Thursday, August 9, 2012

Non-Executive Risk Management Committee- Roles & Benefits

Role of Risk Management Committee

Risk management committee is responsible for reviewing policies and framework on risk management for effectiveness in managing risks.

Risk management committee is responsible for reviewing that policies and frameworks were adhered to during risk management process.

Risk management committee receives reports from risk manager or risk management department on risk faced by the organization.

Risk management committee reviews strategies made by board of directors for managing risks and ensure that risk remains within risk appetite of the board of directors.

Being aware of risk arising from changing environmental conditions and communicates it to board so that timely actions can be taken.

Risk management committee recommends appropriate Risk Responses for management of risk. Board of directors retains final authority for implementing responses to risks and are ultimately responsible for risk management.

Liaise with internal audit committee to communicate risk so that internal controls can be reviewed against risk faced by the organization.

 

Benefits of Risk Management Committee

Risk committee provides audit committee time to focus on matter affecting true and fair view of financial statements.

Risk management committee can be staffed with both executives and non-executive directors. Executive directors having thorough experience of operations of the organization can contribute more effectively towards risk management process. If executive directors lack competencies, then it is better to have only non-executive directors sitting in the risk management committee.

Audit management committee ensures independence of NEDs as having purely monitoring role. While risk management committee can focus on strategic and operational matters along with executive directors to ensure, organizational objectives are achieved fluently.

 

Benefits of Non Executive Risk Management Committee

Risk committee can be staffed with executive directors. However, risk committee only comprised of non-executive directors have following benefits.

Non-executive directors can better monitor strategies devised by executive directors for risks. Executive directors those have devised strategies may not criticise their own strategy for risks.

Non-executive directors receive only basic pay regardless of performance. Therefore, they are more likely to be independently challenge risky strategies. Executive directors receives majority of reward as performance related pay (PRP) are likely to take high risk to earn high profits on which their remuneration is based.

Non-executive directors solely sitting on risk committee can make their Independent judgements more easily without being pressurized by executive directors. Non-executive directors may find themselves reserved when criticizing strategies in presence of executive directors.

It allows executive directors to focus on strategic roles. Non-executive directors can use information systems (Executive Information System, Management Information System etc) to obtain information necessary for risk management in the absence of executive directors.