Risk Management and the Board: Lessons learned from the COVID-19 crisis.

• Author: Oates, Brad
• Position: THE AGE OF RISK: Boards in Crisis

One of the most important skills for a board member is the ability to think strategically about risk management and that thinking requires looking at redundancy, diversity in the supply chain, and both financial and talent capacity within our organizations. Examining each of those should be viewed more as a productive investment than an unproductive cost.

We have focused on a relentless pursuit of efficiency for the past 30 to 40 years, looking to seize the day and maximize our financial returns with technology advances helping us to become more efficient more quickly. In doing so, we have created fragile--as much as agile--management and production systems. The fully loaded cost of risk management gaps and weaknesses is exposed in crisis situations, whether from supply or demand shocks to an economy.

The lesson here is there is always a risk cost of not having diversity, redundancy and capacity in our systems, and that risk cost is now showing up clearly in the COVID-19 crisis. Let's be honest with ourselves--we took out as much current expense as we could and there was always a risk cost to taking out those expenses. When we run the financial model, it is clear we did not "flatten the risk curve" and will pay a much higher net present cost for not doing so.

The unprecedented amount of stimulus injected into the economy will impact the long term. Perhaps the most important question will be who ultimately bears all imaginable "tail risk." What is the long-term impact of simply moving excess leverage from companies to the government? Make no mistake, this will have consequences.

We need to step back and think about what we created. We wanted process efficiency, and we found leaders who have run companies with maximum efficiency and adopted compensation structures to drive and motivate that even further.

We were on a path to create better clarity between tactical and strategic governance with the last year's debate of stakeholder vs. shareholder models. As an optimist, I think this current crisis will accelerate the trend to strategic governance and help us find the right balance for stakeholder interests, including shareholder financial interests. Efficiency is more tactical, while harmonizing shareholder and stakeholder interests is strategic intelligence. True competitive advantage comes from mastering both sets of skills.

As a result of these governance trends, x the bar for directors has been raised substantially --and it was already...