Relationship between risk management and corporate governance for government boards
All boards are held to high standards of accountability and transparency. Government boards are sometimes scrutinized more heavily than other boards because taxpayers fund the work that they do and the programs and services they offer. The Obama administration placed a renewed focus on accountability and transparency for all forms of government. This renewed focus has prompted government boards to take a fresh look at risk and controls.
New regulatory requirements have risen sporadically, causing government boards and other types of boards to take a piecemeal-type approach to managing risk. Many experts feel that placing risk management efforts in silos is costly and inefficient. Government board members are starting to realize the benefits of taking a holistic approach toward risk management, as it provides greater value overall.
Along with most other types of boards, government boards are recognizing the value in moving toward an enterprise-wide risk management (ERM) approach. An enterprise-wide risk management approach is comprehensive in that it covers operational, strategic, financial and reputational risks. Transition always comes with its own unique challenges. Related to ERM, the benefits will likely outweigh any challenges.
As the evolution in corporate governance takes place, new governance principles will aid board directors of government boards by making it easier for them to perform their work with accountability and transparency. Government boards should also consider partnering with a technology provider that focuses on improving governance. The solutions included in the Diligent Governance Cloud can make sure that boards are using boardroom best practices so that moving forward they can make sure they are following established governance practices.
Establishing a Universal Definition of Risk
Boards are participating in discussions around the globe about changing longstanding corporate governance standards and best practices. Many of those discussions speak of the need for corporate governance principles to be broadly defined so that they can be applied to all types of boards, including government boards.
One thing that makes forming broad principles difficult is that corporations and government boards are forming their own definitions of risk. Some entities include risk threats. Others include risk opportunities. Still others factor in risks and opportunities. Still, there is currently no universally accepted definition of risk.
In recent years, risk was perceived as a threat, and it was only viewed as a negative event. Identified risks were managed in silos and they were only addressed as they surfaced. This is in stark contrast to the evolution of risk-taking in today's marketplace, where boards are beginning to integrate risk into other structures and processes. Many organizations are starting to consider risk as a common expense. As with any other expense, board directors are interested in taking an organized approach to managing risk, rather than being forced to deal with it head-on.
Progressive boards view themselves as risk owners who prevent and mitigate risk on the front end as well as the back end.
Benefits of Enterprise Risk Management (ERM)
Government boards will see many benefits by taking a holistic approach to viewing risk from an enterprise risk management perspective. The theory is that risk is more fully understood when viewed in the context of the big picture. This approach sets the stage to elevate the agency's credibility, which is always a net positive in government work.
When agencies take risk from a wide-lens perspective, it gives them the opportunity to make better-informed decisions because of increased knowledge and understanding of risks across the organization. In turn, increased knowledge about risk will help the board to properly align risks with agency program objectives and goals. An ERM approach will help to solidify the board's core values and get a buy-in from the whole board about the necessity for a comprehensive risk management approach. The end result will be a more efficient, cost-conscious and cost-effective way to manage risk.
Challenges of Enterprise Risk Management
There are several different models of ERMs for government agencies to consider, as outlined in the report, 'Managing Risk in Government: An Introduction to Enterprise Risk Management,' by Dr. Karen Hardy. All models require the appropriate foundation, evaluation and management support.
ERM works best when it is accepted as standard management practice starting at the executive level, and is not considered to be a separate and distinct task. Agencies that lack top-down support will find ERM challenging. One way to overcome this challenge is to align risk rewards and incentives with strategic objectives that encompass ERM.
Implementing ERM will mean that risk-related projects that are currently harbored in silos will need to be put on hold in order to alleviate competing priorities. Employees who fall prone to an internal competitive culture may not fully buy into ERM, causing silos to continue to exist, if only on a smaller scale. Employees that lack understanding about the positive impact of ERM may impede progress.
To be truly successful with ERM, government agencies will need to enlist the help of qualified risk management professionals with experience and expertise in ERM. Such individuals will be a major part of building an extensive risk culture, which is another potential net positive to be gained from implementing ERM.
Building an Improved Risk Culture
Building an improved risk culture is not a one-time event. Rather, it's a continual work in progress that should leave its mark throughout the agency. When it works well, ERM will be applied in a strategy setting and will touch people at every level of the organization. An ERM approach to risk-taking should provide reasonable assurance to the board of directors and managers that all potential areas of risk are adequately covered.
ERM recognizes and addresses the fact that objectives and the risks that come with them sometimes overlap.
Building a new perspective of risk culture across the enterprise, at every level and at every unit, will help to identify potential risks that hold the potential to affect the entire entity, managing them within the agency's risk appetite. Educating everyone involved about the scale and importance of ERM helps all parties to take a serious view of risk culture.
ERM as It Relates to Corporate Governance Principles
The real beauty of ERM is that it ties in quite nicely with the evolution of corporate governance principles. ERM supports the premises of governmental agency accountability and transparency, so it's easy for government boards to consider implementing. Government boards are keenly aware of their fiduciary duties because their work is supported by taxpayer funds. ERM models are proving to be efficient and cost-effective, which gives government agencies increased stature and credibility within their peer groups and in the eyes of the public.
ERM is a comprehensive approach to addressing the impact of risk that incorporates defining risk on a universal level. It's also a broad approach that applies to many types of government industries, such as transportation, health, security, social welfare and all other programs.
In summary, ERM contains all the components to support the new direction of corporate governance principles.
