Risk Management in Corporate Governance: A Review and Proposal

• Date: 01 September 2009
• Author: Adam Steen,Julie Foreman,Ian Brown
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00763.x
• Published date: 01 September 2009

Risk Management in Corporate Governance:

A Review and Proposal

Ian Brown, Adam Steen*, and Julie Foreman

ABSTRACT

Manuscript Type: Conceptual

Research Question/Issue: In this paper we identify and discuss the relationship between corporate governance and risk

management of high technology firms, with publicly listed Australian biotechnology companies as a case in point. We

present a governance structure that better manages the numerous complex risks such companies face.

Research Findings/Insights: Audit committees are traditionally responsible for oversight of auditingmatters relating to the

company’s financial systems and risk management relating to financial reporting. While the audit committee needs to have

a full understanding of the risk management system in order to be able to assess the overall risk profile of the company we

illustrate that the complex risk and regulatory environment high technology firms face may necessitate the creation of a

separate risk management committee to interface with and assist the board and audit committee.

Theoretical/Academic Implications: We provide evidence that the traditional governance model is inadequate in today’s

complex business environment, particularly for high technology companies. By analyzing the legislative, industry, and

complex risk environment faced by these firms, we posit thatthe traditional model may need to change to meet the demands

of a wider definition of governance that specifically incorporates risk management.

Practitioner/Policy Implications: Against a backdrop of corporate collapse, increasing corporate regulation and reporting,

risk management and oversight has been a recent addition to the roleof the board. It is not inconceivable thatcapital market

regulators may require reporting on risk management and the creation of a separate risk management in the future.

Keywords: Corporate Governance, Risk Management, Audit Committee, Enterprise Risk Management

INTRODUCTION

The current global financial crisis has seen the collapse of

numerous businesses internationally, illustrating thatno

industry or jurisdiction is immune from inadequate or inap-

propriate risk management. All businesses should have the

capacity to develop policy with a full appreciation of risk

and the development of a suitable set of operating proce-

dures in order to respond to changing circumstances in a

timely manner.corg_763546..558

In the light of the current global financial crisis, we discuss

the need for appropriate risk management, planning, and

control and the need for companies to reassess their gover-

nance structure to ensure adequate risk management.As we

write international debt markets are paralyzed, increasing

the reliance on equity as a source of finance. If this greater

reliance on equity finance is to persist for some time, as

appears likely, the use of appropriate risk-focused gover-

nance mechanisms is more critical than ever. The increased

reliance on equity funding, particularly in the current global

climate, leaves investors in these firms deprived of the rig-

orous protections included in most debt contracts. Although

risk is inherent in every industry, we present a risk spectrum

that illustrates the variability of business risks across in-

dustries. It could be argued that at the lower end of the

spectrum, in lower risk environments, risk is more easily

foreseen and managed while at the upper end of the spec-

trum more complex and volatile operating conditions make

outcomes less easy to predict. Our paper focuses on devel-

oping a governance mechanism for identifying and manag-

ing risks in industries at the upper end of the spectrum. To

do this we focus on the example of a publicly listed biotech-

nology company operating within the regulatory context of

one jurisdiction, Australia.

As with many similar high technology industries, biotech-

nology can be considered to be a new, dynamic, and

complex industry. The success of biotechnology companies

is dependent in large part on their therapeutic product

*Address for correspondence: Professor of Accounting, Faculty of Arts and Sciences,

ACU National, Locked Bag 4115 DC, Fitzroy, Victoria 3065, Australia. E-mail:

Adam.steen@acu.edu.au

546

Corporate Governance: An International Review, 2009, 17(5): 546–558

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00763.x