
satisfaction with and usefulness of current risk and risk
management disclosures and reviews risk disclosures in annual
reports of listed financial institutions. .Therefore the study
triangulates these sources of data in order to come up with solid
conclusion on the extent or level of disclosure in risk and risk
management.
3.1.2 Qualitative and quantitative approachesRyan (2008) distinguished research design into qualitative and
quantitative. Qualitative research method give the advantage to
obtain more realistic feel of the situation which cannot be
experienced with numerical figures and statistical analysis as in
quantitative research methods. It provides flexibility in data
collection, analysis ,interpretation of data gathered as well as
a holistic view of the phenomena under investigation [risk
management disclosure](Matveey, 2002). According to Borg and Gall
(1989) qualitative research consists of the following attributes:
69
it involves a holistic investigation conducted in a natural set
up and subjects are selected in a purposeful, rather than random
manner. Quantitative research approach consist of counting
measurement of events as well as conducting a statistical
analysis of numerical data, the main concerns of the quantitative
paradigm are that ; measurement is reliable, valid and
generalisation is possible (Matveey, 2002). Quantitative method
has advantages of ; ability to get to a more objective
conclusions, the high levels of reliability of gathered data due
to controlled observations among others and elimination or
minimizing of subjectivity of judgement (Matveey, 2002).
The study employed qualitative method because risk management
disclosures are of a qualitative nature and are in their format
of presentation in annual reports. Qualitative research method
was used in data collection method such as open-ended
questionnaires in order to gather the necessary data on risk and
risk management disclosure to answer the research questions and
meet the objectives of the research. Multi-method refers to the
combination of more than one data collection technique in
association with analysis techniques Saunders (2009) and for the
purpose of the research Case study and Descriptive methods were
employed.
70
3.1.3 DescriptiveA descriptive study is one in which information is collected
without changing the environment (that is nothing is
manipulated).Descriptive research strategy provides an accurate
profile of phenomena, persons, events or situations Saunders
(2009).In this study a detail profile of risk management
disclosure as corporate governance phenomena was provided of the
listed banking and financial institutions in Zimbabwe. Also the
interpretation of data needs a concrete discussion of the
respondents comment and figure out exactly the message intended
to be conveyed.
3.1.4 Case studyRobson (2002) defined case study as a strategy for doing research
which involves an empirical investigation of a particular
phenomenon within its real life context, using multiple sources
of data. According to Mourton (2001) a case study research is
usually qualitative and, its aim is to provide an in-depth
description of a small number of cases thus only listed financial
institutions in Zimbabwe were selected. Case study approach was
of interest in this study because of the researchers need to
conduct an investigation into the risk management disclosures by
listed banking and financial institutions in Zimbabwe. In a case
study research method, data may be collected by means of various
techniques such as questionnaires, observation of physical
characteristics, social qualities and data reported in specific
documents (Collins et al, 2000). In the research multiple sources
71
where data was collected comprise of primary data collected
through questionnaires and for secondary data regulatory
frameworks as well as published annual reports were used.
Case approach had the advantage to enrich understanding of the
risk and risk management disclosures and corporate governance in
Zimbabwe’s listed banking and financial institutions .This
method has a considerable ability to generate answers to the
questions as “what is the level of risk disclosures in Zimbabwe
and how are the regulatory official responding to this phenomenon
as research objectives and questions in particular (Saunders,
2009).For the purpose of this study it helped to answer research
questions such as what is the extent of compliance of listed
banks with RBZ requirements as well as consequences for non-
compliance. As mentioned earlier it calls for multiple data
collection techniques such as questioners and documentary
analysis (annual financial reports) or triangulation
respectively. Also case study approach enables the researcher to
employ a theoretical or judgemental sampling in the sampling of
cases or participants’ .In this study officials from Banks
listed on the ZSE, RBZ, ZSE and SecZ were selected for
participating in the study or as respondents. One of the major
advantages of a case study research method is it has a high
construct validity; thus the researcher was able to have an in-
depth insight of risk management disclosure and establish rapport
with research subjects (Mouton, 2001).
72
3.2 PopulationPopulation is a group of research participants who are available
to the researcher for participation in the study Johnson and
Larry Christense (2005). Population is also defined as a group of
individuals or items that share the same characteristics from
which data can be gathered and analysed Friedman (2010).Best and
Khan (1989) defined a population as any group of individuals that
have one or more characteristics in common. It is those
characteristics that are of interest to the researcher. Sixty
three (63) listed institutions on the Zimbabwe Stock Exchange
formed the population of the study. As at June 30, 2013 they were
twenty five (25) active registered banking institutions in
Zimbabwe. Of the twenty five, eighteen (18) are Commercial Banks,
two (2) Merchant Banks, four (4) Building Societies and one (1)
Savings Bank (RBZ Publications, 2013). However, of the twenty
five banking institutions under RBZ, the study at hand focused on
the banking institutions listed on the Zimbabwe Stock Exchange
(ZSE) as at 30 June 2013. Zimbabwe Sock Exchange was chosen as it
is guided by rules and regulations such as listings requirements
in the Zimbabwe Sock Exchange Act Chapter 24: 18 and compliance
with the Securities Act Chapter 24:25 and Companies act Chapter
23:04.
73
3.2.1 Target PopulationHussam (2010) defined target population as the entire population
which the researcher is interested in. The population for the
purpose of collecting primary data comprise of officials from
three regulatory boards that have a direct control of banking and
financial institutions and also listed banking and financial
institutions. These institutions are the Reserve bank of
Zimbabwe, Zimbabwe stock exchange and Securities commission of
Zimbabwe and six (6) listed banking and financial institution
(ABC Holdings, CBZ Holdings, ZB Holdings, FBC Holdings, Barclays
Bank Zimbabwe and NMB bank).
3.2.3 SamplingEven if it were possible, it is not necessary to gather data from
each and every individual in the population in order to come up
with valid findings. In qualitative research, a subset of a
population is selected for the given study. The study’s research
objectives and characteristics of the study population determine
the sample to be selected. A sample in a research is a group of
in which required information is obtained from, or population
chosen for the purpose of analysis which comprise of RBZ, SecZ
and ZSE and listed banking and financial institutions officials.
It is a representative of the population extracted in the form of
officials from regulatory boards to show their relationship with
the results. The sample was specifically chosen from the
officials who have access to submitted financial reports or those
74
who work in the department where those reports are analysed
before their final publication. Sidhu (2003) stresses the
relevance of sampling and also elaborate that if the population
is very large it can be satisfactorily represented by sampling.
3.2.4 Sampling techniqueIn business research study, using a case study approach as in
this research there exist no possible sampling frame appropriate
to answer the research questions, in this case the study dictates
the use of non-probability sampling (non-random sampling)
Saunders (2009).Non-probability sampling is a technique which is
judgemental based selection of respondent so as to choose the
necessary subjects who can answer the research questions and meet
the objectives. Judgemental sampling allows undertaking an in
depth study focusing on a small case selected for the particular
study. In this study a case of Zimbabwe stocks exchange listed
banking and financial institutions
3.2.5 Non-probability samplingThe researcher used a non-random sampling technique method,
Saunders (2010) mentioned that some business research projects,
your research objectives, question (s) and choice of the research
strategy may dictate non - probability sampling method for the
purpose of this study a Case descriptive approach. In order to
75
execute the study the researcher so it necessary to employ non-
probability in the form of a purposive sampling
3.2.6 Purposive sampling
Purposive or Judgemental sampling enables the researcher to group
participants according to preselected criteria relevant to the
research question or the use of the researcher’s judgement to
select participants that will enable answering of the research
questions and meet the objectives Saunders (2010).This form of
sample is often used when working with very small samples such as
in a case study research and when the researcher wish to select
cases that are particularly informative (Neuman 2005).Purposive
sampling method was chosen in this research as the study is only
confined to banking and financial institutions listed on the
Zimbabwe stock exchange. In this study participants were selected
from the study population based on their expert knowledge in risk
and risk management and their disclosures, regulatory frame work
in place, access to annual reports for the banking and financial
institutions under study. Thus these participants were only
available from ZSE, SecZ, RBZ and banks department of corporate
governance and risk management.
