It is the responsibility of management to provide the members of the board with sufficient information to enable them to understand the company’s risk profile, including information regarding the external and internal risk environment that the company and its industry face, the specific material risk exposures affecting the company’s current and future operations (including financial and other risks), how risks are assessed and prioritized by the management team, risk response strategies, implementation of risk management procedures and infrastructure, and the strength and weaknesses of the overall system. The variety and severity of risks to which a company is exposed, and the extent to which the company can “manage” such risks, depend on many factors, and it is crucial that the board and management share an understanding-which should be updated on an ongoing basis and revised as appropriate-as to the company’s overall tolerance for risk. One of the most important elements in effective oversight of risk management is direct communication between members of the board and members of senior management, including senior management executives responsible for risk management. There are a number of important elements to risk oversight by a board of directors that can be addressed through effective communication between the board of directors and members of senior management, effective communication among board members, board committees, and board advisors and effective coordination among all of the participants.Ĭommunications between the board of directors and members of senior management. The goal should not be to eliminate risk, but to make sure that risks are understood and appropriately managed the management team is responsible for managing the risks, while the board of directors’ role should be one of oversight. However, it is important for directors to take steps to be well-informed as to the company’s risk profile, to discuss and evaluate risk scenarios and to satisfy themselves on an ongoing basis as to the adequacy of management’s efforts to address material risks. What needs to be understood, though, is that there is no way to eliminate risk, nor would any enterprise be well-served by attempting to do so. As a result, along with the task of implementing corporate governance procedures and guidelines, a company’s board of directors is expected to take a leading role in overseeing risk management structures and policies. Just as the Enron and other high-profile corporate scandals were seen as resulting from a lack of ethics and oversight, the credit market meltdown and resulting financial crisis have been blamed in large part on inadequate risk management by corporations and their boards of directors. One might say that “risk management” is the new “hot topic” in corporate governance.
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