10 things every director should know about risk; The focus on risk has only just begun. If you don't have a regular risk assessment program or a risk committee on your board, you will.

• Author: Kiernan, Peter D.
• Position: RISK OVERSIGHT

A SPECTER IS HAUNTING the boardroom. In all its forms and guises the nature of the apparition can be distilled to a single word--risk. More than any time in our history, companies are coping with the teeming array of risks that characterize their daily operations. And many boards are underinformed or, worse, unaware.

It has become standard to decry the risk assessments of the major Wall Street firms and the banks, as if they alone possess the balance sheets so striven with endlessly worrying volatilities. But ask not, fellow directors, for whom that risk bell tolls ... it tolls for thee.

What has occurred is an explosion of trading and investing based on a simple notion--volatility has value. Every company has volatility, and most do not manage it well enough. As the trillion dollarplus hedge fund and derivative markets break down assets and flows of every type into subatomic parts, a viral sort of liquidity has occurred. Once assets fractionate and trade, then an essential ingredient of a well-managed organization is a keen aptitude for evaluating the risks. This complex valuation of risks is the new normal.

The board of directors is the ultimate risk manager. The board should be engaged in both the policies and the policing of risk management. Put more succinctly, if you are not managing your volatilities, you can be sure that there are legions of traders betting against you.

How your board of directors manages risk can be debated, but recent history indicates few companies' boards have a real grasp of the subject matter. Despite the acknowledged unpreparedness, the reaction of many boards, particularly nonfinancial institution boards, has been timid against the new challenge. It is inconceivable that a major review of risk is not a constant in any board review of operations For some companies the audit committee may be the apt place for such a review. But for many others a risk committee is entirely in order.

What follows are 10 observations that should be in the mind of any informed director regardless of how a board structures itself to address risk.

[ILLUSTRATION OMITTED]

1. Risk is not a monopoly of Wall Street

   Every business has obvious and hidden risks shot through it. And like it or not there are people actively betting that your company, or a collection of your peer companies, are thinking unintelligently about managing the volatility inherent in your business. You may know more about the underlying commercial enterprise of your company, but make no mistake as you read these words: people are betting against you. From the simple fixed to floating interest rate swaps to a whole world of complex derivatives, it is highly likely that you are making decisions based on a market view. Because there is so much detail involved in derivatives, most boards are reluctant to micromanage. Fair enough. But without an overarching view of the...