Posts Tagged ‘Board of Directors and Enterprise Risk Management’
The Need for ERM Becomes More Evident
In this month’s issue of the Journal of Accountancy, Enterprise Risk Management (“ERM”) is profiled as a management discipline that has much room for improvement in many companies today. The authors of the article note that few companies have adopted a true ERM approach and a large number of companies have yet to see the value of implementing an ERM program. However, with the complexity and interconnection of risks increasing, many senior executives and board members are realizing the need for a solid ERM program in their company. Here is what the authors have to say.
Much of the shift in thinking about risk oversight has centered on ever-growing calls for boards and senior executives to embrace the business paradigm widely known as enterprise risk management (ERM). ERM is championed as an effective approach to identifying, assessing and monitoring risks across organizations and establishing communication protocols to efficiently share this risk information quickly across the entity. The ERM approach emphasizes a top-down, holistic view of the inventory of key risk exposures potentially affecting an enterprise’s ability to achieve its objectives. Proponents argue that a comprehensive ERM process helps to ensure that significant risks are given adequate consideration by senior management and boards of directors in the strategic planning process. Boards and senior executives use this inventory of risks with the goal of preserving and enhancing stakeholder value.
Is your company contemplating an ERM implementation? If so, Wheelhouse Advisors can help. To learn more, visit www.WheelhouseAdvisors.com.
Boards Are Reassessing Risk Management Practices
This month, Financial Executive Magazine highlights risk management survey results from a recent study by the National Association of Corporate Directors (NACD). Not surprisingly, board members indicate they are not very satisfied with their respective company’s risk management approach. Here is what they said.
More than half of audit committee members polled in the NACD survey said they were only somewhat or not satisfied that their board has effective processes in place to oversee the company’s risk management activities. Risk management has been on the radar — if not a priority — for most companies and boards over the past several years. Yet many are asking whether “the ball is being moved forward,” and whether risk needs to be considered in a different way. Nearly 75 percent of the audit committee members surveyed said they are reassessing risk management and oversight processes as a result of the financial crisis. One of their biggest challenges, they said, is understanding the link between strategy and risk; and many are concerned that management may not have a holistic view of the company’s risk profile.
A true enterprise risk management program is required to address these challenges. Wheelhouse Advisors can help. To learn more, visit www.WheelhouseAdvisors.com.
Board of Directors Under Attack
In the wake of the financial crisis of 2008, boards of directors are coming under attack for their role in overseeing companies at the center of the firestorm. Evidence can be found in yesterday’s announcement by a prominent proxy advisory firm that it is recommending the removal of directors at Citigroup. Here is a summary of their case against the directors as reported in the Wall Street Journal.
Proxy-advisory firm Egan-Jones is recommending that Citigroup Inc. shareholders withhold votes for six incumbent directors at the annual meeting April 21, saying the current or former members of the board’s audit and risk management committee failed to fulfill their risk-management responsibilities. Egan-Jones said the directors in question — Michael Armstrong, Alain Belda, John Deutch, Andrew Liveris, Anne Mulcahy and Judith Rodin — “failed to protect shareholders from excessive exposure to credit, market, liquidity and operational risk.” The firm added that Citi’s board failed to effectively manage risks, “helping cause the company’s current instability and increasing volatility in the global financial markets.” Egan-Jones cited as examples of that failure an increase in Citi’s exposure to mortgage-related assets from $28 billion in 2005 to $234 billion in 2006, as well as an 85% increase in the number of subprime mortgages originated. Citi’s 2008 losses “are a clear indication that the committee failed to properly assess and control risks,” Egan-Jones said.
Directors at other companies should take heed of this action and ensure their corporate governance and enterprise risk management practices are solid. Wheelhouse Advisors can help board audit and risk committees gauge the effectiveness of their current practices. Visit www.WheelhouseAdvisors.com to learn more.
A Renewed Focus on Risk
In the wake of the current financial crisis, many changes will need to occur to strengthen management practices and to provide stability to corporate performance. A prediction for one such change was offered in this week’s edition of Compliance Week. Stephen Davis and Jon Lukomnik believe that the discussion in many boardrooms will change in dramatic ways – and for the better. Here’s what they had to say.
Strategy re-enters the boardroom, through the risk door. After a decade in which directors have at times felt like compliance cops, they’re probably not looking forward to what some have called their new role: risk regulation. But calls for “risk committees,” for dedicated risk expertise in the boardroom, for linking executive compensation to risk taking, and for comprehensive enterprise risk management programs, will be welcomed in hindsight. Why? Because determining the appropriate risk profile for a company is fundamentally a strategic planning exercise. As a result, there will be a renewed focus on directors with appropriate domain expertise.
Let’s hope boards are willing and able to integrate a risk viewpoint in their strategy discussions with management. Without it, many companies will continue flying blind.
Board Members Agree – ERM is Top Priority
As we move into the fourth quarter of a year filled with major corporate calamities, a recent survey of over 1,000 public company board members points to the need for stronger enterprise risk management. Today, Corporate Board Member magazine released the results of their 7th annual survey entitled “What Board Members Think”. This survey, conducted by PricewaterhouseCoopers, highlights the board members’ belief that shareholders deserve greater assurance that risks will be effectively managed. The magazine reported the following.
When asked if they felt their board members could adequately meet the responsibility of monitoring the company’s multitude of risks, 81 percent of directors felt their board was capable; yet only 50 percent said their board was effective or very effective at monitoring a risk management plan to mitigate corporate exposures.
Based on this survey, board members seem to understand their role and also, more importantly, seem willing to address the challenge of holding management accountable for building and maintaining strong enterprise risk management programs. Do you agree with these results? Share your thoughts below.
What Should Board Members Be Doing Now?
In times like these, the tension in most corporate board rooms is thick, but many board members may not be taking the necessary actions to ensure that they or their fellow members are not unduly exposed. At the core of the issue is requiring management to establish a solid Enterprise Risk Management (“ERM”) program that surfaces the appropriate issues and holds management accountable for addressing risks in a proactive manner.
“Now, more boards may take a bigger role in risk management. During a Sept. 9 roundtable held by the National Association of Corporate Directors, 24 chairmen of audit committees agreed “the whole board needed to be engaged” in monitoring risk, an association official says.”
- Pick directors with temperament, skills and experience to spot warning signs
- Engage in regular scenario planning
- Choose independent law firm as future crisis adviser
- Create an effective risk-management committee
- Appoint a nonexecutive chairman
- Develop and practice an emergency communications system
- Prepare for special committee to explore crisis’s cause and remedies
Board members are realizing that in today’s turburlent climate, a lack of action toward addressing a company’s risks can be more deadly than originally thought. Just ask the board members at Lehman, they can surely tell you.
