The draft of the third King report on corporate governance that was released earlier this year places unprecedented emphasis on risk management. The draft report – which is due to be published in its final form in September for a 2010 rollout – became necessary because of the anticipated new Companies Act and changes in international governance trends. King III differs from its forerunners in that it applies to all entities regardless of the manner and form of incorporation or establishment.
Risk management is also given far more prominence and King III recognises that “risk management is inseparable from the company’s strategic and business processes”. This is the very principle that underpins the concept of alternative risk transfer (ART) and corporates that have been integrating their insurance and risk financing and management activities by, inter alia, using ART facilities, will find that there will be no marked transition to applying this aspect of King III; instead it will be ‘business as usual’. After all, the success of such an integrated risk financing and insurance programme depends directly on the company’s ability to accurately assess and understand its business risk profile, and to gauge its appetite for risk.
The draft report emphasises the importance of introducing a risk management ethos into companies’ every day operations, at all levels of the business, clearly stating that this function does “not reside in any one individual or function but requires an inclusive, team-based approach for effective application across the company”.
Having said this, the draft report is adamant that it remains the board’s responsibility to determine the company’s risk profile: “the board should calculate the company’s risk-bearing capacity and the tolerance limits for key risks, to ensure that these two metrics do not exceed the company’s risk appetite.” Logically, then, it follows that the board must also consider an appropriate method and vehicle for funding to provide for the corporate’s risk appetite.
The report urges companies (especially smaller companies that do not have the resources to design and implement complicated risk management processes) to “avoid unnecessary complexity so that risk management procedures can be understood and implemented with minimum cost and disruption. An approach that places the primary focus on, and concentrates training around, risks that are significant, ensures objectives are prioritized and clearly allocates responsibility within the company for the procedures.”
No doubt, many long-time ART users will be pleased to be able to say: “Been there, got the T-shirt!” when it comes to King III and its risk management recommendations!