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The role of the board in risk management

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Although risk oversight has always been an important aspect of the board’s oversight responsibilities, the financial crisis of 2008 raised the bar even more. The role of the board of directors in enterprise-wide risk oversight has become increasingly challenging and there is heightened expectations from the public on the board’s involvement in risk.
In the aftermath of the global financial meltdown and credit crunch, risk oversight became an imperative for boards of public companies, particularly so for United States companies where the boards of listed companies took a hard look at their membership, how they operated and whether their operations and the information to which they have access are conducive to effective risk oversight.

Risk is part of everyday business and organizational strategy, however the volume and complexities of risks facing organizations has increased tremendously over the last decade due to the complexity of business transactions, technology advances, globalization, speed of product cycles, and the overall pace of change in the environment.
Boards now have a difficult task in overseeing the management of the increasingly complex and interconnected risks that are a threat to the survival of businesses. There is an increased focus on the effectiveness of board risk oversight practices from the public, government and regulatory bodies.

The New York Stock Exchange’s corporate governance rules now require audit committees of listed corporations to discuss risk assessment and risk management policies in their meetings. Credit rating agencies, such as Standard and Poor’s, are now assessing enterprise risk management processes as part of their corporate credit ratings analysis. This shows how much pressure is being exerted on the boards with regards to their risk oversight responsibilities.
To effectively exercise its risk oversight role the board should apply some of the principles discussed below.
There is a need, for the board, to build a strong risk culture in the organisation, develop a robust risk appetite framework, and increase the role of the board and board committees in risk governance. The board’s responsibilities should be to oversee organisational activities and risks while risk management will rest with senior management and ownership of risks resides in the business units.

The risk culture should be deeply embedded in the organisation, so that changes in the economic cycle, leadership, and staff turnover do not make the culture disappear.  The board should ensure that it sustains the right attitudes and behaviours through continuous training to bring awareness and through monitoring. The boards of directors should demand periodic reviews of the overall organisation to identify areas that merit a deeper look.
The board should foster an environment where people at every level manage risk as an intrinsic part of their jobs. Rather than being risk averse, the staff should understand the risks of any activity they undertake and manage them accordingly as an integral component of the activity undertaken. The concept that ‘risk is everyone’s business’ should be ingrained in the day-to-day operations of the organisation.

The next principle that the board should understand is the appreciation of the key drivers of company’s success and risks inherent in the company’s strategy. The board should understand the business model and be aware of the critical enterprise risks that threaten the execution of the company’s strategy and the business model.
The board needs then to agree with management on how to deal with these risks in line with the company’s risk appetite while pursuing enterprise value creation. In the process the board should help in defining the risk appetite of the organisation. The CEO proposes risk appetite levels, but the board approves the risk appetite level based on an evaluation of its alignment with business strategy and stakeholders’ expectations.

The other key principle is for the board and its standing committees to define its role with regard to risk oversight. The full board should have primary responsibility for risk oversight, with the board’s standing committees reviewing the risks inherent in their respective areas of oversight.
The various risks that the board will have to deal with fall into the following categories, namely governance risks, critical enterprise risks, board-approval risks, business management risks (that is the normal, ongoing day-to-day risks) and lastly emerging and non-traditional risks (such as climate change and disruptive technological innovation.)
The fourth principle is to ensure that directors are selected on the basis that they possess skills and experience that help in understanding business risk. Non-executive directors are generally chosen because they have a breadth of experience, and are of an appropriate calibre and have particular personal qualities and attributes that will help provide the board with useful insights in key related industries.

The board should therefore possess the expertise and experience needed to promote a broad perspective, open dialogue, and useful insights regarding risk. Thus the board, through the nominating and governance committee, should consider the board’s composition.
Periodically assessing each member’s expertise, experience, and perspective will enable the board to develop and implement a sound risk governance process.
The nomination committee should also assess whether, and to what extent, the establishment of committees of the board is necessary and appropriate. Director induction is also crucial in ensuring that new directors have the appropriate background and understand the business. On-going training and awareness is crucial to provide directors with both updates on technical developments as well as changes in industry and market perspectives.

