On 1 June 2020, The Chartered Governance Institute has published new Terms of Reference for risk committees, which are intended as a guide for companies to adapt to their needs where the board decides it is necessary or desirable to have a separate risk committee.
Peter Swabey, Policy and Research Director at the Institute comments, “In recent years, the importance of the board’s role in risk management has become increasingly clear, with attention turned to issues of liquidity, insolvency and market risk amongst others as rarely before. Beginning with companies in the financial services sector, we have seen an increasing trend for companies and organisations of all kinds to establish a separate, board-level risk committee to give specific focus to this area, rather than combine it with other committee responsibilities. This focus has been exacerbated during the COVID-19 pandemic.
“The risks each company faces will be very specific to the business. Terms of reference for a risk committee therefore require a great deal of thought and need to be drafted with input from senior managers who have a good understanding of the risks associated with the operational activities of the company. Our guidance covers all the essential elements that a risk committee needs to consider, such as membership, frequency, engagement with shareholders, duties, risk appetite, tolerance and strategy and reporting requirements.
“The guidance should be used as a starting point only from which to develop company specific terms of reference, with a remit covering the risks associated with the business of an individual entity. However, the guidance provides a long list of risks that are likely to be considered by companies and a second list of risks that are specific to certain business sectors. These examples are intended to stimulate the board’s thinking as to the risks that are particularly relevant to the company, and also to prompt consideration of other risks not mentioned in the guidance but important to the individual company.
“This guidance complements the updated Terms of Reference that we published earlier this year for Audit, Nomination and Remuneration committees. Committees play an essential role in enabling the board to focus its efforts in a targeted manner and need to be structured in such a way that specific duties are allocated to just one committee, with no gaps or overlaps. The Terms of Reference for those three committees incorporate the requirements for an increased level of detail in reporting in the annual report; increased emphasis on committee chairs’ engagement with shareholders on matters within the committee’s remit; and the need for interaction between committees.”