76
3.2.7 Sample sizeThe sample size is a list of the target population and such a
list encompasses respondents (Emory and Cooper).The research
sample frame comprise of RBZ Bank supervision and Surveillance
department officers, SecZ Institutional supervision department
inspectors and ZSE defaulter and insolvency department
supervisors and bank officials from corporate governance and risk
management department. The participants (subjects) individual has
well vested knowledge in risk and risk management and their
disclosures in financial reports, regulations that govern the
stock market, banking industry and securities exchange listings
requirements. Educational qualifications were also of importance,
higher learning qualifications such as bachelor’s degree in
accountancy, business studies, risk management and banking and
finance.
77
Table 3.1 sample of the study
Sample size No. of
officialsRBZ Bank supervision and Surveillance department
officers
5
SecZ Institutional supervision department inspectors 5ZSE defaulter and insolvency department supervisors 5Bank - corporate governance and risk management
officers
6
Total 21Source: Secondary data
3.3 Sources of data
The study employed both primary and secondary data.
3.3.1 Secondary data Secondary data can be defined as data that has been collected for
other purposes of the study Saunders (2009).The Companies Act,
Banking Act, Zimbabwe Stock Exchange Act, Securities Act, RBZ
Code 1, Accounting Principles guide lines, International
Corporate Governance codes, previous research journals and annual
reports were some of the documents in which secondary data was
collected. Saunders et .al (2009) states that these can be
important raw data sources in their own right as in the study on
contents of risk management disclosures in annual reports.
78
Secondary data analysis made it possible to examine the risk
disclosures in annual reports. The annual reports were important
in the research because of this document being the basis for
discussion in regulatory provisions applicable to the conveyance
of risk and risk management information. It is also widely and
regularly distributed to shareholders and the contents of which
the company has almost total editorial control and good proxy for
firm’s disclosure policy.Focus was on the risk management and
corporate governance section of the annual report.
3.3.2 Primary dataPrimary sources involves data that is collected at the source
for a specific purpose and for the very first time Zikmund (2001)
noted that primary data involves original data collected from the
targeted respondents on the subject under review. For the purpose
of this study questionnaires were used to collect primary data.
Regulatory officials from the Reserve Bank of Zimbabwe, Zimbabwe
stock exchange and Securities Commission of Zimbabwe (SecZ) as
well as respondents from a sample of the listed banking and
financial institutions were employed as ideal candidates to
participate in the study. This was so as their experience in the
area of risk and risk management disclosures was a criterion seen
necessary in selecting participants. Questioners were used to
collect information about the views and opinions of the users of
the annual reports concerning the risk and risk management
disclosure practices of the listed banking and financial
79
institutions, which is the subject under study. Collection of
primary data has the advantage of providing current information
Saunders (2003)
3.3.2.1 Primary data collection techniques These were methods used for the collection of information and
data required to come up with solutions to the problem under
study. Methods employed in the collection of data comprise of
questioners and interviews .As a descriptive research the
strategy required the use of opinion and organisational based
questioners Saunders (2009) that enabled the researcher to
identify and describe the variability in risk and risk management
disclosures of listed banking and financial institutions in
Zimbabwe.
3.3.2.2 QuestionnairesA questionnaire is a general term that includes all techniques of
data collection in which each person is asked to respond to same
set of questions in a predetermined order (deVaus 2002).In order
to gather the views of the regulatory bodies and bank officials
on risk and risk management disclosures open-ended questionnaires
were used in this study. While close-ended questionnaire were
employed to gather information on how the respondents rate the
level or extent of risk and risk management disclosure using
Likert scale measure. The sample is made up 21 respondents’ and
80
therefore a total of 16 questioners were sent to the respondents
while 5 were interviewer administered.
3.3.2.3 Self-administered questionnaire These are questioners that are personally completed by the
respondent (Saunders, 2009). Such questioners are administered
electronically using internet or intra-net, posted to respondent
who return them by posting after completion or delivered by hand
to respondents and collected later. Interviewer administered
questioner and structured interviews were both employed to ensure
that the answers were provided by the intended respondent.
3.3.2.4 Questioner design
3.3.2.5 Close questionnairesSometimes referred to as closed ended questioners (Dillman, 2002)
or forced choice questions (deVaus, 2003) provide a number of
alternative answers from which the respondent is expected to
choose. Closed questions were employed in this study as the
research aimed to gather specific information from areas which
deal with risk management disclosures and corporate governance in
banking institutions, compliance to regulatory mechanisms in
place, implementation of Basel 2 convention and measures that are
taken to deal with non-compliance. The closed-ended questions
were designed on a 5 point Likert rating scale. According to Cart
(2003), the use of the Likert scale of rating helps to eliminate
81
the development of response bias amongst the respondents as it
assesses their attitudes, beliefs, opinions and perception. Using
the Likert scale makes the response items standard and comparable
amongst the respondents which make it easy to code and analyse
data directly from the questionnaires. The respondents were asked
to rate level of risk disclosures from (1) non-disclosure, (2)
briefly disclosure, (3) average disclosure, (4) comprehensive
disclosure and (5) very comprehensive disclosure. Respondents
were also asked to rate the level or extent of compliance with
the RBZ Minimum disclosure requirements on risk management
disclosures from three possible answers were (a) more than
required, (b) same as required and (c) less than required, by
listed financial institutions in Zimbabwe
3.3.2.6 Open ended questionnairesOpen ended questionnaires were used to enable the respondents to
explain, clarify or describe how they perceived the informative
of the annual reports on risk and risk management. Also open
ended questionnaires were used to gather information on
supervisory activities of bank regulators and measures being
implemented to ensure compliance. In order to probe deeper into
the disclosures of risk management the respondent were provide a
chance to give their views and opinions based on their personal
experience and knowledge of the phenomenon.
82
3.4 Research Validity
3.4.1 Validity Validity is concerned with whether the findings are really about
what they appear to be about (Robson, 2002). Validity is
described as the degree to which the research measures what it
intends to measure. There are two types of validity which are
internal and external validity. Internal validity refers to the
validity of the measurement and test itself, whereas external
validity refers to the ability to generalize the findings of the
population.
Construct Validity: Construct validity set to tests correct
operational measures for the concepts under study, and ensure
consistency between theory and the defined construct (Yin, 2003).
Bertrand and Fransoo (2002) argued that operational research
studies generally lack construct validity because data could be
affected by subjective judgments. To reduce effects of this
problem to the overall research, essential data for this study,
was acquired from the Stock Exchange website, therefore construct
validity appears not to be a problem.
