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Top reasons for under performance of Risk Management Committees

Risk Management Committee (RMC) is one of the most important committees of the Board. It is expected to look at risk, and how to mitigate or manage it. A number of RMCs are underperforming on account of a variety of reasons. These include –

  • Composition of RMC – Until recently, regulations did not require the presence of an Independent Director (ID) on this committee. Hence the RMC of a number of companies comprised executive directors and management persons. An ID is important since he/she would bring a fresh perspective.
  • Lack of role clarity – Most RMCs are not clear about their role. This is because they do not have proper risk management documents and processes in place.
  • Risk register – A number of RMCs do not update the risk register periodically. As a result, risks may not be correctly identified. Mitigation efforts, as a result, would be adversely impacted.
  • Unknown risks – Very few RMCs put in efforts to push management to attempt to identify the unknowns. Those are the hardest to mitigate.
  • Absence of a Chief Risk Officer (CRO) – A number of companies have not appointed a CRO. This is important since risk management is a specialised area, which needs a professional to head it.
  • Not using Internal Audit as an aid – Internal Audit can serve as an excellent tool in risk identification and consequent risk mitigation. However, in many companies, these two functions do not seek to reach out to each other.
  • Agenda and agenda notes – Unless a proper agenda, along with agenda notes, complete in all respects, is sent to the RMC in advance, the deliberations cannot be meaningful. Tabled items, as is the case in a number of companies, prevents meaningful discussions.
  • Number of meetings – While regulations mandate a minimum of 2 meetings in a year for RMC, the committee cannot meaningfully discharge its role in 2 meetings. Very few companies have moved towards convening quarterly meetings of the RMC.
  • Not a statutory committee – Even though risk management is vital for the survival of a company, RMC is not a statutory committee, as it does not find a mention in the Companies Act, 2013. This gives some companies the wrong impression that this is a less important committee.