The board should assign oversight of the company‘s risk management function to an appropriate board committee usually the audit and risk committee. The audit and risk committee‘s charter should be clear on the scope of the committee‘s responsibilities for risk management.
There should be effective communication and coordination of the board’s oversight activities to ensure that the audit and risk committee is informed of all significant actual or potential financial and non-financial risks that may have implications on the business. The audit and risk committee should have an adequate level of comfort regarding the company‘s process for identifying, managing and reporting on risk.

The committee should also satisfy itself that the following areas have been appropriately addressed by itself, namely, the financial reporting risks, internal financial controls, fraud risk as it relates to financial reporting; and IT risks as it relates to financial reporting.
It’s important for the board to assess whether the company’s risk management system, its people and processes, is appropriate and is well resourced. The board should ensure that risk management is part of strategy and performance management.

The risk processes in operation should look beyond mere risk identification to considering the adequacy of measuring, monitoring as well as mitigating risk through appropriate policies, processes, people, reporting, methodologies and systems and data.
The board should agree with management on the type and format of risk information that will be helpful in decision-making. It’s important for management to avoid providing excessive information which results in information overload. Reports from management to the board should provide a balanced assessment of the key risks facing the company and the effectiveness of the ensuing risk responses and interventions.

Any significant risk response failings or weaknesses should be disclosed in management‘s reports to the board, including the impact that they may have had, or may have on the company, and the resultant corrective responses and interventions taken.
The board should disclose any current, imminent or envisaged risks that may threaten the long-term sustainability of the organisation. Risk reports to the board should contain meaningful information on the firm’s overall risks, risk concentrations, emerging risks, and any changes or trends in key risks.

Risk reports should also include relevant strategic information in order to facilitate the use of risk information in strategic decision-making. The board should engage in constructive risk dialogue with management challenging assumptions which have an impact on risk.
One of the lessons from the financial crisis is the potential adverse impact of a company’s culture and incentive compensation structure on behaviours, decisions and attitudes toward taking and managing risk.
The significant lesson of the financial crisis is the danger of short term compensation structures for executives on how executives take and manage risk exposing the organization to significant risks. It is therefore very critical for the board to structure compensation schemes appropriately to avoid short termism on the part of management.
It is very important that the board monitors the alignment of strategy, risk, controls, compliance, incentives and people. Properly aligning these elements will ensure that there is not likely to be a disconnect between a company’s strategy and its execution.

Lastly the board should not only be interested in the normal risks but should also consider emerging and interrelated risks, those risks that are not on management’s radar. The board should task management to monitor the external environment for those issues that will impact on the organization’s business and are likely to be disruptive to the business thereby changing a company’s risk profile.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

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Jobs galore for Lesotho

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94 000 jobs.

That is what the Millennium Challenge Account (MCA-Lesotho) will create in the next 10 years, according to Prime Minister Sam Matekane.

The MCA-Lesotho was created by the Lesotho parliament last year after the United States’ Millennium Challenge Corporation (MCC) found Lesotho eligible to receive development funds.

The MCC gives development grants to poor countries that respects democratic principles and human rights.

The MCC has unlocked a staggering US$322 million (over M5 billion) to the government of Lesotho after the country enacted three laws the protect people’s basic rights this week.

Matekane advised youths to visit MCA-Lesotho offices to understand how best they can benefit from the fund and the projects that will be financed.

The MCC’s investments are aimed at increasing the availability of water for household and industrial use, enhance watershed management and conservation methods, rehabilitate health infrastructure and strengthen health systems, and remove barriers to private investment.

The MCA-Lesotho’s Health and Horticulture Compact seeks to assist the country in unlocking equitable and sustainable economic growth in partnership with the private sector by addressing key constraints to growth.

