How to improve the effectiveness of the risk committee?
The risk committee provides oversight and advice to the board on the current risk exposures and future risk strategy of the company.
The risk committee is often part of the role of the audit committee. However, in considering whether a separate risk committee is necessary, a company should assess factors such as: business complexity, risk profile and risk appetite in deciding if risk needs a singular focus.
In a high-risk business, such as company manufacturing explosives or staff working in oil rigs in inclement conditions in the North Sea off the UK, this item should be the first on the Board agenda.
David W Duffy in his book “A Practical Guide To Corporate Governance” has outlined 10 Questions to help improve the effectiveness of a risk committee
- Do the models for risk adequately address low probability but high impact risks?
- Has the risk committee considered which scenario is the most challenging for the company?
- Has the risk committee considered whether the board may need to amend the company strategic plan, including expectations of future growth and the company’s ability to sustain or modify its business model?
- Does the risk committee communicate regularly with the board and are these recommendations on risk listened to and adhered to?
- How does the board assess the independence of members and the chair of the risk committee?
- Do the board members have the required and specific experience necessary to sit on the risk committee?
- Which risks will the committee oversee, and which will be left to other committees such as financial risk?
- Does the committee regularly keep abreast of regulatory changes that affect the company’s risk?
- Is the committee satisfied that the business presents the principal risks and uncertainties that most concern the board in a fair and transparent way?
- Is risk a regular board agenda item?
What other questions would you ask to improve the effectiveness of a risk committee? Please share your thoughts on this.
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David W Duffy