Boards www.boardroomteen.com/best-governance-strategy-examples/ have always had a fundamental function: managing risk. This year’s pandemic brought this obligation to the forefront. In a world where risks can change rapidly, it’s vital for boards to be in a learning mode and understand how the latest external developments are changing the risk landscape, as well as longer-term developments that could impact their business.
To achieve this, they must be able assess the risks of new and established projects objectively. It is possible to spot the potential issues using a simple red-amber-green analysis, however it isn’t always easy for boards to gain an accurate understanding of risks. Boards can benefit from employing quantitative methods to facilitate better communication between managers and the boards, and also to help the board understand the management’s risk-taking appetite.
More sophisticated tools, such as ones derived from options pricing (the mathematical method used to calculate the theoretical cost of an equity option) can be extremely useful in helping to assess the risk and prioritize issues that may arise. For instance, they can help to highlight the extent to which a project is at risk from oil price risks or credit risk, and reveal how risk-taking has been taken care of.
The board should also make use of its knowledge of the risk profile of the company in order to inform its strategic planning process and review and monitor internal controls. It should also make sure that the other board committees including audit, compliance and strategy share the same understanding of the risk profile of the business.
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