Risk Governance

Risk Governance refers to a regulatory framework that sets standard rules and guidelines to ensure proper risk identification and handling. It entails implementing sound governance concepts to detect, evaluate, manage, and communicate risks. It also establishes a strategic model and decision-making system for efficient risk response in different fields, including business, disaster management, etc.

This framework includes everything from physically existing units to be considered authorities to the intangible principles and regulations that act as standards for decision-making when it comes to strategizing risk handling. The procedure involved guarantees regulatory compliance, protects the interests of stakeholders, and improves decision-making.

Risk governance is a concept of developing a collective framework of decision-making that aims to deal with uncertain consequences. Developed by the International Risk Governance Council located in Geneva, it incorporates classic and goal-oriented research to ensure effective risk management. The framework encourages a transparent environment and promotes risk awareness. It foresees challenges and helps in the prevention and mitigation of risks, implementing ways to adapt to or improve the situations.

Governance facilitates actions by the government, institutions, conventions, and relevant persons. It goes beyond just risk assessment and involves its management, communication, and regulation as well. It requires an in-depth understanding of risk mitigation strategies, including adaptable actions and constructive criticisms, to handle challenging circumstances. When the risk is known, the individuals and entities involved in multi-disciplinary and integrative expertise remain prepared to face even the worst scenarios.

The framework is designed keeping in mind the common understanding of hazards and consequences of resilience in managing unexpected situations. It, therefore, enables risk acceptance and helps different participants adapt to secondary impacts and societal, environmental, and economic effects. Risk governance balances inclusive decision-making and decision-making needs.

Strong risk governance includes recognizing risks, holding people accountable, and having defined processes for delegation and escalation. Given the difficulties that the governing units face while conducting effective identification and mitigation of residual risk, handling internal audits, addressing external environment changes, etc., becomes important. Additionally, framing strategies for removing cyber vulnerabilities, maintaining contractual boundaries, managing issues, and finding remedies also fall under risk governance.

Let us look into a few instances mentioned below to understand the risk governance definition better:

Example #1

Suppose ABC Ltd. is a reputed firm that gets involved in a controversy, claiming that the company restricted the freedom of its auditors, leading to tampered financials. Dan, a senior-level executive, is given the responsibility to take care of the situation. Hence, he employs corporate risk governance in response to a possible reputational risk arising from a controversial business practice. He forms a committee, carries out a comprehensive risk assessment, puts in place mitigating measures, and makes sure that the risk is regularly monitored and reported. These proactive initiatives make the business capable of controlling risks, protecting its brand image, and upholding stakeholder trust until the claims are proven false.

Example #2

In March 2012, Macquarie University conducted research that suggested that the traditional corporate risk governance framework or measures are ineffective in assessing risks associated with large financial institutions (FIs) due to excessive risk-taking. The paper examines the role of risk governance structures in determining risk outcomes using an international sample from 2004-2010. The study found that FIs with strong risk governance did not perform significantly better in determining the risk levels involved with stock prices, stock returns, or accounting returns. Plus, it did not perform as expected during the past crises that occurred. 

The paper stated a significant negative association between risk governance indicators and risk outcomes, supporting the risk governance hypothesis. The observations found that participants' overconfidence in such approaches caused them to suffer in terms of not being able to control losses despite being powerful enough to do so.

The study also suggested that decisions about risk governance matter regardless of local conditions. Assessing risks using publicly available information can undoubtedly provide insights to investors and regulators, but this accessibility doesn't help participants until they know how to use it for effective risk control and management.

Risk governance allows individuals and entities to have a set of guidelines to implement measures to identify risks, communicate the same, and deal with them simultaneously. Multiple reasons make risk governance and compliance essential for a business or entity:

• Organizations can detect and address vulnerabilities that could hinder the attainment of strategic goals, mitigating potential negative impacts.
• Risk governance and compliance is instrumental in providing businesses with a proactive approach to risk management and forms a crucial basis for its implementation.
• A finely tuned risk governance framework becomes a vital element in the effective management of risks across enterprises.
• Risk governance aids in communicating and monitoring compliance with the desired level of risk tolerance. 
• It helps in enhancing the quality of information available for making well-informed decisions.

Some of the differences between the two concepts are as follows:

• Meaning: Risk governance refers to the comprehensive framework and procedures that steer decision-making related to identifying, assessing, communicating, and mitigating risks across an organization. On the other hand, risk management centers around the particular activities and methodologies employed to mitigate risks. 
• Procedure:  A risk governance framework involves establishing a risk appetite, defining roles and responsibilities, and ensuring accountability. On the other hand, risk management involves executing risk monitoring, assessment, and mitigation strategies.
• Focus: Risk governance primarily focuses on the governance structure, institutional culture, and supervision of risk. In comparison, risk management places greater emphasis on the practical implementation of actions and measures associated with risk.