Corporate governance, enterprise risk management, and corporate failure: Evidence from financial institutions in Zambia

Vincent Bwato; Norman Kamanga; Romeo Yohane

doi:10.51867/AQSSR.3.1.34

Authors

Vincent Bwato The University of Zambia, Zambia Author https://orcid.org/0009-0003-4588-4997
Norman Kamanga The University of Zambia, Zambia Author
Romeo Yohane The University of Zambia, Zambia Author https://orcid.org/0000-0003-3786-1675

DOI:

https://doi.org/10.51867/AQSSR.3.1.34

Keywords:

Governance, CAMELS, Corporate Failure, Enterprise Risk Management, Emerging Market, Financial Service Institutions, Zambia

Abstract

This study sought to examine the effect of financial performance, corporate governance quality, and enterprise risk management on corporate failure. The sample size of six was drawn from the financial institutions listed on the Lusaka Stock Exchange in Zambia. The study adopted a mixed-method approach in analyzing data for the period 2020 to 2024. The quantitative analysis focused on financial performance using the Capital, Assets, Management, Earnings, Liquidity, and Sensitivity to Risk (CAMELS) approach and regression analysis. On the qualitative side, the study analyzed corporate governance quality and enterprise risk management (ERM) maturity levels based on the firm disclosures for the same period. The findings of the study indicate that firms experience financial distress, evidenced by low levels of capitalization, decline in earnings, and liquidity challenges. Additionally, there is evidence that poor corporate governance structures and ERM systems are not sufficiently effective in mitigating risks and enhancing financial stability, which exacerbates the financial distress faced by the firms. Consequently, these challenges worsen the financially distressed situation that the firms are operating under. Using panel data (2020-2024) from six firms registered on the Lusaka Securities Exchange, this study estimates three regression models predicting financial distress (Z-score), performance (ROA/ROE), and company value (Tobin's Q). The distress model explains 66% of the variation in stability (R² = 0.66), indicating that board independence, capital strength, liquidity, and regulatory compliance lower failure risk. Non-performing loans significantly increase vulnerability (β = -0.52, p < 0.01). Profitability models (R² = 0.63 and 0.61) show that good governance and appropriate capital/liquidity lead to higher returns, but inefficiency and low asset quality hinder success. The company value model (R² = 0.68) indicates that profitability, governance quality, capital adequacy, and compliance increase market valuation, whereas asset deterioration decreases it. Overall, stronger governance, effective risk management, and regulatory discipline are linked to greater stability, better performance, and increased market value. The regression analysis above indicates that the relationship between ERM and governance quality is both negative and statistically significant. The implication is that good corporate governance practices and ERM are effective in reducing the probability of corporate failure. The delayed regulatory intervention can lead to corporate failures that are preventable. Investrust Bank Plc is an example of the effects of regulatory delays. Therefore, financial performance, corporate governance practices, and ERM have an effect on the success of firms. The study recommends that policymakers in the financial services sector should ensure good corporate governance practices; ERM and financial performance are frequently monitored to reduce the likelihood of business failure.

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