Risk & culture
A changing environment
Boards continually evolve and their focus changes over time. For a time, strategy was the big issue. Many boards didn’t spend enough time on strategy, spending time instead on matters of operational detail. Now, most boards have more strategic agendas and focus on the bigger issues and the longer term. But risk remains a thorny topic – what should boards do about risk and how much can be delegated to a committee?
Board’s focus on risk can be variable and, at times, less than rigorous. Most recently, the Covid-19 pandemic has highlighted shortfalls in many organisation’s approach to risk, particularly where they do not invest enough time, thinking and focus - and they see this as a tick-box exercise.
There are a number of common traps that boards fall into when looking at risk. Amongst these are: working off a long list of risks instead of focusing on the key ones, taking a static perspective rather than thinking through the impact of a changing business or regulatory environment and scanning the horizon for emerging risk, failing to consider low probability but high impact risk events, looking at individual risks in isolation rather than the impact linked risks may have - and not giving sufficient focus to risk culture at board meetings.
Boards are increasingly recognising the importance of the linkages between culture, risk and strategy. Culture is appearing on board agendas, and it is also a topic clearly on the regulators' radars. (The Financial Reporting Council’s report, entitled Corporate Culture and the Role of Boards, is a good starting point.) But culture remains a challenging area for boards to get to grips with.
The Risk Coalition
Hanif Barma, founder of Board Alchemy, is also a founder of the Risk Coalition. The Risk Coalition is a network of not-for-profit professional bodies and membership organisations committed to raising the standards of risk management in the UK. The Risk Coalition published Raising The Bar (download here) in December 2019. This sets out principles and guidance for board risk committees and risk functions in financial services - but much of this guidance is relevant and can be read across to other industries.
In developing the guidance, the Risk Coalition drew on industry, academic and regulatory best practice and consulted widely, including with the key UK financial regulators - all of whom are supportive the Risk Coalition’s work that raises risk standards across the industry. The Risk Coalition’s objectives for its principles-based guidance were to:
establish a common understanding of the purpose, role and activities of the board risk committee and risk function
provide a benchmark against which board risk committees and risk functions can be assessed objectively
raise the general standard of risk governance and oversight practice within UK financial services, and
fill the gap in the absence of principles-based good practice risk guidance whilst recognising the presence of detailed regulation.
You can find out more about the Risk Coalition’s work at https://riskcoalition.org.uk.
How we can help
At Board Alchemy, our philosophy in relation to risk is straightforward. The key risks a business faces are those that are most likely to crystallise and, therefore, to prevent the achievement of business objectives and delivery of its strategy. That means the starting point should be having clear strategic objectives - so the board should ask itself what is needed to achieve these objectives, and what might disrupt its plans.
At Board Alchemy, we work with our clients in a flexible way in relation to risk, ethics and culture by helping:
the board get clarity over its role in relation to risk, ethics and culture
improving the reporting of risk to the board
developing appropriate measures to help the board gauge culture
undertaking a review of the risk function to assess its effectiveness.