- 50% of the respondents still believe that regulations will influence RM positively
- 29% feel that there is unambiguous and standard application of RM framework across company subsidiaries
- 42% are not satisfied with the quality of integration of RM
- 2/3rd of the respondents feel that Chief Risk Officers will bring perceptible change in the quality of RM practices in organizations
Poor risk management practices at major companies, especially financial institutions, has often been cited as a key contributor to the global economic crisis. Over the past eighteen months, there have been hectic regulatory developments in the area of risk. In India, the draft Companies Bill proposes to mandate Board’s review and affirmation of their company’s risk management policies and practices. But regulation in some ways is part of the problem itself.
A survey by KPMG titled “Risk Management – A Driver of Enterprise Value in Emerging Environment” across Europe, Middle East, Africa and India has brought to the fore how organizations are progressing in their efforts to elevate risk management to a strategic level. Close to 500 companies across various industries have participated in the survey which includes approximately 55% of the Indian respondents.
Commenting on the finding of the survey, Mr.Neville Dumasia, Head of Governance, Risk and Compliance, KPMG in India, said ,“Organizations were not completely successful in aligning risk perceptions and appetite of key stakeholders with that of individual decision makers, resulting in suboptimal business decisions being made”
“The key to effective risk management lies in untangling it from regulations and making it more useful to today’s business leaders as a strategic tool for effective decision making” concurs Ashley Smith, KPMG Head of Internal Audit, Risk and Compliances Services (EMA) results that have emerged from the survey are set below
Key Highlights
- Overall, post the global crisis, there is a consensus that anticipating and managing risks proactively is going to deliver tremendous long term value to organizations. Establishing a global footprint, cross border regulations, geo-political events and increased complexity in the value chain are leading to more risks.
- In the context of making risk management a strategic tool, CEOs expect their risk officers to be more market and strategy oriented than be focused on the operations and processes. Risk officers who are able to transcend to a strategic role will deliver the greatest value to their organizations. While organizations are making progress in implementing risk management processes and structures, the biggest challenge is around integrating risk with strategy and the business. “There is a need to de-mystify risk and make it simpler for business managers to grasp and implement. A firm commitment at the top and training in the use of risk management tools and approaches is essential to overcome this hurdle. Otherwise, the benefits of risk management will continue to be fuzzy” avers Richard Rekhy, Head Advisory Services, KPMG in India.
- The survey results reveal that risk management policies and responsibilities are to a certain extent informal in India when compared to more developed markets such as Europe. Indian companies tend to rely on key people to evaluate the risks and make the right decisions instead of processes.
- Boards today are expected to play the watchdog role – that of linking strategy, risks, rewards and executive compensation to ensure that there are no misalignments. How much risks are organizations taking on? and are they taking the right risks? are some of the key questions that Boards need to answer. Boards have the role of balancing majority and minority views and this is where their job becomes even more difficult. Risk oversight challenges faced by independent directors are on account of their limited review of strategy and inadequate information architecture to know about the business, industry and external factors. The survey also reveals that organizations have made little or no progress in actually linking up the dots Responses / mitigation strategies are still developed in isolation rather than on the basis of more holistic view that takes into account multiple scenarios and potential events. The usage of economic models and technology is limited. Also, few organizations look beyond 3 years while identifying and assessing risks and aspects such as sustainability and climate change are given limited importance. Some companies are now adopting the practice of appointing Chief Risk Officers; even within the non-financial services sector. “Appointing a CRO is only part of the solution. Companies need to integrate risk management into day-to-day decision making and this requires (a) a holistic approach to risk management (b) forward looking risk information and (c) a strong risk culture” points out Neville.
- In order to overcome the aforementioned challenges and leverage risk management as a driver of enterprise value, the survey report suggests five key imperatives for companies, namely:
1) Enhancing effectiveness of board oversight of risks by separating risk process and content – Companies need to get specialists to help the Board navigate through the strategy and improve their understanding of key risks. It is also important to bring in diversity and align the board composition to key business and strategic priorities.
2) Integrating risk management into decision making by leveraging Key Risk Indicators (KRIs) – Key trends that can be predicted with the help of risk management tools could help organizations have a better grip on what is around the corner
3) Focusing on softer aspects: Companies need to focus on risk leadership, risk perception & behavior, and communication
4) Positioning the Chief Risk Officer as a strategic business advisor – A CRO should be someone who can independently validate the strategy with the help of a robust information architecture
5) Integrating the company’s risk management efforts at an enterprise-level – Companies need to harmonize the top down and bottoms up views on risks.
About KPMG
KPMG is the global network of professional services firms of KPMG International. KPMG member firms provide audit, tax and advisory services through industry focused, talented professionals, who deliver value for the benefit of their clients and communities.
KPMG in India has offices in Mumbai, Delhi, Bangalore, Chennai, Chandigarh, Hyderabad, Kolkata, Pune and Kochi and services over 5,000 international and national clients. The firms in India have access to more than 3,500 Indian and expatriate professionals.
For a copy of the report, log on to www.kpmg.com/in
