In this day, most companies are exposed to risks that go beyond financial risks. Thus risk warrants a separate discussion of its own. Every element of strategy involves investment and risk. Most risk are small enough or low enough in probability that they are manageable. But if the perfect storm arrives, the company could face a threat.
All too often, any discussion of risk beyond financial takes place piecemeal, capital expenditure, for example. But it is often a combination of operating risk and financial risk that compound to put survival in question.
The board can expand its monitoring function by examining the links between risks in the business—whether driven by factors in execution, competition, customers, supply chain, economy, or natural disaster—and financial health. It can also help the CEO stress test the strategy to see what happens to the company’s liquidity under variety of circumstances.
There are many types of risk to consider, beginning with financial risk. How sensitive is the business to interest rate movements? What might put the credit rating at risk?
Then there is political, legislative, regulatory risk. What if new tariff make raw material more expensive? What if laws are eased to make it easier for new competitors to enter the industry?
Some boards are forming Risk Committees to assure themselves that management understands the major risks the company faces. The committees can work with management to examine the risk factors and identify where risks may concentrate or compound. While the Risk Committee can take the lead and make recommendations, the whole board should involve it self with risk assessment in one board meeting per year. The full board must understand the most dangerous and likely risk and help management think through the implications.
Source: Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage, John Wiley & sons, Inc., 2005
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