How Boards Can Mitigate Risk

Nicholas J Price
5 min read
Even the best-planned businesses can get disrupted by unforeseen risks. This is why a good risk management plan incorporates planning for current risks as well as casting predictions about unknown future risks. Boards have the challenging role of balancing management's desire to take risks while aligning risks with the designated risk management plan. The balancing act requires establishing a collective approach toward risk management and giving it enough time for discussion during board meetings. Board management software systems can ease the challenges of dealing with the interconnectivity and complexity of risk management.

Assessing Unforeseen Risks

Disruptive risks can negatively impact a company's bottom line and reputation. Boards need to take a proactive approach to their risk management plans and make sure that they give risk management the time that it demands on board agendas. Timing counts and so does spending enough time on various types of risks.

Most boards understand that they have to spend time discussing known risks. It's also important for boards not to overlook how much time they spend discussing known risks, as opposed to devoting time to assessing unknown risks.

It's a challenging task to dig for risks that aren't readily apparent. When board agendas don't allow enough time to tackle discussions about unknown risks, they may need to set up special meetings one or more times during the year for this purpose.

Awareness Is Key to Addressing Disruptive Risks

The National Association of Corporate Directors published a report by more than 25 board directors and leading governance experts called the NACD Disruptive Risks report. The guide gives boards insight on how to increase awareness of addressing unknown risks. The experts encourage boards and their management teams to explore what disruptive risks look like. From there, they can look for outside resources, including experts and information, that can help them to better assess risk. The report highlights the importance of board members being self-aware and fostering a culture of skepticism in board discussions.

Risk management should also be considered during succession planning. Boards that lack expertise in risk management should add it to the list of qualities their board needs.

Addressing Risk Management at the Right Times

According to a report by global leader, EY, boards perform their responsibilities best when they take a quarterly view of their duties.

EY advises boards to place a heavy focus on risk management issues during the first quarter of the year and revisit it as necessary throughout the rest of the cycle. Boards should focus heavily on the financial plan and approving strategy during the third quarter. The first and third quarters are good times for boards to prioritize evaluation and compensation plans for the CEO and other senior executives. The fourth quarter is the best time to focus on the budget. All year round, boards need to work on approving material transactions and monitoring managerial performance.

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.

The board and managers need to develop consistent risk language and reporting, as well as a common set of risk filters, so they can communicate the risk management plan and attain a collective understanding of it between the board and managers. When companies lack a common understanding of the organization's risk appetite, they won't be able to appropriately evaluate significant opportunities that consistently bring risks.

Risk management issues should appear consistently on board agendas and also be a part of ongoing board conversations. Boards must be aware that risks impact daily management processes and should be in line with the company's culture.

Management plays a key role in decision-making over risk management. Managers may be inclined to take more risks to enhance their own performances in the eyes of the board. As objectively as possible, managers need to consider the likelihood and impact of risks and analyze how they may interconnect. The impact of multiple risks simultaneously could be detrimental to the company. Knowing this, managers must measure risks against the company's risk appetite and capacity for handling the fallout. Armed with the proper information, managers can plan to accept, control, share or insure risks. In addition to interconnected risks, managers are wise not to gloss over risks that exist in silos and those that stem from the organization's broader business strategy.

Boards are challenged with coordinating planning and risk reporting cycles so that they have continual information about risk issues and can incorporate them into the overall business plan. With the awareness that risks are unpredictable, boards need to plan and practice responses to potential known events, so they can respond responsibly and quickly if circumstances require them to. Risk management also requires boards to keep all affected stakeholders informed about potential risks.

Board Management Software Programs Provide the Right Platform for Risk Management

Governance Cloud by Diligent provides a secure platform for boards and risk management committees to conduct their very important work. Governance Cloud incorporates a suite of governance solutions that support board meetings, D&O Questionnaires, board self-evaluations, voting and resolutions, and more. The software solutions are fully integrated into a board portal system that supports all governance functions. Diligent Messenger provides the top-level security for board collaborations and communications on risk management and other issues that far surpasses that of any personal or business email platforms. With Diligent Boards, Diligent Messenger and the other tools that Governance Cloud provides, board directors can conduct all of their board business within the security of one platform. Directors who serve on multiple boards have the added benefit of using only one log-in.

Risk management is a vital process for boards, so it makes complete sense to take advantage of governance tools to make the process smoother and as diligent as possible.