The role of corporate governance in managing risks

by Jo Ellis on Jan 16, 2023

corporate governance managing risks

Good corporate governance practices play an essential role in helping companies to identify and manage risks. Companies can help protect themselves from financial, operational, and reputational risks by implementing effective governance policies and procedures.

While no company is immune from all risks, good governance can help reduce the impact of those that do occur. As such, senior managers should ensure that their companies have robust corporate governance practices. This includes setting clear objectives and goals, appointing competent directors, designing effective management systems, and providing regular training.

It is also vital to ensure that corporate governance policies and procedures are up to date. This includes reviewing risk management protocols, providing accurate and timely information, and developing oversight and compliance systems.

Read more: This is the primary global risk

A corporate governance framework to manage risks

Corporate governance is the process of assessing and managing risks related to organisations and businesses. It sets rules and standards for organisational performance, stakeholders’ relationships, monitoring activities, and compliance with applicable regulations. Corporate governance has become increasingly important as technology has changed organisation dynamics and created new business opportunities.

By providing a framework that helps organisations identify potential risks and make informed decisions, corporate governance can provide companies with greater protection from potential losses due to misconduct or other unforeseen circumstances. Additionally, it holds executive leaders accountable for their decision-making processes, which translates into enhanced organisational transparency.

Ultimately, corporate governance provides necessary oversight to guarantee continued economic success while protecting the investment interests of its stakeholders.

Read more: The lack of ESG is a big risk

Good governance practices in risk management

Good governance practices can go a long way toward effective risk management, especially in large organisations. By implementing good governance practices such as accountability, transparency, and setting clear objectives, everyone is better able to assess potential risks before they occur and take necessary steps to avoid them. Risk levels can be drastically reduced when all stakeholders access the same information.

Additionally, when everyone is aware of their role and responsibilities within the system, it creates greater internal control. It also improves operational efficiency and creates higher profit margins. For example, when an organisation has a clearly defined set of responsibilities and expectations, it is easier for everyone to know how to respond in case of a problem. As such, good governance helps create a culture of accountability and responsibility that can help mitigate potential risks.

Read more: A guide to risk management

How to identify and manage different types of risks

Identifying and managing all the different types of business risks can be daunting. However, by taking the time to assess potential threats to the company up front, one can significantly reduce their impact down the line. For example, businesses can identify financial risks by monitoring currency and interest rate changes. They can identify operational risks such as equipment breakdowns or even human error.

Once these threats have been identified, it is essential to act. The extent of action taken depends on how severe the risk is but often includes putting safeguards in place or diverting resources as necessary.

For example, if a company identifies a financial risk due to currency fluctuations, it may hedge its exposure by investing in other countries or currencies. Additionally, companies can implement operational safeguards such as safety protocols and training programs to minimise the impact of operational risks.

Read more: What is reputational risk?

The importance of communication and transparency

Corporate governance involves the system of rules and standards which are used to manage and control business entities. It is crucial for business leaders to emphasise the importance of communication and transparency in corporate governance. This ensures that all stakeholders clearly understand how decisions are made within an organisation. Without open communication, problems can cause costly misunderstandings and even conflict between partners.

Communication and transparency within corporate governance are integral for businesses to succeed. Clear communication around decisions and actions will create confidence in the leadership team, ensuring that company policy is adhered to at all levels. Additionally, transparency helps build trust with stakeholders, customers, shareholders and other interested parties.

For example, if an organisation is conducting a merger or acquisition, all its stakeholders must be informed about the details. They should be included in decision-making processes and have access to all the information needed to make informed decisions. This ensures that everyone involved in the transaction understands their roles and expectations and can contribute accordingly.

Read more: What is risk appetite? 

Good governance practices reduce risks

Good governance practices are essential in successful risk management for companies of all sizes. Proper governance helps identify and manage risks. It includes the rules and procedures that govern how a company’s board of directors makes decisions, sets policies, and oversees management.

Case studies show that companies implementing good governance practices regarding risk management have reaped many benefits. If your company is looking to improve its risk management strategy, consider implementing some or all of the corporate governance best practices we’ve discussed here.

Read more: What is risk management? 

Study at the Corporate Governance Institute

Do you want to become a better leader?

The diploma course in corporate governance will help you become a more effective leader and make better decisions for your company. You’ll learn about the principles of good governance, financial reporting and risk management and how to apply them in a business.

With our online learning platform, you can study at your own pace and get the qualifications you need to take your career to the next level. We offer a range of courses perfect for directors, executives and aspiring directors.

Enrol in the Diploma in Corporate Governance today.

Diploma in Corporate Governance

Enhance your career as a director. Develop the practical knowledge, insight and global mindset to be a great board director.

Learn more

Diploma in Corporate Governance

Enhance your career as a director. Develop the practical knowledge, insight and global mindset to be a great board director.

Learn more

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