Corporate Governance

Figure 2-4: The (Business) Risk Management Process

Determine Objectives

Identify Risks

Assess Risks

Choose Strategy

Implement Strategy

Monitor

• Risk Avoidance

• Risk Sharing

• Risk Minimization

• Risk Insurance

• Risk Abatement Implementation Strategic

Management

Whether the objectives are set within or outside the risk management process is a disputed issue but the interaction between Strategic and Risk Management is undisputed. The holistic approach implied above seems to fit perfectly with the inter-organizational scope of SCM.

In the European Union (EU) a comparison of the Corporate Governance guidelines of the individual member states²⁰ led to the development of a plan of action for the harmonization of rules and principles across all member states. In the plan the Commission, contrary to the practice in the USA, did not recommend the development of a detailed codex for Corporate Governance but focused on:

1. strengthening the requirements on external reporting, 2. enhancing the rights of share holders, and

3. modernization of the work performed by the members of the board.

Furthermore the Commission suggested that the financial statements from companies registered on the stock exchange should contain a section on Corporate Governance initiatives, or an explanation of why Corporate Governance is irrelevant (the “comply or explain” principle). Following the receipt of feedback on the plan of action and suggestions the Commission has started the work on modernizing and harmonizing Corporate Governance across member states. In March 2004 a suggestion concerning the mandatory auditing of registered companies was put forward, suggesting rules for changing responsible accountant much resembling the American rules. More proposals are anticipated.

Danish Initiatives

For unknown reasons Denmark was one of the last countries in Europe to commence working with Corporate Governance²¹. Speculation will have it that perhaps the Nordisk Fjer scandal (resembling the before mentioned Enron scandal) was the catalyst to strengthen the regulations ensuring independence between management of the firm on the one side and the board and auditors on the other. In March 2001 Ole Stavad, the Minister of Economic and Business Affairs of that time, commissioned four highly respected Danish businessmen to further develop the ideas presented in the report from 1999 and draft a guideline for Corporate Governance. Three quarters of a year later the “Nørby commission” published a report containing voluntary guidelines for Corporate Governance in Denmark²². The report focused on seven main areas:

1. The role of the shareholder and the interaction with the management of the company 2. The role of the stakeholders and their importance to the company

3. Openness and transparency

4. The tasks and responsibility of the board 5. The composition of the board

6. The compensation of the board and the directors 7. Risk Management

20 See Weil, Gotshal, & Manges (2002).

21 According to Iversen (Iversen, 2004), the first official Danish contribution was the report “Debatoplæg om aktivt ejerskab” (Ministry of Finance, 1999) – a product of a joint collaboration initiated in 1997 between The Ministry of Economic and Business Affairs, The Ministry of Finance, and The Ministry of Taxation.

The report can be downloaded from the homepage of the State Employer’s Authority (www.perst.dk).

22 “Nørby-udvalgets rapport om Corporate Governance i Danmark – Anbefalinger for god selskabsledelse i Danmark” (Nørby Johansen et al., 2001).

The report caused quite some debate. Some commentators rejected the proposals in the report as they were perceived being to narrowly defined and restrictive, whereas others considered the proposals being too operational. Nonetheless, the community embraced the report for its intent: to improve the practice of corporate management and to provide a starting off point for further debate. The Copenhagen Stock Exchange immediately after publication recommended companies being traded on the stock exchange to apply the recommendations put forward in the report, a recommendation which was adhered to by more than half of the companies in their financial statements in 2003.

Since the initial report was published the Copenhagen Stock Exchange has been the main driver of Corporate Governance, as two reports have been published so far: “Report on corporate governance in Denmark”²³ (Fondsbørsen, 2003) and an updated version in 2005.

Recommendations on Risk Management

Of special interest here is naturally the content on Risk Management. In the original report the commission under Chapter VII “Risk Management” recommended:

“Effective risk management is a prerequisite for the board to perform the tasks it has been appointed to do. It is therefore crucial the board ensures appropriate systems to the management of risks are present, and further ensures the systems match the requirements of the company.” (translated from Fondsbørsen (2005), p. 58).

The report promoted the focus of the risk management was to support the company in reaching its goals by:

1. making sure strategic and operational goals are known and understood throughout the organization,

2. analyzing threats and opportunities relating to above mentioned goals, and 3. analyzing the core activities of the company to identify risks.

Furthermore it is recommended that the risk management is evaluated at least yearly, with special attention given to insurance, foreign currency, and investment policies. Besides insisting Risk Management is a part of Corporate Governance, the recommendation did little in way of supporting the development of a practice as no tools, methods or frameworks were supplied. In the latest report the section on Risk Management has been revised. Besides the original recommendations, it is now recommended that the Board and the Management when developing the overall business strategy also identify and describe the major risks.

Management is furthermore encouraged to develop a plan for risk management for approval by the Board. The plan should include periodic reporting and evaluation of the risks identified, as well as strategies for the management of the risks. Finally the report recommends openness by suggesting a section in the Annual Account for description of the risk management activities.

23 Translated from: ”Rapport om god selskabsledelse i Danmark – Fondsbørsens komité for god selskabsledelse”.

Risk Management is definitely on the agenda within Corporate Governance, albeit the recommendations still does little in guiding implementation. The recommendations also have a shortcoming in relation to SCM as the view of the company in the reports does not support the notion of supply chains. Nonetheless, the recommendations might have an impact on the external reporting, if not directly on the practice of SCRM.