Getting stuck into it | Business Reporter

20 May 2012 ? By Stephen Overell

In the wake of the financial crises, Business Reporter looks at advice to help directors navigate future corporate traumas

The causes of the financial crisis were complex, but a failure of risk management at board level is at the top of the list for many commentators ? perhaps because it is a relatively easy area in which to identify practical reforms.

The Institute of Directors (IoD), will next month issue Business Risk: A Practical Guide for Board Members. This makes the point that board members are the main players in terms of managing risk. Their role in evaluating risk outweighs that of risk management specialists ?and even chief executives?, according to Roger Barker, head of corporate governance at the IoD.

In his 2009 report following the crisis City grandee Sir David Walker called for some structural reforms to financial service firms to beef up their risk capabilities. Audit committees should be split in two, one dealing with audit and another dealing with risk.

And he called for the appointment of chief risk officers in financial service firms.

But structures count for little if the right people with the right skills are not on boards, reckons Iain Coke, head of the financial service faculty at the Institute of Chartered Accountants. ?There were a variety of governance structures and none ensured success or failure during the crisis.? He argues that more people with risk management backgrounds need to be appointed to non-executive roles.

The Institute of Chartered Secretaries and Administrators will also issue a new guidance notethis month urging non-executives to ?satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust?.

The institute?s director of policy, Seumus Gillen says company boards should be able to decide their own governance arrangements.

However, on the wider issue of board behaviour in the build-up to the financial crisis, he is in no doubt that ?risk had not been taken seriously enough?. There was ?widespread governance dysfunction? with dominant chief executives able to get their way without being questioned sufficiently.

?There is never strategy without risk but in 2007 strategy became uncoupled from risk, says Gillen.

Today, he sees firms rediscovering risk: ?Risk management is like the brakes that make a car go faster.?

Risk analysis

The questions non-executives must ask

• What are the main risks the company faces, and how are these risks managed?
• What is the company?s risk appetite in the light of its strategic objectives?
• Does the company have sound and effective internal controls?
• How is the risk function viewed internally?
• Can it influence decisions at an early enough stage?
• Do board members have proper access to the chief risk officer?
• Is risk taken seriously in strategic discussions?
• Is good quality information available and are risk assessments underpinned by proper analysis?
• Is there anything about the nature and extent of the company?s business activities that would cause you concern both in terms of risk and personal ethical considerations?
• What insurance cover is available to directors and what is the company?s policy on indemnifying directors?

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