Take a Look at the World through Risk-Colored Glasses

I help organize the Summit Director and Officer Training Conference that is held every year in Deer Vally, Utah. While doing a bit of research on topics for this year’s conference I found a well-written paper by Steve Wagner and Maureen Errity on the Risk Intelligent Board: Viewing the World through Risk-Colored Glasses. It’s a topic of keen relevance in today’s business world.

Analyze the demographics of most corporate boards and you’ll find a heterogeneous collection of exceptional talent. The skills members bring to the table reflect a wealth of experience, knowledge and wisdom. Yet despite this extraordinary diversity of viewpoints, it is important that every member of the board don a pair of risk-colored glasses.

These days, you can’t even sit on a public company board without giving at least cursory attention to risk. The New York Stock Exchange requires the audit committee of all listed companies to annually discuss the company’s financial risk exposures and understand how management addresses such risks. Several shareholder ratings services and institutional investors now include risk management in their corporate evaluations. And, of course, the potential for out-of-pocket settlements paid by board members or costly shareholder suits against the company have driven home the point in boardrooms across the land — risk has become personal.

To meet their fiduciary responsibilities, directors must share a common vision of risk and adopt a framework to support their risk oversight activities.

Boards are generally not negligent when it comes to risk. Quite the contrary; most board members make careful deliberations and bring to bear their best judgment. They summon the chief risk, strategy and audit executives, along with the external auditor and others who manage exposures to risk and related policies, to appear before the board. They listen to presentations, ask tough questions, and review reports.

Boards are under pressure — regulatory, legal, fiduciary, stakeholder — to oversee the risk management activities of the company. But many board members are unsure how to approach their risk-related responsibilities. They are uncertain about roles and delineation of responsibility. They wonder where to start and how to bring all the disparate pieces together.

Merely putting risk on the agenda for discussion starts a process that will spur creative thinking and generate illuminating discourse. Whether the initial conversation takes place at a committee level, at the full board level, or both is not as important as getting the discussion started. The topic of risk should be placed on the full board meeting agenda on a regular basis, perhaps several times per year.

By broaching the risk discussion at the board level, one pervasive problem is immediately confronted — the tendency for risk management activities to take place in “silos.” Most companies spread risk management across the organization. Treasury manages credit risk; IT oversees technology and information risk; facilities handles real property risk. This level of specialization is essential to effective risk management. But problems can arise if these risk specialists remain in isolation, never venturing from their bunkers. Among the potential concerns: the “big picture” remains out of focus; disparities arise in the terminology used to talk about risk and the metrics used to measure it; and risks in combination and cascading risk scenarios don’t enter into the discussion.

To combat these problems, the board can act as a catalyst to bridge the silos. By bringing various risk managers into the same room to present their perspectives and strategies on risk, the board is creating an environment that will jump-start a collaborative and synchronized approach to risk management.