Your company’s board of directors is charged with reviewing all kinds of risks to the corporation. But how well prepared are its members to do so? How ready are directors to evaluate, communicate, and act on risks — and thus to better ensure that your company is doing a good job?
A great deal rides on the answers to these questions. Risk oversight of the boards themselves is what the Conference Board, a business membership and research organization, recently called the next frontier in corporate governance. “If boards really understand how to take risks well, their organizations will do better,” said David Koenig, founder of the Directors and Chief Risk Officers group (DCRO), an industry organization that formed after the 2008 financial crisis.
Responding to an overwhelming sense that boards didn’t accurately monitor risk in the time preceding the financial crisis, investors and directors themselves called for boards to up their game in overseeing organizational risk culture. Regulators let it be known that they would be looking over boards’ shoulders and taking them to task for lax risk oversight. Additionally, a growing number of index tools are tracking governance. In the decade since the crisis, boards have rushed to put risk monitoring mechanisms in place, boosting the enterprise risk management market to nearly US$4 billion in 2019, according to Transparency Market Research. But worries have lingered that many of these boards were asking for risk analyses solely as a box-ticking exercise. And a series of recent lawsuits has attempted to chastise directors for ignoring risks.
But risk oversight isn’t just a matter of avoiding a slap on the wrist or other sanctions. A widely cited 2004 study by Institutional Investor Services, a proxy advisory firm, concluded that firms with good corporate governance were more profitable, had higher stock market returns and dividend payouts, and made less risky investments than those with weak governance structures.
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