Risk Management and Compliance

• Author: Bert Spector
• Profession: Professor of Strategy at Northeastern University
• Pages: 87-101

Risk Management and Compliance 87

CHAPTER7

RISK MANAGEMENT

AND COMPLIANCE

Ask directors of corporate boards what keeps them up at night, and the

answer typically comes down to one word: risk. Unanticipated, unknown dis-

ruptio ns caused by both ext ernal a nd interna l factor s: tsunam is and gove rn-

ment actions as well as financial reporting mistakes and even fraud. Then

ask a follow-up question: other than shareholder value and bottom-line per-

formance, what should boards pay the most attention to? The answer comes

back: risk management. Clearly, risk is a topic that demands consideration.

Risk management has important legal ramifications. Counsel is often

involved in crafting a response when companies are forced to deal with the

negative consequence of risk and noncompliance. Furthermore, general

counsel is typically part of the firm’s executive committee that assumes

primary oversight of companywide risks. To help appreciate the challenge,

this chapter will address two types of risk: decision-making risk and finan-

cial controls risk.

The Nature of Risk

Business decisions—whether to invest in a new product, move to a new over-

seas market, buy or sell an asset, change a supplier, and so forth—involve