Risk Management and the role
of the Board
Risk Oversight and Good Governance
Dugald Ross
Jeito Board Reviews
November 2013
Who are we?
Dugald Ross; B.Econ
Jeito Pty Ltd
Australian & UK
Expertise in financial market operational
risks and board oversight
Jeito Pty Ltd
Consulting firm with a global focus on the
Web delivery of reviews of third sector
Boards
‘Jeito’ (pronounced ‘J2′ ) is Brasilian/Portuguese
slang meaning “the knack,” which sums up
our vision to find the right solution to our
client’s needs.
2
Points to Understand – focus that RM begins with
good governance
• Good risk management is a key component of
good governance
• Risk failures are usually a result of poor
governance
• The boards role in risk management is of oversight
• Risk oversight is a continual process of questions,
decisions, feedback and review.
Risk Failures at the Heart of the Financial Crisis
“It is clear that governance failures contributed
materially to excessive risk taking in the lead up to
the financial crisis. Weaknesses in risk management,
board quality and practice, control of remuneration,
and in the exercise of ownership rights need to be
addressed in the UK and internationally to minimise
the risk of a recurrence
Walker Review of corporate governance of UK banks and other
financial entities: July 2009
Why the Failures?
Why did some financial institutions fail or need public
rescue, some came close to the brink but many
others weather the storm and continue to operate
profitably?
Part of the answer is differences in business
models….. But a significant part, was the differences
in the quality of their corporate governance.
THE IMPORTANCE OF GOOD GOVERNANCE speech by JOHN F LAKER Chair of
Australian Prudential Regulation Authority to the Australian British Chamber of Commerce,
Melbourne 27 February 2013
Risk Oversight Failures – a Governance Issue
The inability of many Boards to accurately identify
and understand the risks inherent in their
businesses is seen as the main governance failure
leading to the crisis. …………………….
Their risk appetite was vague.
THE IMPORTANCE OF GOOD GOVERNANCE speech by JOHN F LAKER Chair of
Australian Prudential Regulation Authority to the Australian British Chamber of
Commerce, Melbourne 27 February 2013
Egregious Cultural failures
Corporate culture is widely seen as a difficult and
complex issue, but the egregious cultural failures
that lie behind the lamentable story that is now
emerging in relation to the conduct of some banks
make action essential.
Values and ethical standards, and the overall culture
in which they are embedded, are keystones of
governance in any corporate entity.
‘Banks must solve the problems of ethics’ by Roger Ferguson, John
Heimann, William Rhodes, Sir David Walker .Times newspaper August
22 2012
What is happening in the world today?
Focus world wide is increasing on risk management
and good governance
• What is new?
• Comply or Explain
• Insurance wont save you from poor performance
Board‘s Role in Risk
Oversight
Risk Oversight v Risk Management
The board should provide oversight and
guidance for ‘the systems and processes
concerned with ensuring the overall direction,
supervision and accountability of an organisation.’
Chris Cornforth Governance Overview, Governance and
Participation project, Co-operatives UK, 2004
Management should provide the risk management
implementation
Risk Complacency
“Just 15 per cent of directors reported a very good
understanding of the risks their company faces, 54
per cent a good understanding, while almost one
third (29 per cent) said they either have a limited
or no understanding. The remaining two per cent
said they did not know.”
There is little variation from a previous study in 2011
Improving board governance Mckinsey global survey results 2013
Co-operatives UK Findings
• The Boards role in risk oversight is misunderstood
• They see it as managements role to report and
provide instruction.
• They forget the board has the ultimate
responsibility and is responsible for oversight
Risk Governance and Risk Management Cycle
BOARD
oversight and
adequacy
BOARD
understand and
relate to strategy
Identify and
Accept Risk
Board
Reviews
Test Review
Report
Procedures
Control and
Manage
Risks
Monitor risks
Management to Implement
Risk Oversight Foundations
Risk oversight IS NOT a process with a beginning
and an end.
It is continual process from which to make sound
decisions in two areas of oversight.
1. oversight of critical risks and risk decisions (risk
governance)
2. oversight of enterprise risk programs (risk
management).
Appropriate Risk Oversight – ‘No one size fits all’
• Strategy and risk management are linked.
• An Intelligent risk management culture is never an
impediment and should more than just a
supplement.
• It should fit the organisation, and the role of the
board is to ensure the risk management framework
is appropriately designed, adapted, implemented
and becomes an integral part of an organisations
decision making culture.
The Upside to Oversight and Good Governance
Healthy risk oversight is not just about risk avoidance
Setting Culture
Improved education, communication
and innovation
Preparation for crisis
Better understanding of processes
across an organisation
Building Morale
Better decision making
Governance Codes & Risk
Good Governance
Good governance should be thought of as a floor
– not as a ceiling
Good Governance is all about
•
•
•
•
•
•
Recognising and accepting risk – don’t be afraid
Setting the appropriate risk oversight.