Internal validity: In this study only internal validity was
guaranteed by ensuring that the coding manual for data collection
and analysis was designed in line with the Basel 2 conventions,
RBZ Banking supervision and Surveillance (Minimum Disclosure
Requirements), Zimbabwe Stock Exchange Act, Banking Act and
Securities commission Act.
83
External validity: tests whether the study’s findings are
generalizable beyond the immediate case study (Yin, 2003).
According to Yin (2003), external validity is the major barrier
in conducting case studies as they rely on analytic
generalization. The study employed qualitative method of
analysing data and their for the findings cannot be generalised
and this became one of the limitations of the study
3.4.2 ReliabilityReliability refers to the extent to which the research’s data
collection techniques or analysis procedures will yield
consistent findings. The data is considered to be reliable when
there is transparency in how sense was made from the raw data
which leads to similar observations being reached by other
observers under the same conditions and measures.
3.5 Data analysis and Data Presentation
3.5.1 Qualitative data analysisThe study used a qualitative data analysis method. This is a
range of processes and procedures were the researcher moves from
the qualitative data that have been collected into some form of
explanation, understanding or interpretation of the people’s
responses and subject under investigated. The idea being to
examine the meaning and content of the qualitative data so as to
gather the respondents view points, opinions and how they
84
conveyed their perception of the situation. As the researcher
chose an inductive approach therefore content analysis was
employed to analyse both primary and secondary data.
3.5.2 Content AnalysisContent Analysis is an approach to document and text that seeks
to quantify content in terms of predetermined categories and in a
systematic and replicable manner (Brymann and Bell, 2007).It also
allows inferences about the attitudes and intentions of the
author by identifying specific characteristics (Morris,
1994).Content analysis can be a very beneficial research tool as
it is unobtrusive technique (Morris, 1984) that allows for the
study and reconstruction of the perceptions and beliefs of text
authors(D’Aveni and McMillann, 1990).Thus content analysis can be
used as a proxy to gain insight into otherwise unusually
inaccessible to level decision making thought process(Short and
Palmer, 2007).Risk management in annual reports is disclosed in
qualitative form therefore the research used a coding manual to
determine whether information in annual report is communicating
risk management. The researcher designed a coding manual based on
Beretta and Bozzolan (2004), the authors put forward four
complementary aspects to be considered (1) the content of
information,(2)the type of measurement used to quantify expected
impacts,(3)the managerial approach to risk management and (4) the
economic sign of expected impacts.
85
.
3.5.3 Data presentationData that was collected through primary and secondary sources was
presented using tables and descriptive analysis. The descriptive
approach employed was aimed at describing the extent of
compliance with RBZ Minimum disclosures requirements, extent of
Basel 2 implementation and the regulatory mechanism in place that
enforce such non-statutory instrument
3.6 Ethical considerations in researchGenerally ethical issues in a study were considered by the
research design so that it does not subject those being
researched (research population) to embarrassment, harm or any
other material disadvantage Saunders(2009).Ethics in research can
be divided into two that is Research Ethics and Professional
Ethics. Research ethics deals primarily with the interaction
between the researcher and the people they are studying, while
professional ethics is concerned with additional issues such as
collaborative relationships among researchers, mentoring
relationship, intellectual property, fabrication of data and
plagiarism (Nyamongo and Ryan, 2009).
The study harnessed research ethics through ensuring that
individual’s responses were not shared with other participants’,
thus safe guarding their right to privacy. Plagiarism was
eliminated by giving relevant credit to the author providing the
86
name, date and title of the document were ideas, opinions, views,
ideologies, statements and phrases were borrowed from.
87
3.7 Chapter summaryThis chapter highlighted the research methodology that was
employed to gather, analysis and present data. In the chapter the
researcher gave an in-depth explanation of research methodology
employed to help understand how information was collected to
answers research questions and meet the study’s objectives.
88
Chapter 4
Data presentation, interpretation and analysis
4.1 IntroductionIn this chapter, characteristics of the participants(demographic
data),perceived level of risk disclosure, the extent of
compliance with RBZ minimum disclosure requirements, are
discussed and evaluated in light with the research findings, the
frequency of examination and supervision of financial
institutions by the Reserve bank of Zimbabwe. How compliance is
enforced by the Zimbabwe Stocks Exchange and Securities
Commission of Zimbabwe. Data presentation, interpretation and
analysis is of qualitative in nature. Tables, verbal description
and direct quotes from the respondents are used to allow data
interpretation and analysis more meaningful. The interpretation
and analysis are supported by referring literature review sources
which was discussed in chapter two (2) of this study. In General
there must be a systematic pattern in the presentation of data in
any research work so as to convey meaningful results. The data
analysis must demonstrate emerging patterns pin-point
similarities, variations, with interpretations inevitably
revealing the meaning of research findings in the study.
89
4.2 Questionnaire response rateThe table below shows the total questionnaires that were
distributed; a comparison of those that were returned against
those that were not returned as well as the response rate was
provided.
Table 4.1 Response for distributed questionnaires
Respondents Sample
size
Returned
Questionna
ires
Questionna
ires not
returned
Response
rate (%)
RBZ bank
surveillance and
supervision
officers
5 3 2 60
Bank corporate
governance
6 4 2 66.6
90
employeesSecZ institutional
supervision
officers
5 3 2 60
ZSE defaulters and
solvency
inspectors
5 3 2 60
Total 21 13 8 62Source: Researchers calculations
The response rate for Reserve bank of Zimbabwe (RBZ) bank
surveillance and supervision officers was (60%),banks corporate
governance department senior members (66.6 %),Securities
Commission of Zimbabwe(SecZ) institutional supervision officers
(60%) and Zimbabwe stock exchange/ZSE defaulters and solvency
inspectors (60 %).The overall questionnaire response rate was 62%
which is well above the least expected response rate of 40%
(Robin, 2004) and 8% short to meet the 70% very well response
rate mark.
4.3 Demographic dataThe study subjects (participants) used to gather data on the risk
and risk management disclosures as a corporate governance measure
of the listed financial institutions in Zimbabwe comprised of,
RBZ bank surveillance and supervision officers, ZSE defaulters
and insolvency inspectors, SecZ Institutional supervision
91
department inspectors and listed banking and financial
institutions corporate governance risk management officers.
Table 4.1.2 respondents’ academic qualifications
Academic
qualifications
Total
respondents
Frequency Percentage
Masters degree 13 4 30Bachelor’s
degree
13 6 46
Professional
qualification
13 3 24
Source: Primary data
Table 4.2 above shows the academic qualifications of the research
subjects, 30% had Masters Degrees, 46% had bachelor’s degree
while 24% had professional qualification. Their qualifications
comprise of Accountancy, Business studies, Banking and finance
and risk management while professional courses were ACCA and CIS.
Higher learning qualifications were of importance to the study as
the knowledge base of the subject in the area of risk and risk
management disclosures and regulation frameworks contributed to
reliability of their remarks and answers to the questionnaires.
