Effective Risk Oversight Begins with Triage

Most senior legal executives report that risk management is a top priority for their Boards in 2009, But do they have the right oversight structure to effectively address it?

By The Staff of the Corporate Executive Board

In a recessionary economy that brings increased operating exposure, it is no surprise that risk management is at or near the top of a majority of companies' 2009 board agendas. For companies placing a renewed emphasis on this issue, the key to effective oversight lies in whether or not their boards adopt appropriate and structured risk oversight processes.

A recent survey by the Corporate Executive Board of leading senior midsized company legal executives indicates that companies typically assign board-level risk oversight to one of two entities: the audit committee or the board as a whole. Yet, there are potential downsides to each approach. As the audit committee's expertise lies more squarely on financial risks, assigning it broad risk oversight can prevent it from focusing on its core responsibilities.

Alternatively, tasking the entire board with the responsibility can lead to an overemphasis on certain risk areas at the cost of attention to others, such as industry-specific risks.

In an analysis of companies with leading governance practices, the Corporate Executive Board finds that a mixed 'triage' method that matches risks with the board-level entity best equipped to handle them is most effective.

Companies should begin by grouping individual risks into more broadly-defined categories, such as operational, legal, financial, or industry-specific. From there, they can "triage" risks by aligning each category to a separate board committee or the full board, based on expertise. Finally, to demonstrate accountability and transparency into risk management efforts, companies should incorporate risk ownership guidelines into all board and committee charters..

By blending risk oversight across the full board and its committees, company-wide mitigation strategies can improve while providing greater accountability to shareholders and regulators.

Provided by Corporate Executive Board —What the Best Companies Do™

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