Matekane said the job creation potential of the horticulture project alone is estimated at 4 000 jobs.

This excludes indirect jobs that will be created through packaging supplies, logistics, cold chain activities as well as the processing of the output.

“Let us all be ready and ensure we spend all the funding that is available,” Matekane said.

He said the money is going to be invested in agriculture, trade and industry, value chains, infrastructure development, tourism and creative sectors.

“The Compact has come at a critical time when the country is in dire need of financial injections to revive the economy,” he said.

“This second Compact forms the core of Lesotho’s private sector-led economic growth, recovery and job creation agenda.”

He said the MCA staff should work diligently, to implement this Compact.

“There are several Basotho businesses out there that are eager to seize the opportunities that the Compact brings,” Matekane said.

“Serve them with integrity, accountability and dedication.”

Matekane said the government has established the Cabinet Sub-Committee on the Compact which is under the leadership of Deputy Prime Minister Nthomeng Majara.

The sub-committee is mandated to ensure that the government provides overall oversight, strategic direction and support for successful implementation of the Compact.

He said he expects the MCA-Lesotho to ensure the full implementation of the project within the next five years.

“Our economy needs this capital injection to boost productivity and job creation,” Matekane said.

Matekane said the government had to enact three pieces of legislation which were necessary to support the investments that the MCC is making.

The enacted laws are the Labour Code Amendment Bill, the Administration of Estates and Inheritance Bill and the Occupational Safety and Health Bill.

Majara Molupe

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Bank spearheads career expo

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Standard Lesotho Bank will tomorrow host a career expo at the ’Manthabiseng Convention Centre for high school students who will sit for their final exams this year.
The 14th Annual Standard Lesotho Bank Career Expo was launched in Mokhotlong on Monday where the Lesotho Highlands Development Authority (LHDA) welcomed students in areas around the Polihali Dam construction site.

On Tuesday the expo was at the Butha-Buthe Community High School, yesterday it was at Assumption High School in Teya-Teyaneng while today it is in Quthing at Holy Trinity High School.

The five-day nationwide event is dedicated to connecting ambitious Basotho youths with exciting career opportunities.

Standard Lesotho Bank says it’s career expo “is a cornerstone of the bank’s commitment to empowering Basotho youth and shaping the future of Lesotho’s workforce”.

The 2024 edition of the event is the 14th where the bank is now the headline sponsor of this important expo that reaches about over 10 000 students countrywide.

The expo promises to be an even better offering where over 35 institutions of higher learning from Lesotho and South Africa as well as professional bodies will explain different career options to Basotho students.

Standard Lesotho Bank communications manager, Manyathela Kheleli, said students in Mokhotlong did not only learn about different engineering disciplines but got to appreciate engineering in action at Polihali.

He said it was a lifetime experience for students from Mokhotlong, “thanks to the collaboration with LHDA, who are fully responsible for the Polihali leg of the event”.

There were also motivational speakers from different professions in the bank and other selected institutions.

Key influencers in the football fraternity, former Likuena captain and now Corporate Responsibility Manager at Letšeng Diamonds, Tšepo Hlojeng, and former Orlando Pirates dribbling wizard, Steve Lekoelea, are among the influencers that have been invited to address the students.

The event is a sponsorship initiative under Personal and Private Banking that is open to all youths, communities, and individuals, where the bank intends to use this event to drive the new Youth or student Customer Value Proposition and attract high school students to open accounts ahead of their enrolment into tertiary institutions.

The objective of this sponsorship is to first create an environment where future leaders of Lesotho will be nurtured and informed of top career choices that demonstrate various skills requirements for the growth of Lesotho’s economy.

Secondly, the career expo is a clear demonstration of the bank’s intention to put youths at the centre of its initiatives.

This position is shown by the bank’s initiative to not only develop special products for youths, such as the Youth Account but also through several initiatives that promote youth empowerment. These include the bursary scheme and the Bacha Entrepreneurship Project.

