Corporate Risk Management

CHAPTER 18Risk Management and Corporate Governance

The objectives of the risk management policy and those of maximizing firm value (or the value of shareholder's equity) reveal a potential conflict of interest that is directly linked to the question of corporate governance.¹ In fact, the board of directors must approve the objectives outlined by the firm's risk management policy, define the firm's risk appetite, and oversee the means used to attain the objectives set, including the controls of the risk management activities. We can then ask whether the board of director's risk and audit committees should be made up of independent directors only, as in other committees, according to the new rules discussed or already applied in many countries following the Enron affair and the 2007–2009 financial crisis.

This topic is relevant because many firms, particularly banks and insurance companies, have specific risk committees on the board. However, as we will see below, most documents that proposed new governance rules in 2002 regulated only the audit committee regarding all aspects of risk management. This decision underestimates the importance of risks in many business sectors along with governance conflicts that may arise from risk management. In addition, the requirements related to the members of risk committees' competencies may differ.

18.1 ENRON AND CORPORATE GOVERNANCE

The board of directors' main role is to represent shareholders' interests. The board thus aims to maximize ...