2.10.4 Internal control and risk management systems

CSR requires that business operations which are potentially harmful to the environment, employees or other interested parties are properly assessed. On the basis of these assessments adequate strategies may be formulated for keeping these risks from materializing. A sound system of internal control and risk management is indispensible to support these strategies.

As far as corporate governance is concerned, it is important to realise that issues that may cause negative publicity adversely affect the reputation of a company, its directors and supervisory board and undermine public confidence in the company. That is why internal risk management systems that assess risks at an early stage are essential. Subsequently, internal control and risk management systems improve the accuracy and verifiability of (financial) information that ends up with the board of directors.1

CSR as well as good corporate governance demands that corporate scandals are avoided or controlled to protect a company's good reputation. This is important to remain attractive for financiers, investors, future employees and consumers.

The down side of these developments is that the board of directors tends to focus more on implementing and monitoring internal control systems and is less inclined to act on the basis of its trust in the people who work for and within the company. This begs the question whether the entrepreneur's capacity to do business and make innovations is in any way affected by this process.2