Risk Management - An Integral Part of Corporate Governance

The recently published King III report on corporate governance, drawn up by the King Committee for the Institute of Directors in Southern Africa, sets out a list of recommendations aimed at improving the way in which companies report to both stakeholders and regulators. The report focuses on how the success of companies in the 21st century depends on the successful integration of social, environmental and economic issues, rather than a narrow focus on financial factors. One of the central messages of King III is that traditional reporting requirements for companies that only focus on financial reporting provide an insufficient explanation of the true nature of a company's activities. The report argues that companies should aim to have a positive impact on the communities in which they operate and a commitment to protecting stakeholders from the risks that face an organisation. At a recent presentation to the British Chamber of Commerce in South Africa, Mervyn King - a former Judge of the High Court of South Africa and founder of the King Committee on corporate governance - argued that the world's largest companies are in many cases more influential than countries and governments, due to their financial resources and global reach. He explained that the issue of sustainability is a now a key concern for any organisation and that companies must demonstrate to their stakeholders that they are not only profitable, but also responsive to the requirements of a world whose resources are becoming increasingly scarce. In the introduction to the newly published book Transient Caretakers – co-written by Mervyn King and Teodorina Lessindrenska – the reader is asked: “What kind of world would you like your children and your children's' children to inherit?” This question is now firmly directed not just to individuals, but also to the companies who shape the global landscape. The King III report sets out a series of recommendations aimed at helping companies to be good corporate citizens that not only create shareholder value, but that also ensure sustainable growth and an awareness of their impact on the planet. The King III report also focuses on risk management, stating that “risk management is the identification and evaluation of actual and potential risk areas as they pertain to the company as a total entity, followed by a process of either avoidance, termination, transfer, tolerance (acceptance), exploitation, or mitigation (treatment) of each risk, or a response that is a combination or integration.” The report urges companies to explain and tackle organisational risks that have an impact on the company and its stakeholders. The global financial crisis and the corporate scandals of the Enron era have served to raise global awareness of the necessity for risk management and a comprehensive understanding of how to mitigate such risks. The recommendations of the King III report serve to underline the degree to which risk management is becoming a primary, rather than secondary consideration for any company that aims not only to increase shareholder value in the short term, but also to become successful and sustainable in the long term. As the global economy becomes increasingly more integrated and complex, risk management – which was once a secondary consideration – is now becoming a fundamental requirement for any company that aims not only to provide short term profitability, but also long term success and sustainability.