Study Unit 5.4: Component one: Governance and culture Flashcards
What are the principles under Governance and Culture?
Exercise board risk oversight
Establishes operating structure
Defines desired culture
Demonstrates commitment to core values
Attracts, develops, and retains capable individuals
Principle 1: What are the principles under Exercise board risk oversight?
Accountability and Responsibility
Skills, Experience, and Business Knowledge
Independence
Suitability of ERM
Organizational Bias (favoritism)
Explain: Accountability and Responsibility
BOD has primary responsibility for risk oversight
But, management is responsible for day-to-day risk management
Board can delegate responsibilities to risk committee
Explain: Skills, Experience, and Business Knowledge
BOD provides expertise through skills and knowledge
BOD must understand entity’s strategy and industry to be informed on relevant issues
BOD determines and review periodically if it has necessary skills, experience
Explain: Independence
BOD should be independent. This enhances to be objective and evaluate performance and well-being without conflict of interest
BOD serves as check and balance on management ensuring best interest of stakeholders rather than a select number of board members
What are the factors that obstruct board member independence?
held the same board position too long
substantial financial interest in entity
Has donated a significant financial amount to an entity
Recently advised the BOD in a material way
Explain: Suitability of ERM
BOD must understand complexity of entity
BOD must understand how integrated ERM can create value
Explain: Organizational Bias (favoritism)
Bias in decision-making has always existed and always will
BOD should understand organizational biases and challenge management to overcome and or managed them
Principle 2: What are the principles under Establishes operating structures?
Operating structure and reporting lines
ERM structures
Authority and Responsibility
ERM within Evolving entity
Explain: Operating Structure and Reporting Lines
Operating structure describes how the entity organizes and carries out day-to-day operations
Operating structure allows personnel to develop and implement practices to manage risk and align with core values
Important to define responsibilities when designing reporting lines
External parties may influence reporting lines
How is operating structure aligned with legal and management structure?
Legal structure influences how an entity operates
Management structure sets out the reporting lines, roles, responsibilities for management
What are the factors to consider when establishing operating structures?
Strategy and objectives
Financial, tax, and regulatory
Risk related to strategy and objectives
Type of reporting lines
Explain: ERM structures
Management plans and carries out the strategy and objectives designed based on mission, vision, and values. Consequently information is needed on how risks affecting the strategy.
A method used gathering information is to delegate this responsibility to a committee
Explain: Authority and Responsibilities
In a single BOD – the board delegates to management the authority to design and implement practices to support strategy and business objectives
In Dual-board structure – supervisory board focus on long-term decisions and strategies
How are risk-based decisions enhanced?
Delegates responsibility to the extent required.
Specifies transaction requiring review and approval
Considers new and emerging risks as part of decision-making
