Fundamentals of Risk Management

Risk governance
348
committee. The structure of separating non-executive and executive directors into 
separate committees is sometimes referred to as a two-tier board structure.
In some countries, the two-tier board structure is more common. Also, it is
usual for a two-tier board structure to be in place in charities and public-sector
organizations. Regardless of whether the structure is unitary or two tier, the board 
will have a range of responsibilities. It is standard practice for the board to identify 
those issues where it will retain ultimate authority and responsibility. These issues 
are usually referred to as matters reserved for the board. A key area of respon-
sibility for the board that is usually not delegated is setting the risk appetite of the 
organization.
Having decided the matters that are reserved for the board, it will then be necessary 
to decide how authority and responsibility will be delegated in respect of other
issues. It is common for large organizations to produce a statement of the delegation 
of authority, which will be an important document related to the governance structure 
in the organization.
Executive directors, managers and staff represent the three levels of management 
within an organization, and together these are the first line of defence in ensuring 
satisfactory standards of governance, including risk management and internal 
control. The board should be aware of specialist risk management functions within 
the organization and should be made aware of the activities of these functions and 
their role as the second line of defence. Non-executive members of the board would 
be the members of the audit committee and they should be aware of their functions 
as the third line of defence in ensuring adequate risk governance.
Evaluation of board performance is a critically important part of the corporate 
governance arrangements for any organization. Table 28.3 provides a checklist
of issues that should be included in the evaluation of the effectiveness of a board.
The areas for evaluation are as follows:
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membership and structure;
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purpose and intent;
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involvement and accountability;
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monitoring and review;
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performance and impact.
The checklist set out in Table 28.3 focuses on corporate governance effort and on the 
level of performance of the board. When deciding issues related to strategy, tactics, 
operations and compliance, the board will need to ensure that adequate procedures 
are in place for reaching decisions. These decisions will result in a course of action 
and the implementation of that course of action needs to be monitored.
The course of action will result in some outputs, and these need to be evaluated 
in terms of the impact that is achieved. When evaluating the effectiveness of the 
board, the impact of its decisions is the ultimate test. The level of impact can then be 
evaluated against the vision, mission and objectives of the organization. This needs 
to be supported by an effective organizational structure, as outlined in the text box 
on page 350.

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