Indian Firms Slowly Embrace Enterprise Risk Management

Intense global competition and rapid growth are forcing Indian firms to examine corporate enterprise risk management (ERM) elsewhere, especially in Europe, Australia and North America, where the process is more mature, concludes a report by The Conference Board.

ERM is a cohesive, enterprise-wide process allowing companies to identify, assess and respond to the social, political and economic risks of doing business. The study, sponsored by KPMG and SAP India, examines the state of risk management integration in companies based in India, and includes case studies of four major India-based multinational firms: Tata Motors Ltd., ICICI Bank, Tata Chemicals Ltd., and Dr. Reddy’s.

“ERM is in the very early stages in India,” says Matteo Tonello, Senior Research Associate at The Conference Board Governance Center, and a co-author of the report. “As Indian firms expand beyond national borders, they become exposed to more strategic and operational risks, including those from different geopolitical and cultural contexts. Tightening capital markets, the internationalisation of successful Indian companies and the adoption of global initiatives to promote business integrity are forcing many firms to pay attention to recent developments in risk management around the globe. Assimilating international standards of risk management is becoming a necessity to remain competitive.”

According to Poonam Barua, Regional Director – India, The Conference Board, “As Indian companies begin to grow globally, they will need to increasingly view enterprise risk-management as a board responsibility and put into place a Risk Committee that reports to the Board – to get maximum value from this strategic corporate function. So far, the custodian of ERM practices still remains the Audit Committee in most Indian companies, which limits its focus to primarily financial issues, without addressing areas such as managing high growth, business execution, innovation, talent retention, succession planning, industrial safety and environment change, and related issues which form an important part of a best practice ERM strategy.”

“Recent events have shown that various high performing companies have suddenly gone down under,” according to Richard Rekhy, Chief Operating Officer, KPMG. “This has resulted in various organisations trying to understand how they need to review their companies due to risks emanating from capital market volatility, forex fluctuations, economic policies, changing business models and global slowdown. Further they also need to take a long-term view of the benefits derived from ERM and implement a framework, which is in line with organizational needs and leading practices.”

“The four companies examined closely in this report are more of the exception than the rule in India, where ERM is not widely used as a management tool,” says Ellen Hexter, Director, Enterprise Risk Management, The Conference Board, and co-author of the report. “However, experience and research from other parts of the world show that those who are early adopters of ERM are likely to enjoy a competitive advantage.”

The report finds that Indian firms often focus on the downside risk, not the opportunity side of the equation. Part of the cultural change that ERM brings is the understanding that it can help identify opportunities, and their associated risks and rewards. ERM also creates greater transparency both internally and externally at those companies that have embraced it. Communication within the company improves by adding a new perspective on risk and sharing risk information. Communication with shareholders and other external stakeholders also improves through more thorough disclosure.

Three of the four firms examined in the report have adopted ERM in part because they have securities listed in the U.S. as well as India. Board members at those companies believe that a comprehensive approach to managing risk is one way to satisfy listing requirements across geographies.

The international community is putting pressure on the Indian government and its enforcement institutions to tighten their grip on fraud, corruption and other illegal business practices. Companies are beginning to recognise the importance of formal anti-fraud and anti-corruption policies and the need to closely monitor business operations. A comprehensive risk management programme would ensure that these protocols are implemented throughout the company.

“The value proposition for ERM is not yet evident for most Indian companies,” says Hexter. “Most companies and boards that have begun ERM are doing so more as a compliance exercise than a strategic one. Unless and until companies can begin to recognise value to forward-looking risk management, ERM will not become part of everyday business practices.”