Corporate Governance in Risk Management
Corporate Governance in Risk Management
In any company the owners have set goals as well as objective to be met which are only achievable with the hiring of employees The hire workforce is the source of thefts, non-compliance to the set laws as well as the regulations of the company, poor resource use, and inconsistent financial reports. Ironically the owners or the shareholders of the company can not work without these workforce and therefore the risk exists as long as the company hires the employees. The owners or the shareholders shield to this losses is a set of goals as well as objectives to the employees with a clear definition of the expected target, explicit definition of tasks, quantify risk, set policies,asses progress and initiate the necessary corrective actions (Dimitris, N 2005).
The director as well as the managers of companies are therefore duty bound to take measures aimed at minimizing risks, a concept known as internal control. The actual risk, the frequency of the occurrence of the risk and the potential cost associated with the risk should be identified as a matter of priority. This is followed by a comparison to the associated with the control of the risk (James, L 2003).
Internal controls have an absolute goal of protecting investments as well as optimizing the returns of the organization through internal control the organization operation are assured to a certain level as far as the attainment of the set goals and objectives is concerned hence the company achieves an efficient as well as effective course of operations. The financial reports are therefore given in a reliable as well as truthful manner and ideally the entire organization is able to abide ti the rules as well as the regulations responsible for governing the organizations actions. However it is important to note that there exists no absolute assurance guaranteed by internal control despite how effective it may be carried out, but rather even the best implemented internal control can only yield to a certain level of assurance. Once internal control is applied effectively it enables the organization to be better placed to meet its intended goals as well as targets out of its operations ability to sensibly comply with the rules as well as the regulations in place and a reliable results of a financial reporting. Lastly internal control is effective to all members of the organization and the members are at their own discrepancy to either strengthen it as well as undermine it (Harold, F,T, Micki,K 2004).
Events that are consequential to the occurrence of a risk or undesirable to a company can be avoided through the application of preventive control measures. These measures are most likely to be imperfect and consequently, they should be applied in conjunction with other types of control. An example of this is to complement preventive control with detective control in which case an error that might not have been prevented is detected (Dimitris, N 2005).
Preventive controls involves controls crafted in a manner such that errors, inefficiencies as well as mistakes are arrested and prevented as much as possible. Damages due to a prevented error is less severe than an error requiring either a detective control or a corrective control. There is a need for the application of physical assets aimed at the prevention of damage in a realistic situation. Further it includes credit checks as an assurance of the assets against damage as well as theft. Passwords as well as signature may also be used as a preventive control measure against access to resources that require protection (James, L 2003).
While some undesirable events occur these measures are resourceful in their identification. The expected as well as the unexpected errors should be identified through the application o f detective control measures. They are resourceful in the provision of an review of an error that ought to have been prevented, and therefore they are not cost effective but a resource for future improvements. Detective controls are therefore applied in conjunction with corrective controls as far as the extent of the error is concerned. The extent of severity of the error will dictate whether the error is worth reporting only, or if there are chances for improvements in the future or if there is a requirement for corrective measures to be applied. There exists costs due to the errors as well as the mistakes. Whereas in the cases of preventive controls measures of prevention of errors as well as consequences they are associated with are prevented, detective controls measures allows for the mistakes to affect the system (James, L 2003).
Corrective controls are also identified as directive controls and in some other context as recovery controls and are aimed at an action of reverting an undesirable event or a mistake once it has already occurred. Errors such as omission needs corrective control which is further strengthened by the application of preventive control to safeguard against future occurrence of the error. Corrective controls are only applicable after the system detects the occurrence of undesirable outcomes hence the requirement by the management to apply the relevant measures to correct the situation at hand. The information concerning the operation of a system should be gathered as a matter of priority, the points at which there are high possibilities for the occurrence of an error as well as an inefficiency is also pinpointed and finally the system of control that targets the detection or prevention of the occurrence of the associate error or inefficiency. The implementation of corrective controls assures that errors of the past are harmless to the current as well as the future performance, and that the mistakes have been totally removed from the succeeding stage of the project. (Harold, F,T, Micki,K 2004).
All these classes of internal control are of immense importances in any institutional setup. To achieve cost effectiveness it is advisable to apply all these forms of control in combination, either dependently or independently. Errors are inevitable and therefore the only cure to inefficiencies brought about by these potential errors is the application of these varied internal control measures. Whereas some errors exhibit high preventive costs their detective as well as corrective control may be cheaper and easier. Other unpredictable and difficult to prevent errors require acknowledgment for the appropriate corrective control to be put in place (James, L 2003).