Setting the culture from the top
Question, question, question
Ensuring the board is a high performance board
Review and assessment
What the code wants from Societies
Provide
statements of
recommendations
Comply with
requests for
Information
Support the code
in your rules
Provide reasons
for non
compliance
High
Performance
Board meeting
minimum
standards
Provide Reasons
for
appropriateness
Four Themes to Improve Risk Oversight
Board
Capabilities
Board
Values and
Culture
Board
Information
Risk
Governance
Financial Stability Board (FSB) Thematic Review on Risk Governance Peer
Review Report 12 February 2013
Board Capabilities
‘Many boards simply lacked the financial industry
experience and understanding of market
complexities needed to ensure they could perform
their fundamental role of independent and
objective oversight. They had inadequate skills,
technical expertise or confidence — to
challenge a dominant or ‘imperial’ chief executive
officer (CEO) pursuing aggressive growth
strategies.
JOHN F LAKER Chair of Australian Prudential Regulation Authority speech
to the Australian British Chamber of Commerce, Melbourne February 2013
Not Just Skills - but Behaviour
Too often directors were unable to dedicate sufficient
time to understand the firm’s business model and too
deferential to senior management.
Financial Stability Board (FSB) Thematic Review on Risk Governance Peer Review
Report 12 February 2013
Understanding Your Board Capabilities
Attitudes
& Values
Knowledge
Performance Assessments
of Board & Members
Skills
Skills Self Assessments
by Members
Board Values - Culture and Ethics
‘The crisis exposed significant shortcomings in the
governance and risk management of firms and the
culture and ethics which underpin them. This
is not principally a structural issue. It is a failure in
behaviour, attitude and in some cases, competence.’
Sants, H, Delivering effective corporate governance: the financial
regulators role, Speech at Merchant Taylors’ Hall, April 2012.
Board Values - Culture and Ethics
Values and ethical standards, and the overall culture in
which they are embedded, are keystones of governance
in any corporate entity.
‘Banks must solve the problems of ethics’ by Roger Ferguson, John
Heimann, William Rhodes, Sir David Walker .Times newspaper August 22
2012
Risk Culture – an example of poor standards
A poor risk culture was not consistent with the risk
appetite and can manifest itself in a number of ways.
• Lack of understanding
• Lack of candour in the relationship between board
and management
• Headstrong front-office leaders always looking to
push the risk control boundaries, that passes the
ownership of risk to the risk management function or
internal audit. Business areas must be the owners of
risk.
JOHN F LAKER Chair of Australian Prudential
Regulation Authority speech to the Australian British
Chamber of Commerce, Melbourne February 2013
Setting corporate culture as ‘Risk Intelligent’
• The board should encourage and set the tone for
an organisations risk culture.
• The board should understand how their strategies
and incentives reward and encourage people to
take risks intelligently.
• This is why risk oversight is a continual process of
defining, measuring, reviewing and questioning.
Board Information - What is Needed
• Timely, relevant & comprehensive information
• Reports that can be easily digested by the board
• A holistic view of the risk exposures of their institution
Reports
• Information not heavily filtered by management hierarchy
nor reaching the board late and/or distorted.
JOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the Australian British
Chamber of Commerce, Melbourne February 2013
Board Information - Integrity in Financial Reporting
• Can I trust the data?
• Does it cover the critical
issues?
• Is it sufficiently up to date?
• Can I digest it quickly ?
• Does it cover future as well as
historical?
• Does it include a holistic
perspective?
• Is it in relevant time context?
CIMA Performance Reporting to Boards. A Guide to Good Practice
Risk Governance Issues
• Inability to accurately identify and understand risks
• Inability to ensure robust structures for managing and
reporting on these risks
o Unclear definitions as to the degree and nature of
risks.
o Vague risk appetite.
o Lacking the stature, authority and independence to
challenge the business areas;
o Unclear accountability and lines of reporting to the
board
o Inadequate experience or independence from
management or the board
JOHN F LAKER Chair of Australian Prudential Regulation Authority speech to the Australian
British Chamber of Commerce, Melbourne February 2013
Independent Assessment of Risk Framework
• Independent assurance that the risk governance
framework works and works as intended.
• However, such internal or external audits and
assessments tend to be compliance-focussed.
• Internal audit don’t reveal external trends and/or align
with best practices.
JOHN F LAKER Chair of Australian Prudential Regulation
Authority speech to the Australian British Chamber of
Commerce, Melbourne February 2013
Questions About Your Risk Processes
• Does your risk management method work?
• Would anyone on the Board know if it didn’t
work?
• If it didn’t work what would be the
consequences?
Blank thoughts?
Assessing Board Performance – is your board adding value
in terms of its risk management and performance?
The most valuable outcome of a board
evaluation is that it helps to bring
“issues to the surface”; and allows
directors to “stand back” from day to day
matters and improve the performance of
the board as a whole.
Evaluating the Performance UK Boards: Lessons from the
FTSE350 – The All Parliamentary Corporate Governance
Group 2007.
Thank You
Dugald Ross
dugald ross@jeito.org.uk
+44 (0) 779 582 4162