4.4 The extent of financial and non-financial risks disclosuresTable 4.4 extent of financial and non-financial risks disclosures
92
Types ofrisks
1 2 3 4 5 n Mean
Credit risk 4 9 13 4.692308
Liquidityrisk
3 10 13 4.769231
Interest/exchange
risk
5 8 13 4.615385
Operationsrisk
8 5 13 2.384615
Strategicrisk
7 6 13 2.461538
Legal risk 8 5 13 2.384615
Compliancerisk
9 4 13 2.307692
Reputationalrisk
5 8 13 1.615385
Source: Primary data
The results from the questionnaire respondents indicate that
respondents perceive the disclosure of liquidity risk as very
comprehensive (4.769231), while credit risk was rated second with
a mean value of (4.692308) and interest or and exchange recording
a mean value (4.615385).Financial risk information disclosure
scored a total mean of (4.692309). The mean values scored by
financial risk disclosure was more inclined to Very comprehensive
disclosure score which was assigned the highest score or weight 5
.The results of the financial risk disclosure was consistent with
that of Dia and Zengal (2012) in Canada were credit risk had a
mean value of 4.460 while interest and exchange rate was scored
4.785. Howe ever there was a sharp decline in the mean values for
93
non-financial risks disclosures as indicated by strategic risk
scoring (2.461538), followed by Operations and Legal risk which
both recorded a mean value of (2.384615) while Compliance risk
had (2.307692).These mean values were below the weight or score
value of three (3) thus they fall under Briefly disclosure score
or weight which was allocated a weight or score value of 2(two).
Reputational risk recorded the lowest mean with (1.615385) which
is in between non-disclosure or briefly disclosure. Results of
the financial risks in the study were inconsistent with that of
Dia and Zeghal (2012) in the study of Canadian firms were
strategic risk scored 4.322, operations risks 4.49.The Canadian
Accountancy board emphasises the disclosure of financial risks as
mandatory while non-financial risk are voluntary, thus Canadian
firms are provide also more information on voluntary disclosures
as compared to Zimbabwe where non-financial risks mandated by the
RBZ minimum disclosure requirements.
Baumann and Neir (2004) found that higher levels of risk
disclosure are associated with lower levels of stock return
volatility. The study conclude that higher level of risk
disclosures are important and useful to investors and may benefit
the financial institutions by reducing their cost of capital at
the same time raising their effectiveness of stock -based
compensation. These findings may be attributed to the reason why
listed banking and financial institutions in Zimbabwe have large
capital base and managed to meet the 25% capital stipulated by
94
the Central Bank minimum capital threshold requirements as a
result of their attractiveness in adequate risk disclosures.
4.5 level of compliance with financial risks disclosure requirementsTable 4.5 level of compliance with financial risks disclosures
requirements
Type of risk Comprehensive
disclosure
Very comprehensive
disclosureNumber
%
Number
%Credit risk 4
31
9
69Liquidity risk 3
23
10
77Interest/exchange
rate risk
5
38
8
62Source: Primary data
Descriptive analysis
Table 4.5 show the respondents on how they rate financial risk
disclosures based on a Likert scale that ranged from non-
disclosure with a weight of one (1) to very comprehensive
disclosure weight of five(5).Sixty-nine per cent (69%) of the
95
respondents rated credit risk disclosure as very comprehensive
while thirty one per cent (31%) agreed that it is comprehensive.
On liquidity risk disclosure seventy seven per cent (77%) agree
they are very comprehensive and twenty three (23%) comprehensive.
Interest and exchange risk had sixty two per cent (62%) of the
respondents agree that they were very comprehensive while twenty
eight per cent (28%) comprehensive. The results show that
financial risk is dominant in annual reports in comparison with
non-financial risk disclosures below.
These findings reinforce those that were presented by
Kongprajya (2010) in Thailand of 30 listed companies, they
conclude that Thai companies financial risk disclosures were the
most popular among all types of risk disclosures. This was
further explained by the fact that "financial risks are complex
to understand as they are usually related to technical terms and
sometimes sophisticated calculations. Therefore there are assumed
to require more clarification as compared to other types of
risks. Financial risk and its sub categories which are credit,
liquidity, interest and exchange risks were the most frequently
disclosed these results were similar to that of Canada. In Canada
the disclosure regulations emphasises companies to disclose
financial risks as compared to other risks category. The results
were also consistence with those carried out by Arshad and
Ishmael (2011) involving 13 (thirteen) banks in Malaysia,
financial risks was found to contain the highest amount of
96
information, the same study was conducted using questionnaire
survey to 20 bank managers.
4.6 The level of compliance with non –financial risks disclosuresrequirementsTable 4.6 level of compliance with non-financial risks
disclosures requirements
Type of
risk
Non-disclosure Briefly
disclosure
Average
disclosureNumber
%
Number
%
Number
%Operational
risk
8
62
5
38Strategic
risk
7
54
6
46Legal risk 8
62
5
38Compliance
risk
9
69
4
31Reputationa
l risk
5
38
8
62Source: primary data
Descriptive analysis
The above Table 4.6 shows the results from the respondents on how
they rate their understanding of non-financial risk disclosures
in annual reports of listed financial institutions. The
97
respondents were asked to rate the disclosures from one (1) non-
disclosure to five (5) very comprehensive disclosures. Sixty two
per cent (62%) agreed Operation risk were briefly disclosed and
38% average disclosure, 54% agreed that Strategic risk were
briefly disclosed while 46% average disclosure, 62% agreed that
legal risk were briefly disclosed while 38% average disclosure,
69% agreed that Compliance risks were briefly disclose while 31%
average disclosure and 62% agreed that reputational risks were
briefly disclosed while 38 % non-disclosure. The research
findings illustrate that non-financial risk were not disclosed in
detail as compared to financial risks as shown by one of the
respondent’s remarks that “ they just mention and define the
types of risk without giving quantitative and qualitative aspects
of how the organisation is likely to be affected”.
This further illustrate that non-financial risk are not being
disclosed or disclosed in a vogue manner that stakeholders cannot
determine the level of exposure of a particular institution to
such risks. The study findings shows that the number of low
disclosures of non- financial risk is higher than the number of
financial risk disclosures for all banking institutions in the
sample. These results are consistence with the research
previously carried out by Kajuter and Winker (2003), Beretta and
Bozzolan (2004), Linsley and Shrives (2006) and Mohobbot (2005)
which was conducted based on Italian, United Kingdom and Japanese
institutions.
98
Further the analysis of annual reports by the researcher
discovered mere definitions and descriptions of non-financial
risks which do not inform the reader on the exposure of the
institution. The study identified a high degree of “box-ticking”
or boilerplate reporting in non-financial risk disclosures as
they do not report on risk exposures and its potential effects on
current earnings and equity of the listed financial institutions.
About fifty per cent (50%) of the listed financial institutions
are of foreign origin which means they are likely to affected by
the implementation of the indigenisation law, however in their
reports they remained silent on legal and compliance risk they
are likely to face once the law is fully implemented. Apart from
such a threat of legal and compliance risk they were quote in
annual reports disclosing legal and compliance risks as
“Regulatory risk is defined as the failure to comply with
applicable laws and regulations or supervisory requirements, or
the exclusion of provisions of relevant regulatory requirements
out of operational requirements”. The deficiencies in legal and
compliance risks was also related to a study conducted by Angela
Ma et al (2012), using a sample of all 300 listed companies on
the Australian Stocks Exchange identified the following. 90 per
cent simply documented phrases in their annual reports regarding
regulatory changes to express the management’s willingness to
comply with all regulatory and statutory requirements. In view of
this extract it highlights that only 10 per cent of listed firms
in Australia provided adequate information pertaining to legal
99
and compliance risk management so as to satisfy Australian Stocks
Exchange Corporate Governance Practices requirements
Poor level of disclosures in non-financial risks is attributed to
the adoption and implementation of IFRS 7 by banking institutions
in preparing their accounts which is mandated by Securities Act
Chapter 24:25 section 3:4 of the securities Act on accountability
and audit stated that “the board should ensure that the financial
statements are presented in line with the international financial
reporting standards (IFRS) adopted in Zimbabwe”. IFRS 7 which do
not recognise the disclosure of operational, strategic,
reputational, and legal and compliance risk as mandatory as they
are not part of the general recommendation. Butler, C.2009 argued
that IFRS 7 guidelines are very vague and so it is possible,
given the complexities of financial risk that entities will
comply with the rules of IFRS 7 without disclosing too many
useful detail. Financial institutions shows a related pattern to
which Butler pointed as they are providing inadequate information
regarding their risk management strategies which difficult to
grasp their meaning.
