In the past few weeks, we have been focusing on board committees – their roles and how important they are to an organisation’s successful management. Board committees are more important than ever before due to the economic challenges we have been facing in 2020 alone – Covid-19, lockdown, a recession, corporate failures and more. We have discussed the most important board and statutory committees in depth, namely the audit committee, social and ethics committee and the nomination committee. This blog focuses on the risk committee.
Risk is a crucial factor, inseparable from business and strategy. Every decision made in an organisation carries a certain degree of risk. To mitigate risk, the board of directors delegates responsibilities to different committees, thereby ensuring the organisation’s longevity and sustainability.
The King IV Report on Corporate Governance™ (King IV™) emphasises risk governance as a key principle, recommending that boards should task a designated committee with oversight of risk governance. The JSE Listings Requirements state that listed companies must have a dedicated risk committee. The committee that handles risk governance should preferably have both executive and non-executive members, with the majority being non-executive board members. The committee members should be individuals with the required risk management skills and experience to perform the functions and successfully undertake the responsibilities of the committee.
The benefits of a separate risk committee are plenty, including:
- Assisting the board with its responsibility, allowing it to dedicate efforts elsewhere.
- Allocating enough time, dedication and resources towards identifying, assessing and managing risk.
- Assuring key stakeholders and shareholders that the organisation focuses on proper risk governance.
- Anticipating and reacting to risks that may not be apparent otherwise.
The roles and responsibilities of the committee and its reporting processes should be set out in a charter, which must be reviewed annually. According to best practice, the committee’s roles and responsibilities comprise:
- Overseeing the risk management infrastructure, ensuring that the necessary policies and procedures relating to risk governance, management and practices are implemented.
The risk management infrastructure includes management policies, procedures and methods to identify increasing risks and ensuring that effective risk management is applied across the entire organisation, hence also improving the organisation’s preparedness to address risk.
- Monitoring risks
The committee assists in assessing and monitoring the organisation’s compliance with the risk limit structure and undertaking remedial action where non-compliance occurs.
- Overseeing risk exposures
The risk committee has to develop insight into critical risks and exposures and assist management with strategies to address possible risks.
- Oversight of risk appetite and risk tolerance
The risk committee identifies and monitors the organisation’s risk culture and its appetite and tolerance for risk.
- Incorporating processes and systems to identify and report risks and management deficiencies
A risk management plan must be drafted to formalise the process of risk identification.
- Timeous and effective implementation of corrective actions regarding risk management deficiencies
The risk committee should ensure that actions are taken to negate the effects of possible risks and deficiencies as soon as they are identified.
- Defining authority and independence related to risk management responsibilities and fostering an appropriate risk culture
Individuals and management need to be aware of their authority and responsibilities about risk within an organisation. All employees should foster a good risk culture to minimise risk throughout the company.
- Advising the board on risk strategy
The risk committee advises the board regarding risk strategy. It informs the board of risk exposures, deficiencies, future risk strategies and the organisation’s ultimate performance and sustainability when faced with all forms of risk.
Ineffective oversight and managing of risk can be harmful to the future of an organisation. At Okina Company Secretarial Services, we can help you establish and effectively incorporate the necessary committees to help your governance structure take shape. We can provide practical guidance and assist with processes, policies, and reporting. Contact us at email@example.com.