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, according to a study.
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 report by The Conference Board, a leading business research organisation, 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 internationalization 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, he adds.
Since 2004, the Board has documented steady progress to drive ERM into corporate practice and culture. Major progress is detected in early stage efforts, such as creating a risk inventory and adopting a cohesive set of assessment processes.
Companies headquartered in Europe or operating in major Asia-Pacific financial markets have advanced significantly in recent years and developed processes at a fast pace, indicating an international consensus on the benefits of risk management integration, it says.
There is also evidence of substantial differences in ERM maturity across industries with financial services, energy and utilities showing more developed ERM processes than other industries, it adds.
"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, 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."
For many Indian firms, the report notes, most risks continue to be managed in silos, whether in business units or functions. Indian companies generally do not take a comprehensive approach that ERM embraces but that is beginning to change, notes the report.
Now that outsourcing has matured, it is no longer limited to single functions within specific business units, but involves entire corporate processes.
As a result, risk and governance issues surrounding outsourcing practices means they need to be addressed at the organisational level, it adds.
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, it stresses and says 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 US 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 report says.
The international community, it says, 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.
Evolving legal standards, it says, make it prudent for business organisations operating in the Indian financial market to strengthen their ERM processes based on best practices and widely accepted self-regulatory principles.
"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 recognize value to forward-looking risk management, ERM will not become part of everyday business practices."
The Conference Board produces the US Consumer Confidence Index and the leading Economic Indicators for the US and other major nations. It also produces a wide range of authoritative reports on corporate governance and ethics, human resources and diversity.