However these non-financial risks are required under RBZ minimum
disclosures requirements of 2007.Therefore the study found that
there is low level of compliance and implementation of these
recommendations. The extent of qualitative disclosures should be
raised and improved as they are supposed to assist in
understanding of the risks reported, while quantitative
100
disclosures stand as clarification for the qualitative
disclosure. Qualitative risk disclosures should be provided to
adequately explain figures reported in the financial statements
and other quantitative disclosures
4.7 The extent of implementation and compliance with the RBZ minimum disclosures requirements and Basel 2 recommendationsTable 4.7 extent of compliance with RBZ minimum disclosures
requirements
Extent of risk
management
disclosures
Total
respondents
frequency Percentage
(%)
More than
required
13 - -
Same as
require
13 4 30
Less than
required
13 9 70
Source: Primary data
The above Table 4.7 illustrate results from respondents which
show that regulatory officials or users of annual reports
indicated lowest satisfactory in the level of qualitative
disclosures in risk management information with only 30%
(thirty per cent) or 4 respondents "same as required"(satisfied)
and 70% (seventy one per cent) or 9 respondents” less than
required" not satisfactory with information disclosed. The
regulatory Officials remarks reflected their experience with
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qualitative risk management disclosures describing them as being
generic , boiler plate in nature and made up of long descriptions
but containing little or limited information quality .
Participants’ remarks further reflected the anticipation that
qualitative disclosures are important to interpret quantitative
disclosures and the risk management policies in place.
Respondents find explanations and qualitative disclosures to be
insufficient and unrelated with quantitative disclosures of
financial institutions. Therefore banking and financial
institutions should adopt an informative communication method
intended to convey the level or extent of risk exposures and the
effectiveness of the risk mitigation or management policies and
systems in place
The lack of transparency in listed financial institutions of
Zimbabwe means their accountability cannot be assessed which is a
sign of weak corporate governance structures as they do not meet
the recommendation of the following code; The United Nations conference
on trade and development (2006) guide to good corporate governance
section (G) on Material foreseeable risk factors, stated that the
board should give appropriate disclosures and assurance regarding
its risk management objectives, systems and activities. It goes
on further claiming that’’ the board should disclose existing
provisions for identifying and managing the effects of risk
bearing activities and report on the internal control systems
designed to mitigate risk including risk identification
mechanisms. In this view it is clear that risk management
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disclosure cannot be separated from good practices of corporate
governance. Same sentiments were also echoed by The Turnbull
Guidance, Paragraph 33, stated “the annual reports and accounts
should include such meaningful, high-level information as the
board considers necessary to assist shareholders' understanding
of the company's risk management processes and system of internal
control".
The Securities Act Chapter 24:25 of 2010 on corporate governance
guide lines for listed companies was composed in line with the
Cadbury and the Combined Codes of United Kingdom, King 1, 2 and 3
of South Africa and Commonwealth Association for Corporate
Governance (CACG). All the codes which Securities Act recommends
their adoption emphasise on the disclosures of risk management.
There for failure by listed financial institutions point to the
need for legislative approach to corporate governance, apart from
the “comply or explain” regime that is currently in place. This
has the potential to compel managers to abide with the codes or
face penal sanctions from the Securities Commission.
4.8 Analysis of annual reports of listed financial institution risk management disclosures
Table 4.8 Risk management disclosure in annual reports of
financial institutions
103
Source: secondary data
Table 4.8 above contain the results of a further analysis of the
secondary data which is annual reports to compare the link
between the results from questionnaires respondents and the
104
Risk management
Disclosure requirements
No. of
banks
Frequency Percent
age
(%)Risk Identification
methods
6 1 16.7
Risk measurement systems 6 2 33.3Strategies for management 6 2 33.3Monitoring and control
mechanism
6 1 16.7
Adequacy and effectiveness
of the systems
6 1 16.7
Stress test/sensitivity
analysis
6 1 16.7
Value at risk
(VAR)
6 1 16.7
Capital allocated to
market and operations
risks
6 1 16.7
Assets held for liquidity
risks
6 1 16.7
actual information disclosed in annual reports on risk management
from 2009 to 2012. Risk measurement systems and strategies for
managing risk were disclosed by (33.3%) of the listed
institutions which translate to only two (2) banks were in
compliance, while risk identification systems, monitoring and
control mechanisms, adequacy and effectiveness of the risk
managements systems, stress test/sensitivity analysis results,
value at risk (VAR), capital held for market and operational
risks and assets held for liquidity risk were disclosed by
(16.7%) sixteen point seven of the listed financial institutions
or one (1) bank.
The results show that there is great information asymmetry as
limited information is reported on how risk is being managed.
This is conflicting with good governance which required
institution to create openness through annual reports. It is
emphasised that apart from just naming the risks the firm is
facing there should also be a detailed discussion about the
policies and measures applied to manage these risks (Curtis,
2010). Elliot and Elliot (2007) argued that a firm's reporting
should include the identification and prioritisation of key
risks, a description of management of these risks and information
about the measures in place. These authors agreed on the need to
report risk management as a way of creating openness to the
investors and stakeholders, by reporting what can be termed
classified information. Therefore all the activities of the bank
must be open to public scrutiny by avoiding withholding
105
information. Investors consider the board's attitude towards risk
management and internal control to be an important factor when
making investment decisions about the company (The Combined Code,
2003).
4.9 Analysis and discussion of the risk and risk management disclosure and the extent of compliance with RBZ minimum disclosure requirements and Basel 2The study findings on risk management disclosures are consistent
with that of Beretta and Bozzolan (2004) discovered that Italian
institutions willingly disclosed their future risk management
strategies (35.9 %),however, expected effectiveness of
implementing those strategies were rarely disclosed thus only
(15.5%) communicated such information. In their study it was
found that Italian annual reports lacked information about
decisions and actions taken to manage risks as evidenced by only
16.2% of all firms to be disclosing such information. Commercial
sensitivity associated with risk management disclosures stand as
a barrier to the dissemination of such information as a financial
institutions may resort to a boilerplate (box ticking) statement
containing general information that will not aid decision making
(Linsley and Shrives, 2000).Such low level of disclosure in risk
management can be attributed to the fact that regulatory
authorities which govern the local securities market are not
enforcing any risk management disclosures. The theory of
political cost put forward by Watts and Zimmerman (1986) argued
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that companies disclose risk management information to ward off
unwanted attention from media, public, politicians and
supervisors. Absence of such mechanism in Zimbabwe may be a
driving factor towards inadequate risk management disclosures in
listed financial sectors.
