The Risk Management Gap
| Date | 01 November 2017 |
| Author | Matthew Leitch |
| DOI | http://doi.org/10.1002/bl.30088 |
| Published date | 01 November 2017 |
ALSO IN THIS ISSUE
What Role Do You PlaY in BoaRD
ConveRsations? ..................... 4
FooD FoR thought .................. 4
CalenDaR oF events ................ 6
NUMBER 154, NOV.–DEC. 2017
www.boardleadershipnewsletter.com
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The Risk Management Gap
by Matthew Leitch
Risk is one of the most important topics addressed in the boardroom. It is also one
of the trickiest. In this article, Matthew Leitch, a member of the Centre for Risk
Research and a coauthor of the Southampton Business School’s guide, “Directing
Risk Management in Organizations,” starts from the perspective that the received
wisdom that the board can somehow be directly involved in every decision
involving risk in their organization, because they have considered the principal
risks, and set a risk appetite is a fantasy. The reality he explores here is that most
of the thinking that takes place in an organization does not involve the board and
requires a quantity of thinking that is orders of magnitude more than the board
itself can deal with.
BOARD LEADERSHIP
INNOVATIVE APPROACHES TO GOVERNANCE
View this newsletter online at wileyonlinelibrary.com
Board Leadership • DOI: 10.1002/bl • Nov.-Dec. 2017
Over the past 25 years or so, a large
gap has opened up between
what boards are told they should do
to manage risk and what most people
really think they should do in practical
situations because it is logical, natural,
and much more likely to be effec-
tive. This article explains and briefly
critiques the received wisdom, then
explains what most people actually
prefer. This is based on several surveys
as well as many conversations and
observations of cases.
The Received Wisdom
Since the early 1990s the clear
trend of corporate risk management
advice and regulation has been toward
setting up a corporate process based
on the idea of filling in a risk register
with a list of risks. This is conveyed
by the language of guidance, which
repeatedly talks about “risks,” and
in the process described, which boils
down to making a list of risks, then
deciding what to do about them, and
doing it. There is usually much associ-
ated guidance about roles, monitoring,
and so on, but the core of the system
is the risk listing process.
(In this description, we must set
aside financial services, where the
guidance has often had a different
focus because of the widespread use
of quantitative modeling and decision
theoretical methods.)
The risk list is often used to select
the “top ten” or principal risks, and
to generate a “heat map” diagram.
Risks are often rated for their prob-
ability of occurrence and impact if they
do occur, then assigned colors based
on these. Most readers will recognize
these methods easily, having seen
New Research on Board
Chairs
INSEAD business school has
published an illuminating new
report, “Board Chairs’ Practices
Across Countries.” As the preface
states, “They have no executive
power but preside over the most
powerful body in the organization—
the board of directors. Their per-
formance is critically important for
every company but they still need
help to improve it. Yet they have no
boss, no peers, no one to turn to
for advice. They learn mostly by trial
and error.”
You can see the full report at
https://centres.insead.edu/
corporate-governance/meeting-
reports/documents/BoardChair-
sPracticesacrossCountries_razv.pdf.
The Necessary and Sufficient
Conditions for Legitimate
Capitalism
The Maturity Institute, which was
created in 2012 for the purpose
of maximizing the value of people
to maximize the value for society,
has recently written an open letter
to the senior partners of the “Big
Four” accounting firms: Deloitte,
EY, PwC, and KPMG. They refer to
their single-measure “Total Stake-
holder Value (TSV)” that combines
the best of profitability, shareholder
returns, company valuation, and
societal benefits.
NEWS
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