Across the pond

with David Anderson

David Anderson is President of the Anderson Governance Group

Unique position
This serves to align the perspectives of the
board and the management team on core risk
judgements. A board governing risk thus works
with management to align their judgements on
an acceptable appetite for risk and, given the
corporate strategy, adopt a set of trade-offs that
are most likely to yield an appropriate return.
So where do boards typically go wrong?

Boards need to get much better at

risk governance.

ntense pressure for tighter controls and a

sharper focus on risk from investors and
regulators continues to build on both sides
of the Atlantic. Consequently, boards are
spending more time on risk management. Is
this response producing more effective boards?
Should boards be managing or governing risk?
The UK Corporate Governance Code
emphasises the boards responsibility for
determining the nature and extent of the
significant risks it is willing to take in achieving
its strategic objectives. Wisely, provisions for
proper risk oversight are shared across the
principles of leadership, accountability and
remuneration, acknowledging the multi-faceted
nature of risk management.
Boards have been inclined to interpret
existing codes and guidance on risk
management to mean that they themselves
ought to engage in the finer details of risk
management. Certainly, correcting the wildly
lax risk management that characterised much
of the last decade and preventing massive
loss are necessary goals. To aid boards in
achieving those goals, some nuance may help:
it is management who needs to improve risk

management; boards need to get much better

at risk governance.
This distinction may be harder to draw
when half the board is made up of executive
directors, but it is that factor which makes the
distinction vital. The unique value of a board is
realised when it serves a governance function
distinct from managements function. To govern
means to oversee managements efforts. By
delving into risk management without a clear
understanding of this distinction, boards are
prone to diving deeply into managements
territory and forfeiting their unique ability to
add value.
Boards that can carve out a unique role
for themselves tend to govern risk more
effectively. They are in a better position to help
management optimise the costs and benefits of
risk (including the costs of mitigation efforts),
which are associated with corporate strategy.
These boards also oversee risk management
efforts, engaging in robust dialogue on
testing risk assumptions and scenarios and the
correlation between the two (a major blind
spot exacerbating the recent financial crisis),
and the variance assigned to risk outcomes.

While directors know that governing and

managing risk imposes a cost, they may
behave as if the costs are marginal. As
such they put the onus on management to
deliver relatively high returns, yet only accept
relatively low margins of risk. This encourages
management to restrict communication to
the board, under-reporting risks.
In an effort to understand risk and reduce
their liability, directors blur the governance/
management line in board meetings,
spending too much time on the details of
risk management.
In an area as nebulous and complex as risk,
some directors focus valuable time on areas
of personal interest or concern.
Boards are more likely to provide their unique
governance value and help management reach
a risk-optimised outcome when directors:
focus on risk governance;
consider strategy and risk simultaneously;
set the risk appetite for the organisation
from an owner perspective;
encourage a culture of innovation, which
praises creative failure within certain
financial bounds;
reward strategic and executional excellence
and associated risk awareness.
The mathematics and procedures of risk
management are well-understood. The
culture and behaviours that support good risk
governance are not so well-understood, nor
so readily articulated. Improving the quality
of human judgement and decision-making
within boards is our best bet for governing risk
intelligently and profitably.

About the author

David Anderson MBA PhD ICD.D is the
President of the Anderson Governance
Group based in Toronto. He can be
reached at david.anderson@taggra.com
and +1 (416) 815 1212.
w w w . c h a r t e r e d s e c r e t a r y. n e t

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