Another important example is that of the financial security law
(2003) in France which was enacted as a measure to formalise the
recommendations set by Autorite' des Marché’s Financiers (AMF)
best practices into regulations enforceable at law. The
development provided an incentive leading to French companies to
comply with recommendations of the corporate governance codes.
Institutions issuing securities on the French stock exchange are
obliged to disclose the terms of preparation and organisation of
the board of directors or the supervisory board as well as the
internal control systems(risk management systems) set up by the
institution
Therefore mere definitions and descriptions of risk and general
statements on risk management policy cannot inform the reader in
predicting any probability of risks impact and may not be the
type of information required by the institutional investors
(Solomon et.al. 2000). This should be taken into consideration
for purposes of Bank supervision by the RBZ, SecZ, and ZSE as
areas which need to be improved through taking action against
institutions that do not report more specifically about risk they
are faced with.
107
Low levels of risk and risk management disclosures in Zimbabwe's
listed financial institutions correspond with the argument that
managers are unwilling to disclose risk management information in
full detail, since they may cause reputation cost, legal cost or
threaten the relationships with trade partners (skinner, 1994).
This was also reiterated by Linsley and Shrives (2005) argued
based on two major barriers in disclosures of risk. First,
managers are unwilling to report on risk information that could
be commercially sensitive and second they are so reluctant to
disclose risk with safe harbour protection. Therefore it implies
that readers of companies’ annual reports may not receive detail
information concerning risk and its management. In comparison
with the signalling theory Spencer (1973), were manager are
motivated to disclose risk management to convey a message that
they competent in risk management. Also lack of credibility in
the forward looking information can provide an escape route for
institutional directors to omit risk management in annual reports
as they seek to avoid publicising information that can change in
future and taken as misleading the investing community. Linsley,
Shrives, & Crumpton (2006) state that this forward looking
information is ‘unreliable and could leave directors open to
potential claims from investors who have acted upon this
information
The disclosures outcomes from RBZ Minimum Disclosure Requirements
and Basel 2 requirement shows that a principle based cannot an
exception for boilerplate and uninformative information
108
disclosures. In fact the vague and wide definitions that are
described as principles are a major contributory factor to the
problem of uninformative disclosures. The review of risk and risk
management disclosures indicated that there is need for
institutions to move away from box-ticking mere compliance in
terms of disclosure requirements
4.10 How many times do the reserve bank of Zimbabwe visit banks in its supervisory duty to assess the level of compliance with the Minimum disclosure requirements?Table 4.10 Response on the frequency of assessment of banks
No. of visits
per year
Total
respondents
frequency Percentage
(%)
Once 13 13 100Twice 13 - -
More than
twice
13 - -
Total 13 13 100Source: Primary data
One hundred per cent (100%) of the respondents agreed that the
Reserve Bank of Zimbabwe visits once in a year for an onsite
examination. Further they mentioned that the Central bank conduct
two off-site assessment using submitted drafts of interim
financial statements and annual reports. In a separate interview
109
with the RBZ official on the possible reason for conducting a
single examinations two of respondents point out financial
constraints while one respondent figured out lack of skilled work
force as a result of human capital flight and retrenchment
exercise . The results of the questionnaire respondents aligned
to the argument that the implementation and supervision of the
Basel 2 requirements which were adopted by the central bank in
its Minimum Disclosures requirements is difficult in emerging
markets and likely to affect its full implementation and success.
Therefore the goal for market discipline is unlikely to be
achieved. Recent retrenchments that were conduct by the Central
bank as a result of financial constraint to remunerate employees
were also discovered as a contributory factor in hindering the
supervisory activities of the institution. This cemented the view
of Barlin. (2008) that the high technicality in Basel 2 and the
inclusion of internal mechanisms in the measurement of risk,
regulators will be forced to hire and hold highly skilled
employees through the medium and long term. Unfortunately, the
educational institutions required to train such personnel may be
absent in a country and many emerging market regulatory agencies
do not have the budget to add costly high-skilled workers to
their ranks Barlin (2008).In this circumstances the successful
implementation, monitoring and enforcement of the Minimum
disclosures requirements which were conceived after a Basel 2
convention of 2004 will be difficult to achieve.
110
4.11 How does the Zimbabwe Stock exchange determine whether listed banking institutions are complying with other regulations which are not in the Zimbabwe stock exchange Act such as the RBZ Minimum disclosure requirementsThe respondents to the questionnaire cited that Zimbabwe stock
exchange no longer deal with disclosures requirements since the
establishment of the Securities commission of Zimbabwe in 2010;
while the other senior official mention that it is the duty of
SecZ and RBZ to monitor the implementation of accounting
standards and also Minimum disclosures requirements in
particular.
The results of the interview strengthened the argument put
forward by Tsumba (2002) that the Zimbabwe stock exchange does
not support institutions that seek to promote market discipline
citing the Johannesburg stock exchange adoption and support of
the King report in 1994 which was initiated as a private business
initiative by Institute of directors of South Africa and made it
part of listings and listing continuation requirements. In a
separate case listed Institutions’ are also bound to comply with
the Recommendation 3/2005 of the Portuguese Stock Exchange
Committee (Commissao do Mercadodos Valres Mobiliaros) requiring
disclosures of corporate governance practices related to internal
control systems (risk management systems) in place. This lack
of recognition of other institutions regulations and failure to
adopt them as listing requirements pose a challenging goal to
attain market discipline in Zimbabwe. In Malaysia, the Code on
111
Corporate Governance was approved by the Ministry of Finance
(Norman et al, 2005) and it was released by the Securities
Commission and enforce by The Stock Exchange Requirements
(Abdullah and Chen, 2010).Such a multilateral approach to
governance practices and codes will foster the implementation of
good governance in organisation as they will be responsible to
compliance from more than one regulatory institution.
4.12 What are the measures being implemented by Securities Commission of Zimbabwe to ensure compliance with the RBZ minimum disclosure requirements and Basel 2 recommendation. The response to the questionnaire indicated deficiencies in
enforcement of Minimum disclosures requirements as the question
generated answers such as “SecZ is engaging with Public
Accountancy Association Board an Institute of Chartered
Accountancy of Zimbabwe to ensure that knowledge on the
implementation of RBZ minimum disclosure requirements of Basel 2
is disseminated among banking institutions account preparers” and
no penalties are levelled against non-compliant institutions as
the recommendations do not fall under mandatory disclosures.
The respondents’ comments bring to light the need for a concerted
effort from the market regulators such as Sarbanes-Oxley Act of
the USA Securities Commission. The Sarbanes Oxley Act provided
the Securities Exchange Commission of USA with powers in respect
to civil penalties, disgorgement, officers and directors bars as
well as equitable remedies. In addition, it provided powerful
112
substantive criminal provisions and sanctions to the Department
of Justice to penalise commercial criminals. In comparison the
Emirates Securities and Commodity Market Authority (ES&CMA)
listing conditions encourage organisations to disclose risk-
related information with an appropriate level of transparency"
UAE Federal Act NO.4 of 2000"(Hassan, 2012). Another notable
development is the Novo Mercado of Brazil which is a separate
segment of the Bovespa Stock Exchange that requires companies to
comply with more rigorous corporate governance standards relating
to shareholders rights and transparency. Under the Novo Mercado’s
rules shareholders may submit any disputes relating to the
listing rules to binding arbitration in Brazil. These provisions
give shareholders of Novo Mercado’s companies a forum entirely
separate from the Brazil judicial system to seek redress for
violations of their rights as shareholders”. Milstein et al
(2005). The Novo Mercado regulation system exhibit how the stock
exchange can be a strong tool to enforce corporate governance
codes or practices in emerging markets like Zimbabwe, even when
the judicial and legal systems are inefficient. The calibration
and reformation of stock exchange rules is relatively simply than
for Companies Acts.
