Risk Committees

8m Read Time
04/02/2024

In the intricate world of corporate governance, where success is often synonymous
with effective execution, the role of risk management committees has become increasingly
pivotal. These committees serve as the vanguards of organizational stability, steering
companies through turbulent waters and safeguarding stakeholders’ interests.

This blog post will delve into the nuances of risk management committees. It will
explore their composition, functions, benefits, and attempt to place them in the broader
landscape of corporate governance.

Composition and Structure of Risk Committees

Defining the Risk Committee

A risk committee in corporate governance, as defined by industry leaders, is a
specialized unit of a company’s governance structure tasked with overseeing and managing
risks. Comprising individuals with diverse expertise, these committees function as guardians
of corporate stability. They’re tasked with addressing a spectrum of risks – including but not
limited to financial, operational, and strategic. A risk committee adapts and develops policies
according to the risk appetite of a company.

Members of the Risk Committee

Members of a risk committee are often drawn from the company’s board of directors.
These individuals bring a wealth of experience, diverse perspectives, and a deep
understanding of the industry. The committee may include financial experts, industry
veterans, and individuals with risk management or legal compliance backgrounds.

The Risk Committee members must consist of non-management directors only. It’s the
responsibility of the board to ensure that the risk committee members are individuals with
appropriate backgrounds and experience to effectively oversee the responsibilities of the unit.

The membership should also meet all applicable regulatory or legal requirements
regarding expertise and other qualifications. In this regard, at least one member of the Risk
Committee should have a background in identifying, assessing, and managing risk exposures
of large, complex financial firms.

Number of Members in a Risk Management Committee

Ideally, there should be a minimum of three members in a risk committee.
Nevertheless, the overall size of risk committee members varies, often depending on the size

and complexity of the organization. While there is no one-size-fits-all approach, a balance
must be struck to ensure representation of key perspectives without hindering efficiency.

Chairing the Risk Committee

Chief Risk Officers (CROs) are often key figures in risk management, and it is not
uncommon for them to chair the risk committee. However, potential conflicts of interest may
arise (either between the CRO and other risk committee members or the board), and some
organizations prefer an independent director to lead the committee to ensure unbiased
decision-making.

Roles and Responsibilities of Risk Committees

The primary functions and responsibilities of risk committees in corporate governance
encompass a broad spectrum of responsibilities. Governance of risk management with clearly
defined procedures and infrastructure is the ultimate function of this unit. This role includes
risk assessment, formulation of risk management strategies, oversight of risk mitigation
efforts, and regular reporting to the board of directors and relevant stakeholders. Some
specific roles and responsibilities of risk committees can be summarized as follows:

Identification and Reporting of Risks: This firstly involves developing the company’s
procedural strategies for recognizing and reporting risks, crucially covering emerging
risks as well. Subsequently, the committee aims to generate promptly formulated
reports to both prevent emerging risks and overcome deficiencies in current risk
management.

Establishment of Managerial and Employee Responsibility: A company’s procedures
for defining and assigning managerial and employee responsibilities regarding risk
management fall under this function. This includes delineating roles and
accountabilities to procure a comprehensive approach to risk management throughout
the organization.

Warranty for the Independence of the Risk Management: This function pertains to the
a business’s methods for reassuring the independence of the risk management as a
function. It involves establishing protocols and practices underpinning that risk
management operates autonomously and impartially, free from undue influence or
conflicts of interest.

Integrating Strategies for Risk Management with Compensation Structure: No risk
management function will be fulfilled unless its findings and mitigation scenarios are
integrated with the other executive functions. This includes aligning pathways for
business objectives, tentative compensation plans, and related controls & incentives of
the board with the proposed risk management practices. That promotes a culture of
accountability and responsibility within the business.

Empowering Talent Retention and Workplace Safety: This is one of the areas where
effectiveness of risk committees is most evident. Investigating, reporting, managing
and mitigating any risks arising in the workplace are among the roles and

responsibilities of risk committees. Health and safety concerns in work often require
immediate attention, and risk committees must be ready to handle those issues to
ensure sustainable talent retention.

Risk Management and Compliance Committees: Joint Roles

In many organizations, risk management committees work closely with compliance
committees. The risk and compliance committee plays a crucial role in ensuring that the
company adheres to relevant laws and regulations, thereby minimizing legal and reputational
risks.

