Governance, Risk, and Compliance (GRC)

Introduction

Corporate governance is a growing area of academic research, as well as a growing area of concern for regulators, investors, and firms. The aim of the course is to provide an overview of recent developments in corporate governance and corporate governance regulation, followed by a more detailed analysis of governance, risk management and compliance issues in the financial industry.

The interest in corporate governance issues has been stimulated by the governance scandals in the early 2000s, but also by the increasing role of institutional investors, large-scale privatizations, increasingly integrated financial markets, and concerns for stakeholder welfare.

We discuss the shareholder value and the stakeholder view of corporate governance. We examine the various combinations of ownership and control, and the key potential conflicts between various stakeholders. An important place will be given to the role of leverage and the associated conflicts between shareholders, debt holders and other stakeholders. We then analyze the need for regulation, as well as the main corporate governance rules adopted in Norway and other countries.

The financial crisis of 2008-2011 revealed a dire need for improving risk management and regulation in the financial sector. Both European and US legislators have since produced a large body of rules that financial firms are expected to comply with. As a consequence of increasingly strict demands and requirements from legislative, regulatory and supervisory authorities, most new jobs created within the financial services sector are within the risk and compliance sector. Bankruptcies within the financial sector have also shown the commercial significance of loss of licenses due to breaches of financial rules and regulations. Forced mergers, nationalizations and large fines have also affected investors and tax payers.

Financial regulation applies to all who do business within the financial sector, investment firms, banks of all sizes, pension funds, insurance companies, etc., and it includes rules pertaining to the organisation of firms, to investment advice, to conflicts of interest, to product designs and to selling, to mention just a few. Working in the risk and compliance department in a financial firm presents also challenging governance issues, where management and leadership skills are key.

Regulatory risk is closely related to the underlying commercial and financial risks of the financial institution. This demands understanding of financial risk models, as well as insight into the firms’ exposure.

The course will include considerable teaching on the technological developments within Fintech and Regtech as tools for making supervision of the financial industry more efficient.

The course will also address the issues of socially responsible investment and ESG-issues in the corporate governance of firms and the investment policies of financial institutions. There will be a discussion of the recent sustainability regulations, including the EU taxonomy and nonfinancial reporting requirements related to the taxonomy.

As the governance of investment banks and other financial institutions have been heavily regulated by the EU in the aftermath of the financial crisis, the legal aspects of the course will mainly be concerned with EU/EEA-law, and the students will acquire familiarity with the most important relevant EU laws.

Course content

1. Corporate governance: shareholder value vs the stakeholder view
2. The moral hazard problem
3. Ownership and control. Owner types: families, financial institutions, governments, “ownerless” firms.
4. Key agency conflicts:
   1. Shareholders vs managers
   2. Majority vs minority shareholders
   3. Shareholders vs debt holders
      1. Asset substitution
      2. Underinvestment
      3. Moral hazard in financial intermediation.
      4. Applications to the financial industry
   4. Shareholders vs stakeholders
      1. Employee ownership and co-determination
      2. Corporate social responsibility, nonfinancial reporting on sustainability issues
      3. Socially responsible investment, ESG ratings
5. Corporate governance codes
6. The need for financial regulation
7. Financial firms and investment banks (Finansforetak og verdipapirforetak)
8. Regulatory risk:
   1. Organisational requirements: Mifid II
   2. Conflicts of interest
   3. Conduct of business rules
   4. Product development
   5. Anti Money Laundering – FATCA
   6. Market Abuse Regulation
   7. Sustainable finance
9. The task of the risk controller/manager
10. Risk models and capital requirements