.
4.13 Chapter summaryThe chapter illustrate the response rate of the study
participants, their demographic characteristics in terms of
academic qualifications. It outlined, described, discussed and
113
evaluated the research findings on the extent of disclosures on
financial and non-financial risks, the level of compliance with
RBZ minimum risk management disclosures requirements, the extent
of Basel 2 implementation, measures being implemented by
regulatory institutions to ensure compliance with good governance
codes.
114
CHAPTER 5
Summary of findings, conclusions, recommendations and
areas of further study
5.0 IntroductionThe study set out to investigate the risk and risk management
disclosures as a corporate governance measure by listed financial
institutions in Zimbabwe. The study explored relevant literature
on risk management disclosures frameworks, corporate governance
in order to come up with informed outcomes. A sample of banks and
securities market regulatory officials which comprise of 21
senior officials from RBZ, ZSE, SecZ and listed banking and
financial institutions were used. The study employed both the
descriptive and a case study as research methods (see chapter
three).The objective of the study was aimed to identify, describe
and analyse the risk and risk management disclosures by listed
financial institutions in Zimbabwe. The study also explored the
level of compliance with RBZ Minimum disclosures requirements,
extent of Basel 2 implementation and the measures being
implemented by relevant regulatory institutions to ensure market
discipline is achieved.
5.1 Summary of objectives
115
The objectives of the study was to assess whether there is
conformity between corporate risk management disclosure practices
in listed banking and financial institutions and the RBZ Minimum
Disclosure Requirements in risk management disclosures.
Investigate the level of risk management disclosure of financial
instruments information among listed banking and financial
institution in Zimbabwe from 2009 to 2012. Examine whether listed
banking institutions of Zimbabwe are providing more information
than statutorily required in their annual financial reports.
Assess the extent of implementation of Basel 2 in Zimbabwe listed
banking institutions if there are consequences associated with
failure to meet the RBZ Minimum Disclosure Requirements faced by
listed banking institutions in Zimbabwe
5.1.1 Summary findings
5.1.2 The extent of disclosures on financial and non-financial risksThere is a high level of financial risk disclosures and its sub-
categories which are credit, liquidity and interest and exchange
risk. Financial risk disclosure scored a combined mean value of
4.69 the results matched that of Dia and Zenghal (2012) in
Canada. There was decline in the mean value of non-financial
risks disclosures which are operations, strategic, legal and
compliance and reputational risks which scored an average mean of
2.63.
116
5.1.3 Level of compliance with RBZ minimum risk disclosures requirementThe results indicated that financial risks disclosures using a
Likert scale ranging from 1 non-disclosure to 5 comprehensively
disclosure.an average of 69 per cent agreed that financial risks
were disclosed in very comprehensive manner while 31% rate them
as comprehensive disclosure. These results were consistent with
those of Kongprajya (2010) of 30 Thailand listed companies in
which they discovered financial risks as the most popular in
annual statements of Thai listed firm. There was a sharp decline
on non-financial risks disclosure based on the response from the
study participants (subjects) Sixty two per cent (62%) agreed
Operation risk were briefly disclosed and 38% average disclosure,
54% agreed that Strategic risk were briefly disclosed while 46%
average disclosure, 62% agreed that legal risk were briefly
disclosed while 38% average disclosure, 69% agreed that
Compliance risks were briefly disclose while 31% average
disclosure and 62% agreed that reputational risks were briefly
disclosed while 38 % non-disclosure. The results illustrate that
non-financial risk were not disclosed in greater detail. These
results are consistence with the research previously carried out
by Kajuter and Winker (2003), Beretta and Bozzolan (2004),
Linsley and Shrives (2006) and Mohobbot (2005) which was
conducted based on Italian, United Kingdom and Japanese
institutions.
117
5.1.4 The extent of compliance with RBZ minimum disclosure requirements and Basel 2 The study findings based on respondents 70% indicated that listed
financial institution were disclosing risk management less than
require while 31% agreed they were same as required. Further an
analysis of the annual report also discovered a deficiency in the
disclosures of risk measurement systems and strategies for
managing risk were disclosed by (33.3%) of the listed banking and
financial institutions which translate to only two (2) banks
were in compliance, while risk identification systems, monitoring
and control mechanisms, adequacy and effectiveness of the risk
managements systems, stress test/sensitivity analysis results,
value at risk (VAR), capital held for market and operational
risks and assets held for liquidity risk were disclosed by
(16.7%) sixteen point seven of the listed financial institutions
or one (1) bank.
5.1.5 Frequency of on-site examination by RBZ in its supervisory roleOne hundred per cent (100 %) of the respondents agreed that the
Central bank conduct a single on site examination on financial
institutions and two off site assessment using interim financial
statements and annual reports
118
5.1.6 Zimbabwe stocks exchange assessment on whether listed institutions are in compliance with regulations which are not on the Zimbabwe stock exchange Act such as the RBZ minimum disclosures requirementsThe research respondents pointed out that Zimbabwe stock
exchange does not enforce or monitor the implementation of other
regulatory instruments that bound listed firms. Their for Minimum
disclosures requirements stipulated by RBZ are not enforced by
the securities exchange
5.1.7 Measures being implemented by Securities Commission of
Zimbabwe to ensure compliance with the RBZ minimum disclosure
requirements and Basel 2
The research found that Securities commission of Zimbabwe is
engaging with the Public Accountancy association Board and
Institute of Chartered accountancy of Zimbabwe to ensure that
full information is disseminated to the financial institutions
pertaining to the implementation of Minimum disclosures
requirements. The study also found that no penalties are
sanctioned against non-compliant institutions
5.2 Conclusions5.2.1 It can be conclude that listed financial institutions are
disclosing more information on financial risks and its categories
which are credit risk, liquidity risk, and interest and exchange
rate risk. Also the study can conclude that non-financial risks
(operations risk, strategic risk, legal and compliance risk and
119
reputational risk) are not being disclosed adequately to give a
full position of the financial institutions exposure.
5.2.2 It can be also concluded that there is high level of
compliance on financial risk disclosure than non-financial risk
disclosures in the annual reports of listed financial
institutions in Zimbabwe as illustrated an average mean value of
4.69 for combined financials risks(credit, liquidity and interest
and exchange risk) and 2.63 for non-financial risks( operational,
strategic, legal and compliance and reputational risks).This
shows that listed financial institutions in Zimbabwe are
complying with International Financial Reporting Standards 7
which only emphasize the disclosures of financial risks, while
the RBZ Minimum disclosures requirements which also mandate the
reporting on non-financial risks is ignored.
5.2.3 Financial institutions trading on the Zimbabwe stock
exchange are not compliant with the risk management disclosures
requirements of the Reserve Bank of Zimbabwe as illustrated by
the study. This also indicate a weak corporate governance
structures in financial institutions as the RBZ requirements are
aimed to reduce information asymmetry by encouraging that risk
management are reported in greater detail to enable investors and
bank customers to fully evaluate and understand the level of
exposure of their funds invested or deposited in a particular
bank.
