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ARM Lecture Week 1 – Introduction to Accountability and RiskManagement
Arm-abs@uva.nl
General
- Make the academic papers as easy as possible in the lectures and seminars
→ Extract the essence of it
- Final Examination: see section 10 of the course outline
The boundaries of corporate governance (Cadbury, 1999)
Corporate governance is an umbrella term: includes specific issues arising from interactions
among senior management, shareholders, board of directors, and other corporate
stakeholders.
“Concerned with holding the balance between economic and social goals and between
individual and communal goals…”
“The aim is to align as neatly as possible the interests of individuals, corporations and
society.”
Principles underlying corporate governance in NL
A company is a long-term alliance between the various parties involved in the company
The stakeholders are the groups and individuals who, directly or indirectly, influence – or are
influenced by – the attainment of the company’s objectives.
- Ex: employees, shareholders, and other lenders, suppliers, customers, the public
sector and civil society.
The management board and the supervisory board have overall responsibility for weighing
up these interests.
- With a view to ensuring the continuity of the enterprise, while the company
endeavors to create long-term shareholder value.
Accountability and CG
Financial scandals have driven evolutions in CG
Reaction to fraud → Codes and Principles: key focus is on improving transparency, internal
control and accountability for stakeholder groups
Corporate governance is therefore partly aimed at improving corporate (organizational)
accountability
Risk management and CG
The purpose of CG is to facilitate, effective, entrepreneurial, and prudent management that
can deliver long-term success of the company. The board of directors (management board)
are, inter alia, responsible for:
- Determining the nature and extent of the significant risks it is willing to take in
achieving its strategic objectives
- The maintenance of sound risk management and internal control systems
,→ Risk management is a core component of corporate governance
→ Responses to financial scandals continually emphasize the role of risk management in CG
- CG failures partly blamed on:
o Failures in risk management systems
o Lack of information about risk exposures reaching boards
o Lack of broad monitoring of risk management
o Lack of disclosure of risks and their management
o Lack of embedding of risk management in strategic decision making
Accountability and CG
Accountability: fluid concept at the heart of corporate (organizational) governance
- The giving and demanding of reasons for conduct
- Identifying what one is responsible for and then providing information about that
responsibility to those who have rights to that information.
Accountability dimensions
Two dimensions:
Being held to account → holding into account
Why is accountability required? → Motivation / drivers
To whom? → Forms of accountability?
For what/How? → Mechanisms / Initiatives
Hierarchical accountability
- Short term functional orientation
- Resource use, immediate quantifiable impacts
- External focus - oversight and control
- Prioritizes upward, short-term accountability to powerful patrons like shareholders
Holistic accountability
- Augments hierarchical accountability
- Accountability for broader, sustainable impacts
- Embraces accountability to broad sets of stakeholders
- Accountability demands are broadening (week 4 & 5!!)
Risk management
Risk management: encompasses the identification of risk factors that form part of the life of
a business, the analysis of risk factors that form part of the life of a business and the
response to risk factors that form part of the life of a business
Effective risk management attempts to control, as much as possible, future outcomes by
acting proactively rather than reactively, offers the potential to reduce both the possibility of
a risk occurring and its potential impact.
Individual: illegal actions by the CEO
Overall: all these risks taken together, where are the major issues in my organization?
Risk is positive as well, that is why organizations could make so much money
,Risk management: a process that allows individual risk events and overall risk to be
understood and managed proactively. It optimizes success by minimizing threats and
maximizing opportunities and outcomes.
→ avoids a mitigation mindset by embracing opportunities
→ embracing risks to get better outcomes
Risks to be managed?
1) Preventable risks
a. Internal risks
b. Controllable and ought to be eliminated or avoided
c. Examples:
i. The risks from breakdowns in routine operational processes
ii. The risks from employees’ and managers’ unauthorized, illegal,
unethical, incorrect or inappropriate actions
Adopt a compliance rules-based approach to risk management → surgent in hospital, ticking
of risks with a question form
2) Strategy risks
a. Not inherently undesirable
b. A company voluntarily accepts some risk in order to generate superior returns
from its strategy
c. Examples:
i. Banks take on credit risk
ii. Companies engage in R&D
d. Strategy risks cannot be managed with compliance, rules-based controls
e. Adopt a risk-management system
i. Designed to reduce the probability that the assumed risks actually
materialize
ii. Improve the company’s ability to manage or contain the risk events
should they occur
iii. Risk review boards (independent experts); risk management groups
(facilitators); embedded experts
- How much risk are you willing to take? What is your appetite for risk?
- The probability that the assumed risks actually materialize (when something goes
really wrong).
- Should something go badly wrong, what is my fall back option, what do I got in my
system to prevent this worse scenario?
3) External risks
a. Arise from events outside the company beyond its influence or control
i. Natural and political disasters
ii. Climate change
iii. Pandemics
iv. Major macroeconomic shifts
b. Cannot prevent such events from occurring, quite difficult to predict →
managing the uncontrollable
, Risk management must focus on the identification and mitigation of the impact of external
risks → system to allow you to shift supply chains quickly.
- Example: Unilever: major political event, alternative supply route in place
- Stress testing, scenario analysis, war-gaming
Accountability is a core subject for Corporate Governance. In the context of trying to be
accountable, risk management is becoming an essential feature and the management of
these risks.
Evolution of Risk management – Limitations of the Silo Approach
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