Fee Implications of an Enhanced Risk Focus

The third edition of the ASX Corporate Governance Principles and Recommendations (taking effect for listed entities’ full financial year commencing on or after 1 July 2014) has an increased focus on risk management.

Risk committee remuneration

Recommendation 7.1 requires that listed entities form a risk committee, a combined audit and risk committee, or a combination of Board committees addressing different elements of risk with:

  • at least three members;
  • a majority of independent Directors; and
  • independent Chair.

In the case that the Board decides to have a combination of Board committees addressing risk, it must disclose how it has divided the responsibility for overseeing risk between those different committees.

If a Board chooses not to implement any of these options, it must disclose this decision, as well as the processes it uses to oversee the organisation’s risk management framework.  The Corporate Governance Principles and Recommendations require that the Board review the framework at least annually and disclose whether it has any material disclosure to economic, environmental or social sustainability risks.

Although our research indicates that relatively few companies had separate risk committees in the 2013 financial year (around 25% in the top 50 and 15% in the top 100, with the majority coming from the Financials sector), conversations with clients have indicated that more will tread this path.

As revealed in the Director Remuneration KMP report we released this month, the median fee for an Audit Committee Chairman in the top 100 was $40,000 in the 2013 year while the membership fee was $20,000. For all organisations that disclosed the remuneration of a separate risk committee, chairmen and members of the risk committee received the same or less remuneration for their service than those serving on the audit committee.

As risk gains a higher profile and Directors assume a greater risk management workload, it is necessary to ask how this change will affect the work value of Directors serving on committees:

  • Will those Directors overseeing the accounts have a more arduous role than those who are overseeing the organisation’s risk framework or vice versa?
  • Where does compliance fit? In the audit committee or in the separated risk committee?
  • Given these considerations, how should the Chairman or member of a newly formed risk committee be remunerated for their role?
  • Where a separate committee is not formed, how do increased risk responsibilities affect the remuneration of the combined audit and risk committee members?

Egan Associates is well placed to advise on these issues.

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