Risk Management and Compliance

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

Risk Management and Compliance 87

CHAPTER 7

RISK MANAGEMENT

AND COMPLIANCE

Ask directors of corporate boa rds 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 m istakes 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 ra mifications. Counsel is often

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

negative cons equence of risk a nd noncomplianc e. Further more, general

counsel is typically par t of the firm’s executive committee that assumes

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

this chapter will address two ty pes of risk: decision-making risk and fi nan-

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, chang e a supplier, and so forth—involve