Question

write a policy brief to senior management and board of directors on any aspect of risk management detailing the rationale why they should accept your proposal

Answer 1

The past year has seen continued evolution in the political, legal and economic arenas as technological change accelerates. Innovation, new business models, dealmaking and rapidly evolving technologies are transforming competitive and industry landscapes and impacting companies’ strategic plans and prospects for sustainable, long-term value creation. Tax reform has created new opportunities and challenges for companies too. Meanwhile, the severe consequences that can flow from misconduct within an organization serve as a reminder that corporate operations are fraught with risk. Social and environmental issues, including heightened focus on income inequality and economic disparities, scrutiny of sexual misconduct issues and evolving views on climate change and natural disasters, have taken on a new salience in the public sphere, requiring companies to exercise utmost care to address legitimate issues and avoid public relations crises and liability.

Corporate risk taking and the monitoring of corporate risk remain prominently top of mind for boards of directors, investors, legislators and the media. Major institutional shareholders and proxy advisory firms increasingly evaluate risk oversight matters when considering withhold votes in uncontested director elections and routinely engage companies on risk-related topics. This focus on risk management has also led to increased scrutiny of compensation arrangements throughout the organization that have the potential for incentivizing excessive risk taking. Risk management is no longer simply a business and operational responsibility of management. It has also become a governance issue that is squarely within the oversight responsibility of the board. This post highlights a number of issues that have remained critical over the years and provides an update to reflect emerging and recent developments.

The focus on risk management is a top governance priority of institutional investors. In recent years, investors have pushed for more meaningful and transparent disclosures on boards’ activities and performance with respect to risk oversight, and a recent National Association of Corporate Directors (NACD) survey revealed that more than one in ten boards whose directors met with institutional investors specifically discussed risk oversight with these investors. In August 2017, Vanguard published several letters and reports that outlined four pillars underlying its evaluation of corporate governance practices, with the fourth pillar explicitly being risk oversight, on the theory that “directors are shareholders’ eyes and ears on risk” and “shareholders rely on a strong board to oversee the strategy for realizing opportunities and mitigating risks.”