Need to develop an EWRM framework in tune with transparency goals
With Indian public sector enterprises (PSEs) increasingly going global, there is a need for the sector to move beyond the mandatory and non-mandatory clause 49 of the listing agreement and adopt best international practices in corporate governance.
A fair and effective corporate governance framework needs to evolve in the light of changing circumstances of business. There is no ?one size fits all? approach here. Several countries (particularly in continental Europe) have adopted an inclusive ?stakeholder? approach where public sector companies are considered ?social institutions? with responsibilities and accountability, not just to shareholders but to employees and the wider community in general. This approach is in stark contrast to the stand in the UK and US where the emphasis is on creating wealth for shareholders.
While approaches in individual countries may differ, generic corporate governance principles?of responsibility, accountability, transparency and fairness?are widely appreciated, along with the ability to adjust and suitably re-engineer the enterprise-wide risk management (EWRM) framework.
EWRM is an integrated and coordinated approach to managing all risks and all consequences of risks. It assumes that risk management should be embedded throughout the organisation, since everyone has a responsibility to manage risk, whether at the strategic or operational levels.
The development of an EWRM framework that is in tune with financial markets and the transparency agenda is a necessity, rather than a holy grail for PSUs. It is important for PSUs to move beyond the set of guidelines in clause 49, and evaluate international best practices, such as those in the combined code (UK). The combined code outlines that risk management should be systematic and be embedded in the company?s procedures, with the directors closely involved in monitoring this initiative and reviewing the effectiveness of internal control systems.
A good practice for such reviews is to cover all controls, including financial, operational and compliance controls, along with risk management, with the audit committee championing the risk management process through an independent chief risk officer (CRO).
The CRO facilitates the alignment of corporate and business strategies with the EWRM process of the PSU. In order to ensure independence, the CRO should have a strong functional reporting line to the audit committee of the PSU. In his main role as a facilitating executive on the ground, the CRO needs to coordinate the risk management function, while facilitating the regular updation of the risk registers in keeping with changing circumstances. The CRO can also develop dashboards with metrics that can show the progress of the EWRM practices.
For EWRM to be effectively embedded in a PSU, the boards and audit committees have to embrace this initiative and review the progress on the risk mitigation plans in board meetings. Also, the PSU?s internal audit charter has to evolve from the risk heat maps, with external audits assessing the extent of risk management strategy implementation.
This brings us to a point where the OECD Principles of Corporate Governance that were originally developed in 1998 become relevant. These principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries; and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance.
The principles have been adopted as one of the Twelve Key Standards for Sound Financial Systems by the Financial Stability Forum and form the basis of the corporate governance component of the World Bank/IMF Reports on the Observance of Standards and Codes (ROSC).
An inflexible EWRM framework in significant public interest entities (PIEs) can be a dampener on any economy, where they play an important role in enabling activities such as infrastructure, which deploy significant financial resources.
Indeed, there is a lot to be gained from building a governance structure as well as compliance requirements that are comparable with the standards followed across the world. With Indian PSUs also making forays into global markets, there is a need for them to maintain global standards in all spheres of corporate governance in order to compete effectively.
The writer is partner, Mazars India
