5.1 The board oversees a risk management framework that aligns to the
purpose and strategy
5.2 Directors seek and are provided with information about risk and how it is
5.3 The board periodically reviews the risk management framework
Risk is inherent in all human endeavours – including in
the activities of organisations. The role of the board is to
understand the organisation’s risk, to make decisions based
on this understanding and to oversee a framework that
manages risk on an ongoing basis. Risk is not something to
be avoided, but to be understood and leveraged in pursuit
of an organisation’s purpose.
“The best laid schemes of mice
Go often awry.”
Robert Burns, To a Mouse, 1785
What is risk?
The International Organisation for Standardisation (ISO)
defines risk as “the effect of uncertainty on objectives”
(AS/NZS ISO 3100 Risk management). This is a useful
definition as it helps to explain why risk is important
to governance – it must be understood and considered
in decision-making so that the organisation achieves its
purpose with an acceptable degree of certainty.
Importantly, risk is not inherently bad. It arises because
the future is unknowable and therefore the outcomes of
decisions are always uncertain to some extent.
Risk is typically characterised by considering examples of
events that could occur, their likelihood and the consequence
of their impact. These examples are colloquially called ‘risks’.
For example, hypothetical risks could be that a building
burns down or that a funding contract is not renewed. It is
important to note that these are only illustrations that help
to understand risk and are only relevant in the context of the
making of a particular decision.
It is easy to confuse these example ‘risks’ with ‘risk.’
Risk refers to the uncertainty that is inherent in all
decisions because they must be made on the basis of
All decisions are based on assumptions about:
- Internal factors (such as structure, staff skills and
- External factors (such as the regulatory environment,
funding availability, interest rates); and
- Wider factors (such as political changes, public sentiment
about donations, or climate change).
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What is a risk management framework?
The way that organisations take uncertainty into account
when they make decisions is called ‘risk management.’ The
goal of risk management is to increase the certainty that a
decision’s intended outcome will be achieved. It involves
the identification, evaluation and prioritisation of risks.
Risk management should not be considered as a discrete
activity. Rather, it should be embedded in the practices,
processes and policies within an organisation that are
concerned with making decisions and ensuring that these
decisions continue to be valid.
Risk management happens in all organisations because
people consider, to some extent, what they need to do to
make sure their decisions achieve their intended outcome.
This approach may be ad hoc and inconsistent across the
organisation, but it is always happening.
However, organisations can adopt more formal processes
to facilitate better management of risk. This is called
developing a risk management framework.
The Australian/New Zealand Standard on Risk
management defines a risk management framework as:
AS/NZS ISO 31000:2009 RISK MANAGEMENT –
PRINCIPLES AND GUIDANCE
A risk management framework is a set of components
that provide the foundations and organisational
arrangements for designing, implementing,
monitoring, reviewing and continually improving risk
management throughout the organisation.
There is no one-size-fits-all approach to developing a risk
management framework. Large organisations may have
highly-developed approaches, systems and processes which
are supported by both internal and external professional
advisers. Smaller organisations facing simpler decisions
may adopt more informal approaches, relying on their own
experience, judgement and common sense to manage risk.
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Benefits of risk management
The purpose of risk management is to support more
informed decision-making. When a decision is made
based on an understanding of risk and how it is managed,
the chances that it will contribute to achieving the organisation’s purpose will improve. Ultimately, risk
management aims to increase the certainty that an
organisation’s purpose will be achieved.
Risk management enables the organisation to:
- Challenge assumptions in decision-making;
- Take actions that will increase the likelihood that a
desired outcome will be achieved;
- Identify early signs that an undesirable event may occur
and take pre-emptive action to address it;
- Learn from successes and failures in a way that improves
decision-making over time; and
- Consider whether previous decisions remain valid and, if
necessary, revise them.
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The board’s role in risk management
The board’s role is to oversee a framework that manages
risk as an integral part of the decision-making process both
at the board level and throughout the organisation.
Risk management is not a separate activity of the board.
While the board may contribute to identifying risks, it can
be a distraction for boards to spend time reviewing lists
of hypothetical risks and the steps that might be taken to
When the board makes a decision, they should ask
management what actions they will take so that the
intended outcomes of the decision will be achieved
with an acceptable level of certainty. The steps taken by
management to identify and control the uncertain elements
of implementation is part of risk management. Boards
should be satisfied that these steps are sufficient and in
alignment with their expectations.
The board should also monitor the outcomes of decisions
they make. Where the context for decisions changes or the
assumptions on which they are made become invalid, the
board may seek to alter these decisions or take new actions
so that the desired outcomes remain sufficiently certain.
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Reviewing the risk management framework
The board should periodically review how well the
organisation is managing risk as part of decision-making.
This should involve reviewing the risk management
framework that enables this to occur.
