Boards face the difficult task of combining management’s willingness to take risks with the risk management strategy that has been established. Establishing a communal approach to risk management and allocating appropriate time for debate during board meetings is a delicate balancing act. The interconnectedness and complexity of risk management may be made easier using board management software platforms.
Identifying Unexpected Risks
Risks of disruption can harm a company’s financial line and reputation. Boards must be proactive in their risk management plans and ensure that risk management receives the attention it deserves on board agendas. Timing is important, as is devoting enough time to various sorts of hazards.
Most boards recognize that they must devote time to discussing recognized hazards. It’s also critical for boards to pay attention to how much time they spend debating recognized hazards vs analyzing new threats.
Digging for dangers that aren’t immediately evident is a difficult undertaking. When board schedules don’t leave enough time for talks regarding unknown hazards, extra meetings may be necessary one or more times during the year.
Addressing Disruptive Risks Requires Awareness
The NACD Disruptive Risks study was produced by the National Association of Corporate Directors and included more than 25 board directors and renowned governance professionals. The handbook provides guidance to boards on how to raise awareness of unknown hazards. The experts advise boards and management teams to investigate how disruptive risks manifest themselves. They can then turn for other resources, such as experts and information, to assist them better assess risk. The paper emphasizes the necessity of board members being self-aware and encouraging skepticism at board meetings.
During succession planning, risk management should also be considered. Risk management competence should be included in the list of qualifications that a board needs.
Risk Management at the Appropriate Time
According to a survey by worldwide leader EY, boards function best when they look at their obligations on a quarterly basis.
EY recommends that boards focus heavily on risk management concerns in the first quarter of the year and revisit them as needed throughout the remainder of the cycle. During the third quarter, boards should concentrate on the financial plan and strategy approval. The first and third quarters are ideal times for boards to focus CEO and other senior management assessment and pay plans. The optimum time to focus on the budget is in the fourth quarter. Boards must approve important transactions and oversee managerial performance throughout the year.
According to EY, the top-performing corporations have the board or a sub-committee playing a leading role in determining the company’s risk management objectives. Risk management plans should include contingency and emergency plans. Certain risks may have a weighty impact on the company’s finances and reputation and may impact the company’s very survival, so it’s vital for the board and managers to be on the same page with risk management plans.
Ultimately, data and other key performance indicators will lead boards to a well-planned risk management strategy. They need to be careful to make sure it’s not too complex or cumbersome to implement.
To convey the risk management strategy and achieve a shared understanding among the board and managers, the board and managers must adopt uniform risk vocabulary and reporting, as well as a standard set of risk filters. Companies that don’t have a shared knowledge of their risk appetite won’t be able to properly evaluate major prospects that are consistently risky.