Corporate governance as far as financial concept is concerned relates to existing mechanisms responsible for motivating as well as controlling the entire workforce especially at the management levels for the benefit of the owners as well as the stakeholders of the organization. The magnitude of the returns based on investments forms the core interest of the organization stakeholders (
Further, corporate governance relates to the level of efficiency while managing corporations through application of diverse processes of control, such as financial incentives, among others, awarding viable contracts, organizational designs,as well as enacting laws. Traditional the conceptual application as far as corporate governance is concerned, profit goals are the major target in the organization, facilitating the organization to pay appropriate returns on the investment made by the company’s investors. When the level of returns is optimal, and the company registers high levels of profit then corporate governance is effective (Harold, F,T, Micki,K 2004).
Corporate governance may as well imply a control as well as directional system existing in the organization for the smooth running of the organizational businesses. The roles duties as well as the individual behaviors as well as responsibilities of the different performers in the organization are well specified by the organizations corporate governance. This is the expectation from the organizational employees the management, directors as well as the shareholders (Stavros, A, 2005).
Corporate governance structure extends to matters of the organization dealing with deliberation as well as decision making processes. This view corporate governance allows for an avenue through which the company is able to set goals and targets based on the aims and objectives of the company. This also extends to the implementation and the attainment of these targets as well as the evaluation procedures of the performance of the actors in the organization (Stavros, A, 2005).
As far as organizational relationships to the entire society as well as non-profit making stakeholders in the organization, corporate governance involves transformation of companies to be more transparent accountable as well as fair to the stakeholders. This in turn is consequential to the promotion of the general welfare of the society as well as the economy of the entire community.
Corporate governance becomes important in agency problems with regard to the interests of the organizational management as well as the shareholder. In companies with huge numbers of shareholders, this case applies while the interests of smaller shareholders are also protected in companies with huge ownership but controlled by a few shareholders. In a general concept the ultimate aim behind corporate governance is to be accountable, to be fair, to be responsible as well as to be responsible. A healthy corporate governance results to the growth in the economy due to high investors turnout and willingness to pay high rates of premiums to the organization (Stavros, A, 2005).
It is through corporate governance that a company’s agents or management applies checks as well as balances that facilitates the promotion of the interests of the company at the expense of individual interests. It is through this that the managers or the agents are capable of running the company as their own (Stavros, A, 2005).
Enterprise Risk Management
As noted earlier any organization is subject to risks. The concept of how the management of the organization handles these risk is enterprise risk management. Risk are naturally integrated in the day to day activities of any viable organization and as well they are holistic in nature. Different segments of any organization are subjected to diverse risk factors and therefore a rising need for the management to be equipped with the necessary risk management tools to off set the effects associated with the impact of the risk. When the impacts of the risk to an organization are too sound then the organization has no option but to try as much as possible to avoid the occurrence of that particular risk. However an organization may embrace certain kinds of risks which bears some return targets that are required by the organization. This is the situation that challenges the management to make a distinction between a viable and a non viable investment. Viable investments are well shielded from the the risks and as well, they meet the expected returns on investment of the organization (Gifford, H, f 2006).
The most important goal that a company is to manage the risks that are associated with the decisions as well as their implementation. This has a further connection to the larger goals as as set by the organization, the processes to achieving these goals, the personnels responsible for the duties of the implementation of these goals the technological requirement and the organizational infrastructure.
The generation of the shareholder value is the basic reason of the existence of most organizations, and therefore risk management in view of the enterprise is a very important concept. Similarly the activities of the organization that bears the potential to generate some meaningful shareholder value are prone to some risks as well as uncertainties. It is therefore imperative that the management of a successful organization to asses the extent of the risk that they can comfortably accommodate and at the same time identify the relevant investments tat are capable of generating the highest returns in tandem with the associated risk level. The uncertain future opportunities are usually accompanied with possible risks of incurring losses, and therefore the two are simultaneous. Therefore, the most challenging task of the management of any organization is the potential ability of identification of an investment having the lowest possibility of the occurrence of losses while being potential value generator. The management of the organization is also tasked to the proper allocation of available resources, to embrace the potential opportunities to generate revenue that exists at the disposal of the organization. The other core duty of the management is the efficient utilization of resources in the most optimal way with a view to realize the set goals as well as objectives (Gifford, H, f 2006).
For a successful risk management in the enterprise to be in place, the management of the organization should be able to plan and develop some important areas in the organization. The organization should be potential in shelving the potential risk associated with a forthcoming opportunity and at the same time align its investment activities to achieve the returns as well as the profits that the opportunity presents; the efforts of the organization to realize in time the occurrence of a risk and the appropriate response to avert the effects of the risk; minimizing the possibility occurrence of risks thus reducing the losses that may be associated with the risks the potential of the organization to take the advantage of the possible opportunities as they arise and the and lastly the promotion of the organization to a status of application of available resources as well as capital in diverse business undertakings (Harold, F,T, Micki,K 2004).
