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    Question

    All of the following can be the reason for failure of

    the corporate governance in financial institutions, except-
    A Complex and opaque organisational Structure Correct Answer Incorrect Answer
    B Inadequate oversight by the board Correct Answer Incorrect Answer
    C Flawed remuneration policies Correct Answer Incorrect Answer
    D Market crash leading to decline in revenue Correct Answer Incorrect Answer
    E Weak risk management systems and internal controls Correct Answer Incorrect Answer

    Solution

    Complex and opaque organisational Structures take advantage of regulatory arbitrage and also of gaps in regulations. Regulators found it difficult to look through the structures and enforce regulation Inadequate Oversight by Board:   Incomplete risk information due to gaps in MIS coupled with inadequate understanding of risk due to the lack of expertise among the directors, hampered effective and timely decision making. Flawed remuneration policies:   Compensation structures which focussed excessively on short term performance incentivised managers to take excessive risks in order to meet the short term objectives at the expense of long term sustainability of the firm. Weak risk management systems and internal controls: With significant developments in technology, risk management in the run up to the crisis became highly quantitative on the lines of an exact science.

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