Risk Committee Meetings

Risk committee meetings are periodic gatherings where members discuss and evaluate
the company’s risk landscape. These meetings involve reviewing risk reports, assessing the
effectiveness of existing risk management measures, and strategizing to address emerging
risks.

Meeting at least in a quarterly basis, the risk committee may schedule further meetings
as it deems appropriate. The committee may engage advisors when it’s found necessary,
including the arrangement of their fees and terms of retention. That does not require any
approval from the board, and the board facilitates resources for this matter.

To catch-up, the unit will provide periodic risk committee reports to the Board, usually
at the next planned meeting with the Board following a Risk Committee meeting. These risk
committee reports will cover the actions taken by the unit, any advisory insights, and
significant matters reviewed in the sessions.

Benefits and Effectiveness of Risk Committees

The benefits of a well-structured and effective risk committee in corporate governance
are manifold. It enhances the organization’s ability to anticipate, manage, and respond to risks,
thereby protecting shareholder value, improving decision-making processes, and fostering a
culture of accountability and transparency.

The effectiveness of risk committees is closely tied to its ability to provide strategic
insights, independent perspectives, and proactive risk management. Regular evaluation of the
committee’s performance and adjusting its composition with functions as needed helps to its
ongoing effectiveness.

Integration of Risk Management with Audit Committees

Shared Objectives of the Audit and Risk Committees

The objective of the audit and risk committee is to ensure the integrity of financial
reporting by providing oversight of comprehensive risk management and internal control
processes. This dual focus helps in aligning financial and non-financial risk management
strategies.

The Risk Committee will collaborate with the Audit Committee of the Board to fulfill
effective coordination. Chairs of each committee can play a key role by handling the

communication between their units. The main objective is to confirm that both committees
have access to the information they need to meet their respective responsibilities and duties,
particularly in areas of shared interest.

The areas of such common interest between the risk management and audit
committees may cover distinctly important matters. Some examples of those points include:

1- Risk Identification and Management: Both committees may discuss the company’s
methods for identifying and managing risks. This will enable them to assess the
effectiveness of risk mitigation strategies and make informed decisions regarding risk
management.

2- Frauds: Both committees will examine and discuss any instances of fraud within the
corporation. Their methods can be reviewing fraud prevention measures, investigating
reported fraud cases, and implementing appropriate actions to mitigate fraud risks.

3- Issues in The Investment Portfolio: The committees will address significant issues
related to a company’s investment portfolio. This may involve evaluating investment
strategies, monitoring investment performance, and considering potential risks and
opportunities associated with the portfolio.

4- Litigation or Whistleblower Issues: The Committees will address significant legal
matters, such as ongoing litigation or whistleblower allegations. This requires
evaluating legal risks, monitoring the progress of legal cases, and implementing
appropriate measures to protect the Corporation’s interests.

5- Actions of Regulatory Enforcement: Each committee will review and deliberate on
regulatory enforcement actions that may affect the business. This involves
understanding the nature of the actions, assessing their potential impact, and ensuring
compliance with relevant regulations.

6- Technological Matters: Each unit will focus on technology-related matters that are of
common interest. This may involve assessing the corporation’s technology
infrastructure, evaluating cybersecurity measures, and addressing any technology-
related risks or challenges.

Risk Committee vs. Audit Committee

While risk committees and audit committees share some commonalities, such as a
focus on governance and risk, they have distinct roles. Audit committees primarily oversee
financial reporting and internal controls, while risk committees have a broader mandate,
encompassing a wide array of risks beyond financial.

Appointment of The Audit and The Risk Committee

Members of the audit and risk committee are typically appointed by the board of
directors, and their independence is crucial to maintain objectivity in their oversight functions.

The chairs of the audit and risk committees play a pivotal role in facilitating informed
decisions for the board, assuring that both financial and non-financial risks are adequately
addressed.

Conclusion

In conclusion, risk management committees stand at the forefront of corporate
governance, acting as a frontline of defence against the myriad of risks. From shaping risk
strategies to arranging compliance with regulations, these committees play a crucial role in
fortifying organizational resilience. As companies navigate the complex seas of the business
world, a well-functioning risk committee becomes not just a necessity but a strategic asset,
guiding the ship toward sustained success.

Komba Corporate Governance is committed to providing comprehensive risk
management solutions. With its well-qualified professionals with diverse expertise, Komba is
ready to address the needs of risk committees across the globe.

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