emmanuel kayode tel. no. 08023224614 [email protected] effective risk management and corporate...

Emmanuel Kayode Tel. No. 08023224614 [email protected]

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EFFECTIVE RISK MANAGEMENT AND CORPORATE GOVERNANACE

By

Emmanuel Kayode Oladimeji

A Paper delivered at the

PORTFOLIO MANAGEMENT INSTITUTE

PMI

Lagos, NIGERIA

10TH December 2010


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EFFECTIVE RISK MANAGEMENT AND CORPORATE GOVERNANCEBy

Emmanuel Kayode Oladimeji

INTRODUCTION

Ladies and Gentlemen, it is my pleasure to be here today to present a few words on the above topic. I believe this topic is important at this point in time for a number of salient reasons some of which we will review in the next few moments.

Effective risk management is an imperative for individuals and corporate entities who want to make a success of their private and corporate objectives. Whether the entity is in the public sector or the private (corporate) sector of the economy, or even an individual, the characteristics of risk, and by inference their management, are quite similar needing few modifications and adaptations.


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For the sake of simplicity in presentation therefore I shall use only the corporate business terminologies to refer to the three separate typologies or, viz public sector, private sector and the individual.

But first what do we mean by risk management and good corporate governance

WHAT IS RISK MANAGEMENT

Risk management embraces all knowledge and strategies that ensures that an organization identifies and understands the risks to which it is exposed. Risk management also guarantees that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs.


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A risk management plan includes strategies and techniques for recognizing and confronting these threats. Good risk management doesn’t have to be expensive or time consuming; it may be as uncomplicated as answering these three questions:

1. What can go wrong? 2. What will we do, both to prevent the harm from

occurring and in response to the harm or loss? 3. If something happens, how will we pay for it?

To be effective, risk management should be an integral part of everyday business management. A regular and robust process should identify and manage acceptable levels of risk before they turn into disasters.


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Without a robust procedure for identifying and dealing with risk, the information, reputation and finances of a business are all in danger.

Establishing a strong process brings benefits from day one.

What Is Corporate Governance

Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations

A well-defined and enforced corporate governance provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws, two practical examples of which are transparency and accountability.


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In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.

Traditionally our topic, corporate governance, has also been defined as the ways in which a firm safeguards the interests of its financiers (investors, lenders, and creditors). The modern definition calls it the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). This framework consists of (1) explicit and implicit contracts between the firm and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.


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Ladies and gentlemen. Your institute is committed to increasing your knowledge in the area of international best practices to empower you to hold fort when responsibilities require you to operate at any level. We shall therefore look at a few of the important concepts and strategies pertaining to this topic.

Key Attributes of a Well-Controlled Organization

Key attributes of a well-controlled organization include :

1. Leadership of Board 2. Translation of strategic vision to day-to-day management 3. Communication of objectives & values to all levels 4. Individual accountability 5. Risk management system

6. Human resources reinforcement 7. Independent, objective and competent oversight.


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What are the benefits of increased disclosure?

Enables a more efficient allocation of capital Reduced risk of market disruptions Reduction in systemic risk Reduces moral hazard faced by supervisors

What should we disclose?

Financial performance Risk management strategies and practices Accounting policies Basic business, management and corporate governance

information


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Board structure Organizational structure Remuneration policy Related party transactions

Does disclosure necessarily achieve transparency?Characteristics of Disclosure:

Comprehensive Relevant and timely Reliable Comparable Material

Internal Control Definitions is a process, effected by an entity’s people (Institute, board of

directors, management, and other personnel), designed to provide reasonable assurance regarding the achievement of objectives in the following categories :

Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations


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Five Components of Control Framework

Control Environment : The Foundation on which everything rests. Risk Assessment : Aware of and deal with the risks it

faces. Control Activities : Actions identified by management

as necessary to address risks to achievement of objectives.

Information & Communication: People to capture and exchange the information needed to conduct, manage and

control operations.

Monitoring : React dynamically, changing as condition warrant.


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From Backroom To Board Room

Organizations in the 21st Century must move internal controlissues from their “Backroom” (Operating Level) to “Board

Room” (the strategic level)

Internal Audit Paradigm Shift

Today internal auditors are management partners and consultants to add values to the organization.

………. No longer as a watch dog or a policeman

Internal Auditing Definition

1999 Definition : Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.


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Traditional Definition : Internal auditing is an independent appraisal function established within

an organization to examine and evaluate its objectives as a service to the organization. The objective of internal auditing is to assist members of the organization in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed. The audit objective includes promoting effective control at reasonable cost.

Conclusion

Rules, regulations, laws, concepts, structures, processes, best practices, and the most progressive use of technology cannot ensure transparency and accountability. This can only come about when individuals of integrity are trying to ‘do the right thing, not just what is convenient or even what is permissible. What matters in the end are the actions of people, not simply their words.

Ladies and gentlemen of PMI, it’s been my pleasure being with you and thank you for listening.

E. K. O.!!!

emmanuel kayode tel. no. 08023224614 [email protected] effective risk management and corporate...

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