Undertaking financial and non-financial risks is the basic job of any business organization. In fact, profit is considered to be a reward for efficiently bearing risks. Since risk-taking is so crucial, It is for this reason that every organization needs to create a framework that needs to be followed in order to manage risks in an effective manner.
The corporate risk governance framework is the organization’s way of institutionalizing the risk management process. In the absence of this governance framework, the organization’s approach will be driven by a handful of individuals instead of being driven in an institutional manner.
This article outlines some of the steps which are commonly taken by organizations in order to ensure that they have the appropriate corporate risk governance policy in place.
What is Risk Governance?
Risk governance is the process of setting up rules, regulations, procedures as well as norms related to the decisions which involve risk-taking across the organization. Risk governance is broader in scope as compared to the risk policy. This is because risk governance considers the impact as well as the point of view of all stakeholders. It also considers wider political, social, and legal ramifications of the risky decision.
The best way to understand risk governance is to think of it as an architecture that enables all other risk management activities in the organization. Risk governance also encompasses the formation of communication lines between various organizational stakeholders.
It is important that all the steps related to risk governance should be in compliance with the Enterprise Risk Management (ERM) framework. It is the job of the risk governance committee to ensure that the tenets laid down by the ERM framework are carefully followed during the risk governance process.
The first step in building a corporate risk governance framework is the establishment of a risk committee. The steps to form this committee and ensure its efficient functioning have been mentioned below:
- Establishment of a Governance Committee: Organizations that have developed best practices when it comes to risk management generally form special committees to take care of their risk management needs. In many such organizations, these governance committees form a part of the building block of the DNA of the company. In many organizations, the establishment and empowerment of such a committee are mentioned in the corporate charter itself.
- Defining the Purpose of the Committee: The purpose of the risk governance committee is to develop the risk policies of the organization. These policies have been discussed in a separate article. They can be considered to be the constitution for all risk management activities in an organization. The committee is also put in charge of allocating managers to the various risk management divisions.
The amount of capital being allocated for various risk management activities also needs to be approved by this committee. If the company is part of a larger framework of organizations, then it would be better if the committee is formed at a higher level and uses the enterprise risk management framework instead of managing the risks at an individual level. This helps in ensuring that the risk management practices being followed across the firm are not contradictory in any manner.
- Members of the Risk Governance Committee: Over the years, organizations have realized that in order for the risk governance process to be effective, two things are important.
- Firstly, the members of the risk management committee should be from higher management. This ensures that they have the ability to effect changes. Ideally, members of the Board of Directors form part of the risk governance committee.
- Secondly, it is important that the members of the risk governance committee not be a part of the day-to-day management of the firm. This helps ensure that they are able to look at the risk management practices from an unbiased point of view. In many companies, a non-executive board of directors may not have the necessary skill in order to lead the risk governance team. In such cases, companies often spend money on professional training programs in order to ensure that they have the skills required to perform their tasks.
- Frequency of Meetings: The bye-laws of the company should make it mandatory for the members of the risk governance committee to meet at a given frequency. The usual frequency for these meetings is quarterly. However, it is possible to call ad-hoc meetings. Such meetings are usually called by the chief risk officer or other higher-level executives of the company.
Industry-wide best practices dictate that the minutes of these meetings must be communicated to the board of management. These minutes should also be included in the quarterly report which is generally sent to all shareholders. The idea is to ensure that all the shareholders are made aware of the risk governance practice.
The central idea behind the establishment of the risk governance committee is that the risk management practices must remain more or less standardized even if the management of the company changes.
Hence, attempts are made to codify and standardize the risk management practices. However, it is important to realize that the risk management practices vary across organizations depending upon their size and complexity of the business.