120
5.2.4 The Basel 2 Pillar three (3) or market discipline
recommendations are not being fully implemented by listed
financial institutions in Zimbabwe as shown by their low level of
disclosures of risk management which are part of the Pillar 3 of
the market discipline.
5.2.5 The study also conclude that there is deficiency in
supervision of the financial institutions by the Reserve bank of
Zimbabwe shown 100% respondents remarks that only one on-site
examination is conducted which can be pointed out as a failure to
execute its supervisory role and lead to non-compliance of its
set regulations which jeopardise investors and depositors funds.
Inadequate resources such as skilled work force as a result of
lack of funding required in recruiting and remunerating personnel
are the barriers that currently affect the Central bank to fully
execute its duties.
5.2.6 There is no co-ordination among regulatory institutions
which are the Zimbabwe stock exchange, Reserve bank of Zimbabwe
and Securities commission of Zimbabwe in implementing and
monitoring the success of good governance codes which are
designed in Zimbabwe (RBZ Code1 and Minimum disclosures
requirements) or adopted from internally recognised Codes of good
governance (The Combined Code, King Report, The Cadbury Code and
Basel 2 recommendations).
121
5.3 Recommendations5.3.1 Adoption of legislative approach to corporate governance
codes aimed to instill, maintain and retain market discipline to
ensure full compliance without option to explain reasons for non-
compliance
5.3.2 Introduction of penalties such as financial, directors’
bars, delisting from securities market or in extreme cases
imprisonment of non-compliant institutions or managers
5.3.3 Incorporating corporate governance codes as listing
requirements by Stock exchange thus render some mandatory power
to the codes
5.3.4 Government should take a leadership role in spearheading
the development, implementation and investment in enforcement of
good corporate governance in Zimbabwe.
5.3.5 Multi-lateral approach to the implementation and
enforcement of corporate governance codes such as pre-
incorporation by the Companies Act, Issuance of trading licenses
such as bank licence by the Banking Act, Listings and
continuation of listing by Zimbabwe stock exchange and the
Securities Commission of Zimbabwe and The Judiciary system such
as the Criminal court.
5.4 Areas of further studyThe study was centred on 6 financial institutions which are
listed on the Zimbabwe stock exchange. That means a small sample
was used and results in limiting the generalisation of the
122
results. A further study is required that involve both listed and
non-listed financial institutions so as to draw general
conclusions in the industry as a whole.
A more institutional specific study is required to conduct an
analysis of risk management disclosures based on individual
financial institutions.
The study was conducted using a qualitative research method a
qualitative approach can be used to determine if the results
yield will be consistent with that in this study.
The is need to conduct a further study based on the influence of
(1) Board of directors characteristics, (2) The influence of the
audit committee, (3) The influence of other board committees on
risk management disclosure.
Another study can be conducted on the influence of (1) Owner
concentration, (2) Cross-directorship, (3) Foreign ownership, (4)
Company size based on total assets ,(5) company size based on
total turnover, (6) Leverage and (7) Profitability on risk
management disclosures.
123
124
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APPENDICES
APPENDIX 1
FACULTY OF COMMERCE
DEPARTMENT OF BUSINESS MANAGEMENT28 June 2013
To Whom It May Concern
Dear Sir/Madam
REQUEST TO OUT RESEARCH
R101551P is a bonafide student at this institution in the
department of Business Management.
He is carrying out research on Risk and risk management
disclosures as a corporate governance measure for listed banking
and financial institutions
Any information you give him will be used solely for academic
purposes.
138
Please assist him in any way possible.
Yours faithfully
A.Mafuka
CHAIRPERSON
Email: [email protected]
Mobile 0772 632 555
APPENDIX 2
Questionnaire on Minimum risk and risk management disclosure requirements and compliance by listed banking institutions of Zimbabwe
Section A (May your please fill in the blank spaces provided below)
Name of organization …………………………………………………………………..............
Age of respondent………………………………………………………………………………
Sex of respondent……………………………………………………………………………….
Professional qualifications of respondent……………………………………………………..
Occupation of respondent………………………………………………………………………
Work experience of respondent…………………………………………………………………
Section (B) compliance level
How do you the rate listed banking and financial institutions’risk disclosures in line with the RBZ Minimum risk disclosuresusing quality scale below
Type ofrisk
Non-disclos
Brieflydisclosu
Averagedisclos
Comprehensive
Verycomprehensi
139
ure
1
re
2
ure
3
disclosure
4
vedisclosures
5
CreditLiquidityInterest&exchangeOperation
alstrategic
Legalcomplianc
eReputatio
nal
Briefly explain what you consider when allocating the score for financial and non-financial risks disclosures
………………………………………………………………………………………………………………………………………………………………………………………………………………
What is the level of compliance by banking and financial with theRBZ Minimum risk management disclosures requirements?
Type of risk Less than required
Same as require
More than required
Credit riskliquidityInterest and exchangeoperationsstrategicLegalcompliancereputational
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Briefly explain how you understand risk management information disclosed in the annual reports and if that can assist in decision making
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
141
PROGRESS ON BASEL 2 IMPLEMENTATION
Basel 2 Pillar 3 or Market discipline require that banking institutions disclose of its objectives and policies for each risk management including the following
A-Strategies and policies
B-Structure and organisation of the relevant risk management functions
C-Extent and content of risk reporting or measurement systems
D-Risk management or risk mitigation strategies
E- Processes for monitoring the efficiency of risk mitigation strategies
Basel 2 Pillar 3 or Market discipline disclosure requirementsIndicate by ticking the box for each risk were compliant with/implementation of the Market discipline and cross where there is no compliance
TYPE OF RISK
Strategies and policies
Structureand organisation of the relevant risk management functions
Extent and content of risk reportingor measurement systems
Risk management or riskmitigation strategies
Processesfor monitoring the efficiency of riskmitigation strategies
Credit riskMarket riskOperational risk
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Interest rate risk
Indicate other areas that have not been covered that you may havenoticed as being complied with or not being complied with
………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
Section (C) Regulatory Authorities Supervision Exercise
How many times does the Reserve Bank of Zimbabwe visit banks peryear for on-site examinations in its supervisory exercise toassess the level of compliance with the Minimum disclosurerequirements risk and risk management
Number of visits/yearOnceTwiceMore than twice
What other factors that you may wish to discuss in this area?
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...............................................................................................................................................................
(Securities commission officials)
143
How does Securities Commission of Zimbabwe assess compliance ofthe listed banking institutions with the RBZ minimum riskmanagement disclosures requirements?
………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
(Zimbabwe stock exchange officials)
How does the Zimbabwe Stock exchange determine whether listed banking institutions are complying with other regulations which are not in the Zimbabwe Exchange Act such as the RBZ minimum disclosure requirements (risk and risk management)?
………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
Section (D) Enforcement of the regulations
What are the measures being implemented by Securities Commissionof Zimbabwe to ensure compliance with the RBZ minimum disclosurerequirements (risk and risk management)?
………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
How does The Zimbabwe Stock Exchange ensure compliance withregulations which are not in the Zimbabwe stock exchange Act such
144
as the RBZ minimum disclosure requirements (risk and riskmanagement)?
………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
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