A sound risk management in the enterprise is an avenue for the organization to the realization of the anticipated revenue, the targeted profits as well as the laid down objectives of the organization, all these achieved at an atmosphere of proper capital allocation as well as utilization. The company has added advantage of maintaining its reputation which is beneficial to its overall performance in the marketplace (Timothy, I 1998).
Implementing Corporate Governance in the Context of Enterprise Risk Management
The research that has so far been conducted as well as the existing literature shows a strong correlation between corporate governance to enterprise risk management as being the most appropriate path to follow in the organization in order that the organization realizes development as well as the set goals and objectives. Further, it has been evident that a lot of benefit and merits exist as a result of the integration of these two ideologies. Several benefits of this integration have so far been evident and documented in the past. Among these benefits is the fact that a mainstream course of performing risk management is a composite of segmented models of risk management applied in the form of diverse aspects as is evident in the organization, as is contained in corporate governance the principle of risk management as far as the organization is concerned has the application to the entire organization. The application of this broad over view of the two principles allows the managers of a company to theorize on ways and means responsible for the reduction of operating costs through the use of more efficient as well as effective methods of operations. This is beneficial towards generation of value arising from the group. Further more in instances that the corporate governance is allied to risk management in the enterprise the company is shielded against entry into operations that are risky and as well they cannot meet the set goals as well as objectives and the set targets of the organization. Further advantages revolve around improved transparency to the organizations shareholders raising the reputation of the organization (Gifford, H, f 2006).
In the investment opportunity provided for the purpose of this paper,it is worthwhile to note that real estate market has recently undergone a decline and the builder has in the past been unable to make developments on this land and consequently, their intent is to dispose it at a price which is below the existing price in the market. The entrepreneurs are ready to take the risk of embracing the opportunity that this project , may posses in a view to identify a potential investor with a view of profit generation in their position as consultants. The risk that they have to take ranges from purchasing to the development of the land in question into the status of a restaurant which will consequently be leased. The entrepreneurs have further to bear the risk of the identification of vendors, the appropriate contractors as well as suppliers. The right materials, the equipments and the right quality of the expected work forms part of the decision making process. Entering into a contract is another duty that as well posses some degree of risk (Gifford, H, f 2006).
The transaction involving land purchasing is ideally an investment of high magnitudes The transaction therefore has to be accompanied with assurance through the use of legally binding documents. This will be the second legally binding document from the contract. A further risk management aspect of consideration is a tittle insurance as part of a purchase contract although this insurance may not be a complete protection against risk. It should therefore be supported by a survey to act as a substitute, both of which are essential in the determination of the power to the use of the property (Timothy, I 1998).
Other risk management issues relate to the environment as there are bound to be environmental problems in existent to be addressed by the purchaser these problems are likely to hider any form of financial assistance thereby making development of the property a risk factor. The risk mitigation in this case involves inspection as well as the relevant research and tests of contamination to the environment that should be thoroughly accomplished before the property has been purchased. This is the responsibility of the buyer since in most cases the seller is ignorant about the environmental status of the property (Timothy, I 1998).
Another risk mitigation measure is the application of Securities Law providing the investors access to all the information regarding the property at disposal. All these risk mitigation factors are important for the investor to acquire the relevant funding from the bank.
Another factor of consideration revolves around government laws as well as regulations concerning the financing of investors in the public as well as the private sector. Since this is a political issue, the risk mitigation should revolve around possible changes with the change of the current regime in the next general election(Timothy, I 1998).
Failure to apply the relevant risk mitigation factor at any one point will render the project inviable. In this case example, we have two categories of risk takers, firstly the commission agents, and secondly the investor. Both of the two are duty bound to exercise risk mitigation as a process of enterprise risk management as well as corporate governance so that they can avoid high losses associated with an investment of such a high magnitude.
Dimitris, N (2005), Risk management Butterworth-Heinemann, ISBN:0750667265,280-390.
Gifford, H, f (2006), World of Risk Management, World Scientific, ISBN;9812565175,160-210.
Harold, F,T, Micki,K(2004), Security Management, CRC Press ISBN:0849332109, 357-423.
James, L (2003), Enterprise Risk Management, John Willey 7 Sons,
ISBN: o471430005, 170-330.
Stavros, A,(2005), Enterprise Risk Management, Elsevier,ISBN:0444508759, 380-490.
Timothy, I (1998), Public Risk, World Bank Pub., ISBN:0821340301,62-123.