“We are more than a bank for our youths, but a good corporate citizen and a partner for the education for Basotho,” Kheleli said.

“We believe that as we grow our youths, they will become assets to this country and by extension, develop into a feeder market for our banking products when they enter the job market,” he said.

The bank has invested M150 000 towards sponsorship of the annual Career Expo.

Staff Reporter

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Ministry launches fresh industrialisation drive

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A new policy to drive industrialisation in Lesotho was launched in Maseru this week.
The Lesotho National Industrialisation Policy 2024–2028 is being spearheaded by the Ministry of Trade.

The ministry says the policy seeks to accelerate economic diversification in the industrial base, enhance productivity and productive capacity for industrialisation and advance domestic and regional value chains for industrialisation.

It also seeks to promote and develop industrial clustering, promote inclusive industrialisation, support entrepreneurship development and strengthen business linkages.
The new policy will also seek to enhance energy efficiency and sustainability, promoting technology adoption and innovation, services-based industrialisation, and stimulating agro-based industrialisation.

This is not the first time Lesotho has launched an industrialisation policy. Previous policies have all failed.

The first attempt was the 2015–2017 industrial policy, whose aim was to accelerate the industrialisation agenda and address key challenges facing the country.

The second one was the 2018–2023 policy, which after its unsuccessful execution during the three years of implementation, the government extended it to the National Strategic Development Plan Strategic Focus (2023/24-2027/28).

The new industrial policy’s target is set to activate implementation on innovation to enhance the efficiency and competitiveness of domestic industries, create decent jobs and improve the welfare of Basotho.

Thabo Moleko, the Ministry of Trade Principal Secretary, said the implementation of the new policy is set to deepen economic growth, promote industrialisation and enhance competitiveness.

“The plan includes greater investment in industrial development with the intention to create employment and incomes while building on maintaining the existing industrial trade,” Moleko said.

Mamello Nchake, a consultant for the United Nations Economic Commission of Africa (UNECA), said the development goals of the industrial policy are set to ensure an achievable inclusiveness and equitable growth as they aim to create sector-led quality jobs for Basotho.

Nchake said the goals are meant to “develop and maintain enabled infrastructure that is critical to the private sectors and also to promote gender equality, environmental and climate risk management”.

“Moreover, the policy (will seek to) harness the collaboration with private sector firms to address common challenges and promote industrialisation,” she said.

The workshop discussed constraints that hindered the implementation of the 2018 – 2023 policy that undermined investment and trade opportunities.

The constraints include access to land for investment, inadequate provision of infrastructure, an outdated and a lack of appropriate regulatory environment, low productive capacity, market size and topological constraints, unstable macroeconomic environment, external factors, and over-dependency of trade preferences.

To address the strategic objectives, the previous industrial policies had proposed tax incentives for industrial development, trade policy and regional integration as the main vehicle for industrialisation and structural transformation.

They had also proposed mechanisms for policy coordination and implementation, institutional alignment and linkages.

However, several key challenges were identified in the implementation of the 2015-2017 industrial policy.

They included limited financial and investment capacity to effectively implement the industrial policy actions.

“Financing instruments are not aligned with the level of development needs of the private sector,” stakeholders heard at the workshop.

They also heard that there is “persistent dependency on few industries that poses risks in the face of global economic uncertainties and ever-changing consumer preferences”.
Another identified problem is limited investment climate that makes it costly for foreign firms to invest in Lesotho.

It was also observed that a shortage of specialised education and skills crucial for growth of industries impact the ability of firms to adopt advanced technologies and improve productivity and the productive capacity.

Stakeholders also heard that there is limited global competitiveness and access to global markets.

Lesotho’s industries, they heard, particularly textiles and garments, face competition from other low-cost manufacturing countries.

The country is also spooked by poor coordination between the implementing agencies due to a lack of a clear implementation framework.

Khahliso ’Molaoa

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