IT Governance

Corporate Governance and Risk: Are They Related?

Corporate governance is a central theme in today’s organizations, especially regarding risk management. Poor visibility, incorrect data and analysis, and communication issues led to several crises, and one of them was the global recession. So, discuss board member credibility, risk appetite, returns, and stakeholder preferences during meetings. In this article at AnalystPrep, James Forjan helps you understand how corporate governance and risk are related.

Link with Corporate Governance

For appropriate risk management, stop risk-inducing activities, set up processes to control risks, and extend risk acceptance criteria. For corporate governance, board members should align strategies to stakeholder priorities, reward staff to prevent fraudulent activities, and establish risk tolerance levels. It is only then that risk governance can be properly in place.

So, your risk appetite statement (RAS) is one of the critical elements of corporate governance. It states the amount and risk types, appetite, capacity, profile, and tolerance your organization is willing to avoid or mitigate to attain business goals.

The corporate governance committee determines policies and guidelines that the risk management team must implement. Let’s find out the roles that work best for risk control and mitigation:

  • Audit committee – Controls the financial and regulatory reporting, standards, and validates firm activities to report
  • Risk advisory director – Manages policies, financial reports, enforces prescribed industry standards and international laws, etc.
  • Risk management committee – Evaluates various risks related to liquidation, market, policies, approves credit, and looks out for portfolios and industry trends
  • Compensation committee – Supervises the amount allotted to stakeholders

How’s Your Risk Appetite?

The corporate governance committee must understand the risk appetite of its organization. So, they approve risks and assign the CEO or chief risk officer to enforce them. These top leaders then come up with financial and non-financial risk KPIs and report results.

  • The chief risk officer (CRO) outlines the risk program, policies, analysis vectors, approaches, framework, governance, oversees the risk limits, and coordinates between the board and the executives.
  • To curb risks, companies are now withdrawing several executive compensation benefits, and the packages are subject to market scenario.

Instead of having a centralized risk committee, risk governance’s responsibility is distributed among line managers and business unit heads. They calculate risk limits based on portfolios and the entire business. VaR metrics, worst-case scenario assessment, and stress testing are part of the process. Once your corporate governance committee has monitored risks according to the compliance, the audit team’s role is to identify lapses and report back objectively.

Without transparent risk management processes, corporate governance would not be successful. Making timely decisions related to risks, following guidelines, and maintaining industry standards can help you achieve it.

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