Audit Committee Bulletin: July 2013
The case for stronger risk governance
Companies are fundamentally repositioning themselves. They are looking to cut costs and increase efficiency so they can survive in smaller shrunken markets, especially in mature economies such as Europe. With many mature markets stagnating, they are also looking to rapid-growth markets for new sales and opportunities.
This change in mindset is causing companies to rethink the risks they face and their relative importance. To prepare for what lies ahead, audit committees may need to refocus their oversight as a consequence.
Navigating the key risks
Companies rank “pricing pressure” as the biggest risk faced this year for those under pressure to outpace rivals amid tough market conditions.
Their second biggest risk is “cost cutting and the related pressure on profits.” Five years into the global crisis, companies have already made most of their simple cost cuts. They now face tougher decisions about how to cut costs further without damaging product and service standards.
Market risks climbed to third place this year, driven by volatility in commodity prices, interest and exchange rates and equities.
Top 10 risks
Evaluating top opportunities
On the opportunity side of the equation, companies ranked their number one opportunity as “innovation in products, services and operations.” Other significant opportunities include “emerging market demand growth,” in second place, and “investing in process, tools and training to achieve greater productivity” in third position.
Top 10 opportunities
Audit committees have a significant role to play to help companies secure the stakeholder-related opportunities, as well as providing oversight on the emerging risks to prepare for an uncertain future.
Companies seek rigorous approach to risk governance
One challenge for boards and audit committees is to find a clear and robust way of assessing the level of risk the business is willing to accept as it seeks to achieve its goals.
A clear statement of risk appetite will address both the minimum and maximum net risk levels that management should pursue.
Benefits and challenges
Participants in the Bank Governance Leadership Network point to five clear and important ways in which implementing a risk-appetite framework has benefited their business. 1
- Driving strategic discussion
- Articulating board expectations
- Gaining a more holistic sense of risk
- Making risk appetite a core management tool
- Improving risk reporting
Challenges they report include:
- Which risks to incorporate in the framework
- How to set tolerances
- How to gather and report information about where the company is in relation to those limits
- 1 Views expressed in this article are of the participants at the European Audit Committee Leadership Network meeting, June 2012 and the Banking Governance Leadership Network meeting, October 2012. The networks are organized and led by Tapestry Networks with the support of EY as part of its continuing commitment to board effectiveness and good governance.
Questions for the audit committee:
- How do these risks impact your organization and are they included in the enterprise risk management framework?
- How satisfied are you that management has the adequate measures to mitigate risks according to their likelihood and impact on the organization? How well are you briefed by management on these risks?
- How does management determine which objectives and opportunities to pursue?
- What risk assessment measures do you undertake to evaluate the opportunities?