Risk management has always been one of the most important tasks of boards. But this year’s pandemic has brought that responsibility into sharp focus. In the midst of rapid changes, boards must be able and grow. They need to understand how external developments can impact the risk landscape as well as long-term trends.
To achieve this, they must be able to evaluate the risks of projects that are new or existing in a non-biased manner. It is possible to spot potential problems using a simple red-amber green assessment, but it isn’t always easy for boards to get a precise understanding of the risks. Boards can benefit from using quantitative strategies to encourage clearer communication between the board and management and also assist the board understand the management’s risk tolerance.
More sophisticated tools, like ones derived from option pricing (the mathematical technique used to calculate the theoretical cost of an equity option) can be extremely useful for helping to evaluate risk and prioritise emerging issues. They can, for example assist in determining how much a project is exposed to credit or oil price risks and highlight the risks management strategies.
The board should also take advantage of the information it has on the risk profile of a company to inform its strategic planning and review and monitor internal controls. It should also ensure that the other board committees including audit, compliance and strategy – share the same understanding of the risk profile of the company.
