Corporate Risk Management & Internal Controls

20 Sep 2022

Corporate Governance is not merely about compliance. It is intended to not just protect investor interests, but also drive investment performance. While corporate governance has assumed mainstream attention in Indian boardrooms, there is still much distance to traverse. Ease of access to information and tech-enabled forums for voicing concerns by stakeholders require companies to be more cognizant of their governance behaviour.

Indian corporations have demonstrated a determined focus to adopt best practices pro-actively in their organizations. However, it must be recognized that corporate governance involves a great degree of self-regulation, self-discipline and systems of internal checks and balances. These go much beyond the regulatory necessities that require making periodic disclosures ranging from finance to sustainability.

There has been an upsurge of corporate and accounting frauds in recent years and the nature of the debate that gains prominence when reports of corporate fraud emerge, has multiple layers. Various regulations and guidelines have been introduced over the years for strengthening corporate governance, risk management and management of internal controls. While regulations have been announced to bridge governance gaps, the causes appear to be a lack of internal controls management and governance processes in organizations. The board and the management need to work in tandem to formulate these control processes and lay down the governance standards, envisioned for the organization.

Nuances of Internal Controls

Internal financial controls form the bedrock for ensuring good corporate governance, preventing fraud and financial reporting irregularities. The role of Independent Directors has become increasingly crucial as they guide the management on best practices and fair standards that can be imbibed by organizations. However, performing these duties comes with their own set of impediments for individual place in these positions and require quite a bit of support of the organization leadership and management officials in overcoming them. 

Studies done from the point of view of Independent Directors on their role, responsibilities and the challenges they face towards confidently executing duties suggest that not only are the expectations from them are unreasonable, but they also, do not have adequate mechanisms and support to meet such expectations.

They are expected to question management assertions, lead board committees, verify information presented to them, and balance the interests of smaller stakeholders. However, performing all these duties comes with its own set of challenges and in many recent instances where governance concerns in organizations have come to light, Independent Directors appear to be disproportionally impacted, given their limited visibility of day-to-day company affairs.

They believe that more often than not the liability on them becomes onerous and management underestimates the proportion to their involvement in the affairs of the company and expectations from the regulatory framework. Thus, there is a need for decriminalizing the liabilities for Independent Directors unless proven guilty.

The Future of Corporate Governance

Through research and pursuant discussions with Independent Directors and Key Management Personnel, CII has identified several takeaways that have the potential to transform corporate governance. The paradigm of corporate governance is gradually evolving and is expected to transform over the next few years as the following necessary standards and practices becomes the norm.

As the role of Independent Directors becomes increasingly crucial, they are being increasingly trusted with the responsibilities of guiding and advising the management on the best practices and fair standards that can be imbibed by organizations.

Independent Directors must ensure that they maintain their independence, and do not hesitate to demand necessary information and have the conviction to ask tough questions where needed. A useful complement to this would be formal training, by internal and external experts, who can be hired by the board for implementation of good governance practices.

It will also be important for organizations to tap internal audit’s immense potential in improving standards of corporate governance practices. Auditors, and especially internal auditors, have the ability to collaborate with Independent Directors to help them fulfill their roles and responsibilities related to internal controls and seek their support in enhancing the stature of internal audit in the organization.

The pandemic has set a precedent for transformation in the corporate world and certainly, this decade will continue to witness enormous changes both at the domestic and global levels. Conversations around improvements in governance, compliance, and disclosures need to be set in motion by industry leaders.

Fueled by fast-paced globalization, the risks today’s organizations face has grown quite complex. A robust corporate risk management framework will not only increase risk awareness within organizations, but will also play a significant role in improving their operational efficiencies and giving them a competitive edge in the marketplace.

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