How a review is undertaken, by whom and with what
frequency will depend on the nature of the organisation and
its circumstances. For example, if an organisation has been
subject to significant change, it may require a more thorough
or frequent review of its risk management framework.
In undertaking a review of the risk management
framework, directors should ask:
- Is there clarity about how risk is managed in
- Is the risk management framework
appropriate for the decisions the
- How effectively has risk management been
applied to past decisions?
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Responding to risk
It is important to note that the purpose of risk
management is not to minimise or eliminate risk. This
approach can seriously undermine an organisation’s
ability to achieve its purpose. There are several different
approaches an organisation can take in responding to risk:
- Avoidance – an organisation can avoid risks by
discontinuing the activity that generates the risk;
- Treatment – taking steps to control either the likelihood,
or the consequence of the risk if it occurs;
- Transference – passing the risk on to another party such
as outsourcing the activity or acquiring insurance; and
- Acceptance – accepting that a risk may eventuate and
putting plans in place to respond if does.
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One of the most important roles of the board in risk
management is in developing an understanding about
the nature and the extent of risk the organisation is
prepared to accept in pursuit of its purpose. This is often
called defining a ‘risk appetite.’ The risk appetite provides
parameters within which management can pursue the
It is critical that the organisation’s risk appetite is aligned
with its purpose. If an organisation is not prepared to
accept enough risk, it may be inefficient in pursuing its
purpose; if it accepts too much risk it may be exposed to
undesirable consequences that undermine its performance.
Defining and documenting the organisation’s appetite
for risk supports the development of an appropriate
risk culture which aligns to and supports the purpose
and strategy. Boards must be careful that they are not
so concerned with negative risk that opportunities are
missed, but they can also not have such a disregard for
risk as to expose the organisation to serious harm. Striking
an effective balance between the two is the hallmark of a
sound risk appetite. The board’s role in culture is discussed
in greater detail in Principle 10: Culture.
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Risk management committee
Many organisations will establish a committee to assist the
board in exercising due care, diligence and skill in relation
to risk management. In smaller organisations it is common
for the risk management committee to be combined with
other committee functions such as the audit committee.
Objectives for a risk management committee may include:
- Advising the board on the effectiveness of the risk
- Supporting provision of accurate, relevant and timely
information about risk;
- Examining previous decisions to see how risk was
managed as part of making those decisions;
- Monitoring and reviewing safety systems throughout the
- Oversight of insurance programs to maintain appropriate
- Monitoring the organisation’s business continuity
- Developing and maintaining an appropriate risk culture
that is embedded through the organisation.
In larger and more complex organisations, staff involved in
the management of risk may also be involved with or have
reporting lines to the risk management committee.
"Boards must be careful that they
are not so concerned with negative
risk that opportunities are missed,
but they can also not have such
a disregard for risk as to expose
the organisation to serious harm.
Striking an effective balance
between the two is the hallmark
of a sound risk appetite.”
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Questions for Directors
- Is the board aware of how risk is managed in the organisation?
- Is there a shared understanding of the organisation's risk appetite?
- How often should the board undertake a review of the risk management framework?
- Is the risk management framework aligned to the organisation's purpose?
- Does the board have access to external professional advice on risk management?
In making or reviewing decisions, the board of
HelpfulCare regularly questions management about
how risk has been understood and responded to.
The consideration of uncertainty is part of its formal
The board has also established a risk management
committee whose purpose is to assist the board with
its oversight responsibility. The risk management
committee reviews decisions made by the board to
consider whether risk has been properly considered,
and there is a sufficient degree of certainty of achieving
the desired outcome.
At their annual strategy day, the board and management
test the objectives of the strategic plan to understand
the uncertainties that could affect the achievement of
their goals. If there is not sufficient certainty, objectives
are adjusted to make their outcomes more certain or
other, ancillary actions agreed upon (to help increase
the level of certainty).
The board of HelpfulCare engage the services of
external consultants to undertake an annual review of
their framework for managing risk. The risk management
committee works with the consultants to agree actions
that should be taken to enhance the effectiveness of risk
management in the organisation.
The Friendlies manage risk as an integral part
of decision-making. Their directors examine the
assumptions involved about uncertainty in the internal
and external environment as part of their decisionmaking process.
The board works to make sure that their decisions
remain relevant and that the desired outcomes continue
to be sufficiently certain. To do this they receive and
consider reports on:
- Whether the implementation of their decisions
proceeded as intended;
- Whether any ancillary actions were also properly
- Whether changes in the operational context have
affected or could affect the outcome of their
In response to these reports, the board sometimes
adjusts their decisions or authorises ancillary action
to make sure their goals are achieved with sufficient
Every two years an ad hoc committee of the board
of the Friendlies formally reviews how risk has been
managed as part of past decision-making. Where there
is adequate documentation past decisions are examined
using the criteria above.