The corporate board has to review and analyze all the risks their organization is undergoing or will face soon. But are they ready to take new risks? Is their risk tolerance level high enough to accept new initiatives? David Koenig, the founder of the Directors and Chief Risk Officers Group (DCRO), says, “If boards really understand how to take risks well, their organizations will do better.” In this article at strategy+business, Michele Wucker shares how organizational development depends on the corporate board’s risk tolerance level.
Risk Tolerance Level of the Board
Investors and executives recently discovered that the corporate board was not managing risks well, and it should improve its risk tolerance level for the betterment of the firm. Since regulators are also monitoring the governance mechanisms of organizations, board members invested heavily in risk management tools. As conveyed by Transparency Market Research, this resulted in positive market growth for enterprise risk management tools by USD 4 billion in 2019.
However, corporate boards must realize that risk management should not merely be a process. Per Institutional Investor Services report, ‘good corporate governance were more profitable, had higher stock market returns and dividend payouts, and less risky investments than those with weak governance structures’.
Action So Far
Recognizing the need for ramping up risk governance, some corporate boards are taking steps. A Spencer Stuart study indicates that 12 percent of S&P 500 companies had risk teams in 2019 compared to 9 percent in 2014. Additionally, the performance of 95 percent of S&P 500 enterprises and 80 percent of Russell 3000 companies are regularly assessed. In the recent Annual Corporate Directors Survey by PwC, 72 percent of directors are changing their protocols based on the assessments they are receiving. However, 20 percent believe that the reviews are not so effective.
Per Koenig, the majority of the changes in the risk tolerance level occur because an influential member has previously experienced profitable transformations. Additionally, risk management platforms also help in achieving greater visibility. The National Association of Corporate Directors and the Committee of Sponsoring Organizations of the Treadway Commission have developed risk guidelines for various corporate boards. These expert insights and actions could help if your board of directors does not work in isolation.
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