Enterprise Risk Management: From Incentives to Controls, 2nd Edition

CHAPTER 22

Role of the Board

A transformation is under way at boards of directors with respect to their role in ERM. In the wake of the global financial crisis of 2008, boards are taking a much more active role in risk oversight. They are reexamining governance structure and roles, risk policies and limits, as well as assurance and reporting processes.

This change indicates a very significant and positive shift in the way corporate boards oversee risk management. Of the key groups that provide independent risk monitoring—boards, auditors, regulators, rating agencies, and institutional investors—the board of directors is the only group with both the direct responsibility and the greatest leverage in ensuring that sound risk management is in place.

At most organizations, corporate management would bend over backward to satisfy board demands. By asking tough questions and establishing board expectations with regard to ERM, the board can set the tone from the top and effect significant change in the risk culture and practices of an organization. Recent surveys have reported that board members recognize the importance of ERM, and even indicate that risk management has replaced accounting issues as the top board concern. For instance, accounting firm Eisner LLP conducted a study in 2010 of more than 100 directors sitting on a variety of cross-industry boards. It revealed that directors ranked both risk assessment and the incorporation of financial models into strategic decision-making ...