Boards need to make risk management a fundamental element of their job due to the complexity of modern business and its constant pursuit of competitive advantage. Yet, an EY survey of board members suggests that the level of risk management in many companies is minimal at best. Many board members struggle his response to keep up with the pace, whether it’s in the format or structure for risk reporting or the number times they engage this topic.
There are some steps that can be taken to assist.
Boards should first create clear reporting frameworks to aid them to understand the risks their companies are facing. This should include a clear breakdown of the kinds of risks that need monitoring (financial and operational, reputational etc.). A clear and concise framework makes it easier for the board of directors to formulate the right questions about risk management and to know which answers are trustworthy.
Second, the board needs to employ sophisticated tools to assess risks and decide on the most appropriate mix of risk-taking. In addition to the more traditional options, such as Value at Risk (VaR) models, tools like Monte Carlo simulation can bring this method into the modern age of science and allow the creation of thousands of scenarios that weigh the likelihood of profit or loss against the impact on the company’s operating strategy and strategy.
In the end, the board must be able monitor the most influential indicators of the risks it’s facing. It should also include trigger-based actions that are activated when the trend isn’t positive. This will enable the board to react quickly in times of crisis such as ransomware.
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