Managing risk effectively

Setting up and staying in business can be risky, and therefore understanding how to best manage that risk is really important. Having a strong board can play an important role in mitigating risk.

Only a few businesses grow if they are completely risk-averse, but reckless decision making also causes business failure. Effective risk management sits at the heart of good governance.

What is risk?

Businesses take risks every day, whether it’s launching a new product, hiring new staff, expanding into new markets, or setting up a new store. These risks are taken because the potential for reward outweighs the possibility of loss. That is not to say however, that robust debate, research and effort has not been done in order to make such decisions.

A board plays a vital role in ensuring a company takes the necessary precautions when dealing with risk, while also maintaining the pursuit for adding value to the company.

Managing risk is about gathering relevant information so you can make a trade off between the likelihood of it happening and the consequences if it does.

Tapping into experience

Different industries have different risks, which pop up at different stages of a company's life cycle. Independent directors are typically members of several boards. This brings:

  • insight into different approaches to risk
  • extensive networks that can be tapped into for specific expertise
  • general know-how to fully evaluate a particular risk.

High risk, high return

As the old saying goes, “With great risk comes great reward.” However, governance and risk management need not put the brakes on a growing business as risk can often represent significant business opportunities.

Independent directors often play devil's advocate and challenge conventional thinking when risk rears its head. They can help a board take advantage of something exciting at the same time as ensuring the risk doesn’t outweigh the benefits.

Who's responsible?

The ultimate responsibility for risk management resides with the directors or board, but the practice of risk management is the responsibility of the company's executives. The management team should work hand-in-hand with the board.

"Businesses need to take risks in order to make profits. Risk cannot be managed away; the important thing is to understand the degree of risk being taken." Ernst & Young Research Report 2009. Risk Management – What do Independent Directors Do?